American Home Bankruptcy: Consumers Still Can’t Catch a Break

08 Feb American Home Bankruptcy: Consumers Still Can’t Catch a Break

Just because your mortgage servicer is bankrupt and your loan is nearly worthless to other lenders, don’t expect you’ll catch a break. That’s the lesson coming from the latest round in the American Home Mortgage bankruptcy.

As we have noted before, American Home Mortgage Investment Corp. is in bankruptcy in Delaware. Part of the case now involves the company selling off its loan portfolio to pay back creditors. A sale of a pool of 424 mortgages is scheduled for February 26th, with a face value of $152 million, according to the Associated Press. The loans will be sold at a steep discount in the current bear market.

One homeowner thought this might be an opportunity. Paula Rush asked the bankruptcy court to allow the individual home owners to bid on their own mortgages, instead of only offering the loans in large packages to large investors. Her idea was simply that any sane person who could buy back their mortgage at fifty cents on the dollar, for example, would jump at the chance to either payoff early at a discount or refinance to a lower balance (if a lender would cover the deal for them).

Judge Sontchi, while sympathetic, is reported saying, “I’m not sure I have to consider giving the consumers a fair shake at bidding on their own loans” in part because the company indicated it would be expensive and difficult to break-out the individual loans to sell. And of course it could leave the less desirable loans to be sold off on the market. So in order to maximize the payout to the creditors in the case, the consumer borrowers subject to these mortgages could not be allowed to pay the “going rate” for their loans but will have to pay face value (the payoff) to get out of the debt.

A twisted irony of the judge’s ruling is that he also pointed out he felt it was “unlikely” that distressed homeowners would be able to outbid the larger investors. That sort of begs the question doesn’t it? If the homeowners were unlikely to be able to find the cash to outbid the guy who wants to buy their mortgage at a discount — and then collect the full face value from those same homeowners — are the bidders on these loans actually just vultures waiting to pick off the homes through foreclosure? Or do they actually think the homeowners will be able to pay, despite the judge’s opinion? No wonder some people are just walking away from their homes even if they can pay the mortgage these days.

We do however know one side of the American Home debacle that is doing just fine, thank you. One executive formerly with American Home cashed out stock options only a year earlier of over $7 million. And unlike many of the 6,000 employees now on unemployment, he’s back at work with a new mortgage servicer. Perhaps he could help out some of the homeowners who’d like to bid at his old employer’s auction this month? Something tells me this is unlikely.

Sometimes, you just can’t catch a break.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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