Wednesday, February 14, 2007
By Bradley Keoun and Jody Shenn
Feb. 13 (Bloomberg) -- ResMae Mortgage Corp., a U.S. home lender to people with bad credit, filed for bankruptcy protection and said Switzerland's Credit Suisse Group agreed to buy most of its assets for $19.1 million.
``The subprime mortgage market has recently been crippled and a number of companies stopped originating loans as U.S. housing sales have slowed and defaults by borrowers have risen,'' Brea, California-based ResMae said in its Chapter 11 filing. The lender couldn't cope with an ``enormous'' surge in loan defaults and may run out of cash as soon as tomorrow.
Closely held ResMae is at least the 20th mortgage company to be sold or closed as delinquencies rise and the market for home loans to risky borrowers contracts by the most ever. Credit Suisse rivals Merrill Lynch & Co., Morgan Stanley and Barclays Plc are swooping in, buying home lenders to produce more revenue from packaging the loans into bonds.
The meltdown in the subprime industry has cost Countrywide Financial Corp., the biggest U.S. mortgage lender, 7 percent of its market value in the past week. New Century Financial Corp., a real estate investment trust that specializes in home loans to borrowers with low credit ratings, has tumbled 28 percent and rival Fieldstone Investment Corp. has dropped 20 percent in the same period. All three stocks rose today.
Lenders may have misjudged the risks they took in extending mortgages as interest rates rose and home prices fell or relied on poor documentation, St. Louis Federal Reserve Bank President William Poole said last week. Fremont General Corp. stopped allowing customers to use second loans in lieu of down payments on homes purchases.
`Open as Usual'
In bankruptcy court in Wilmington, Delaware, today, Judge Kevin Carey said he'll permit an auction for ResMae's assets to give rivals a chance to top Credit Suisse's bid. If Credit Suisse wins the auction, it would take control of ResMae on March 7.
ResMae's offices will remain ``open as usual'' during the sale process, Chief Executive Officer Ed Resendez said today in a statement. Credit Suisse, Switzerland's second-biggest bank, agreed to provide $8 million of debtor-in-possession financing so ResMae can pay its bills and buy as much as $250 million of mortgage loans, according to an affidavit filed with the bankruptcy court.
``Our customers should see no disruption in our service and delivery commitments,'' Resendez said.
Credit Suisse spokesman Pen Pendleton declined to comment.
ResMae said in yesterday's filing that Merrill played a role in triggering the company's tailspin by demanding that it buy back $308 million of mortgages under so-called early payment default, or EPD, provisions. New York-based Merrill, the world's third-largest securities firm, acquired $3.5 billion of ResMae's loans in 2006, the most of any buyer, according to the filing.
``These EPD provisions crippled the debtor's operations, requiring the company to post enormous reserves and dramatically reducing its capital and liquidity,'' ResMae said in the filing.
Merrill said it followed the terms spelled out in its agreements with ResMae.
``We properly exercised our contractual rights to protect our financial interests,'' the firm said in an e-mailed statement. ``ResMae itself acknowledged our rights when it set aside reserves to meet our claims. We offered numerous negotiated settlements in an effort to help the company and those were rejected.''
Many of the securities firms now expanding in mortgage lending are listed among ResMae's top creditors. Merrill, Bear Stearns Cos. and Morgan Stanley claim they're owed for defaulted loans that ResMae was obliged to repurchase under warranty. Barclays, Lehman Brothers Holdings Inc. and Deutsche Bank AG have claims for credit lines that ResMae used to finance the loans it planned to sell.
ResMae's filing doesn't provide exact amounts for the claims. It shows ResMae has 1,037 employees.
ResMae was founded in 2002 by three former executives of Long Beach Mortgage Co. In October 2003, the company raised $25 million of equity from a joint venture of Thomas H. Lee Partners LP, the Boston-based buyout firm, and Putnam Investments.
Last year, subprime loans in the U.S. mortgage industry fell 3.8 percent to $640 billion after rising for five straight years, according to Inside B&C Lending. ResMae made $7.7 billion in loans during 2006, up 11 percent from 2005, placing it 21st among U.S. subprime lenders, the newsletter reported.
Michael Fallacara, a managing director in Credit Suisse's fixed-income division, said in December that the Swiss bank was ``actively looking'' at potential acquisitions of mortgage lenders.
Credit Suisse already has a unit that makes loans through brokers and buys them from other lenders, Fallacara said.
To contact the reporters on this story: Bradley Keoun in New York atLast Updated: February 13, 2007 19:22 EST ; Jody Shenn in New York at .