Mortgage Daily

Published On: August 20, 2007
Lawyers Stung by HomeBanc Bankruptcy

$10 million in funding checks bounce

August 20, 2007

By PATRICK CROWLEY

photo of Patrick Crowley
Closing attorneys in three states who had funded loans after receiving $10 million in checks from HomeBanc Corp. may have to come up with the funds themselves after the checks from the bankrupt mortgage lender bounced.

Tampa, Fla.-based HomeBanc is trying to make good on checks it had written at closings to lawyers in Georgia, Florida and North Carolina. In Georgia alone, lawyers are stuck with at least $10 million in bounced checks HomeBanc has been unable make good.

HomeBanc is trying to negotiate with the lawyers so they can be paid at least some of what they are owed.

But according to Scott Logan, an Atlanta lawyer and president of the Georgia Real Estate Closing Attorneys Association, the move is being fought by J.P. Morgan, HomeBanc’s warehouse lender. Morgan wants to make sure it is paid first.

About 25 closing firms are involved, according to HomeBanc’s bankruptcy filing, and the amount of cashed checks could total $10 million.

“That’s a conservative estimate,” Logan told MortgageDaily.com. “It’s going to be a pretty bloody time until all this gets sorted out and we see where the chips fall.”

Lawyers in North Carolina and Florida are also holding bad paper, Logan said. There is an effort underfoot for the lawyers to band together and work with HomeBanc on getting the loans sold so the attorneys can be paid at least some of what they are owed.

But JPMorgan, HomeBanc’s warehouse lender, is fighting that move because it doesn’t want to lose its place line as a creditor in the company’s bankruptcy.

If an arrangement can’t be worked out, the closing lawyers could get stuck making the checks good. Logan said in some cases that means lawyers will have to put out $2 million or more.

Logan explained how the lawyers landed in their current predicament.

Unlike in most states, in Georgia everyone involved in a real estate transaction gets paid at closing, including the seller and the real estate agents. The money comes from lawyer escrow accounts, which are funded by wire transfers or checks from the lender.

With HomeBanc, the attorneys paid out everything at closing, but then checks cut by HomeBanc were returned unpaid a few days later.

“Where the music has stopped it that I’m aware of a bunch of attorneys who are upside down in their escrow accounts,” Logan said. “They are going to have to make up those funds.”

HomeBanc, which announced Aug. 7 it would sell its retail operations to Countrywide Financial Corp., filed for Chapter 11 bankruptcy in U.S. District Court in Delaware on Aug. 10. The company listed assets of $5.1 billion and liabilities of $4.9 billion. It has also canceled its Aug. 30 annual shareholders meeting.

HomeBanc announced in a statement last week that was it “was unable to borrow any additional amounts under its credit facilities to satisfy its mortgage loan funding obligations, and therefore would no longer be accepting any mortgage loan applications or funding any mortgage loans previously originated and not yet funded.”

HomeBanc, following the lead of other troubled lenders, also announced it is exiting the “mortgage loan origination business.”

“In light of the extraordinary difficulties that HomeBanc continues to face in the mortgage loan origination market, we feel that it is in the best interests of the company to exit this business so that we can focus on preserving the value of our investment portfolio assets and loan servicing operations,” HomeBanc President and CEO Kevin D. Race said in the statement.

Logan said HomeBanc went under after J.P. Morgan cut off funding.

“The recent disruptions in the mortgage loan and real estate markets have been dramatic, in terms of both magnitude and timing,” Race said. “These conditions have had a severely negative effect on HomeBanc’s liquidity and business operations, and have put HomeBanc in an untenable business position going forward.

“We believe that, by seeking Chapter 11 bankruptcy protection, we will be provided with an opportunity to achieve the highest value in exchange for our assets, and therefore benefit our creditors,” he said.


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