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CONTINUING TURMOIL AND CRISIS IN SUBPRIME MORTGAGES – CHALLENGES AND OPPORTUNITIES OF THE SALE PROCESS
 

CONTINUING TURMOIL AND CRISIS IN SUBPRIME MORTGAGES – CHALLENGES AND OPPORTUNITIES OF THE SALE PROCESS

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    CONTINUING TURMOIL AND CRISIS IN SUBPRIME MORTGAGES – CHALLENGES AND OPPORTUNITIES OF THE SALE PROCESS CONTINUING TURMOIL AND CRISIS IN SUBPRIME MORTGAGES – CHALLENGES AND OPPORTUNITIES OF THE SALE PROCESS Presentation Transcript

    • CONTINUING TURMOIL AND CRISIS IN SUBPRIME MORTGAGES – CHALLENGES AND OPPORTUNITIES OF THE SALE PROCESS Van C. Durrer, II Skadden, Arps, Slate, Meagher & Flom LLP PRESENTED BY: Don D. Grubman Hahn & Hessen LLP Weston Anson CONSOR Intellectual Asset Management Stuart M. Brown Edwards Angell Palmer & Dodge LLP
    • Overview
      • Plan v. Sale Considerations
      • Intellectual Property Issues
      • Sale Considerations
      • Regulatory Impact on Sales
      • Auction Issues
      • Valuation Issues
      • Mortgage Loan Purchase Agreement Terms
      • Mortgage Loan Purchase and Servicing Agreement Issues
    • Plan v. Sale Considerations
      • Estates prefer immediate sales but licensing and operational issues create obstacles and challenges to maximizing value
        • Timing and Notice issues – Sale is Faster
        • Sub Rosa Plan Objection?
        • Certainty of close huge issue
        • More power in plan context to address transitional and operational issues especially in servicing rights or staged asset sales
        • Financial buyer’s willingness to pay more may outweigh adequate assurance/licensing uncertainties
    • Plan v. Sale Considerations
      • Plan Approach (cont’d.)
        • Segregation of Business/Bankruptcy Liabilities
          • Purchasers typically assume only “business” or operational liabilities
          • Estate remains responsible for “bankruptcy” liabilities (expenses related to administration of the bankruptcy estate)
        • Other Considerations
          • More expensive
          • Additional benefits and protections
          • Greater flexibility in timing/form of payment and structure of transaction
    • Plan v. Sale Considerations
      • Certainty of Close
        • Financial Considerations
          • When is the payment made to the estate-at or prior to actual closing?
          • What is the danger to the estate of increased liability?
        • Wasting asset issues
        • Complexity of Plan closing
          • Negotiation of incidental plan terms
          • Disclosure and voting process
    • Plan v. Sale Considerations
      • Case Studies
        • New Century—sale and extensive mutual transitional service and sub-servicing arrangements
        • ResMAE—sale of tangible assets and “keep-well” pending plan confirmation and licensing
        • American Home Mortgage—hybrid approach involving separate “economic” and “legal” closings
    • Intellectual Property and Intangible Asset Issues
      • Loan Servicing
        • Continuity
        • Control
      • Other Intangibles
        • IT/Software
        • Databases
        • Systems
    • Role of Backup Service Provider
      • Identification of all intangibles
      • Bundling similar intangibles together
      • Market valuation of the assets (see Valuation scenarios)
      • Monitor existing contracts
      • Manage the portfolio
      • Dispose of the assets in an orderly manner
    • Sale Considerations
      • Wasting Assets
        • Declining Unpaid Balances (UPBs)
        • Employee departures
        • Necessity of ongoing funding to make advances
      • Servicing Expenses/Trustee Issues
        • Servicer receives payments from borrower (servicers pay themselves percent of monthly payment and forward rest to Investor)
        • Servicer responsible to deposit taxes and insurance (“T&I”) and principal and interest (“P&I”) in custodial accounts – These often consist of millions of dollars held for many beneficiaries but may not be estate property
        • Other Servicer advances – liquidity concerns
    • Sale Considerations
      • Access to Data
        • Finding and sorting out who owns what – Stipulation and Funding Issues
      • Interests of Secured and Unsecured Creditors
        • Are there liens on all of the assets being sold?
        • Different secured lenders (e.g., banks, equipment lien holders) may have different interests.
        • Allocation of consideration
        • “ Home run” vs. “Sure thing”
        • Costs of sale-who pays and what is covered?
    • Regulatory Impact on Sales
      • Licenses and Other State Law Issues
        • Origination and Servicing Licenses Required
        • State Licensing Procedures
          • Pre- and post-closing
          • Notice v. approval
        • Options for Unlicensed Purchasers
          • Lease back purchased assets necessary for debtor to provide servicing pending approval (special caveat)
          • Purchase equity of already-licensed debtor through reorganization plan; fund operational costs pending close
          • Bifurcate economic and legal closings
    • Auction Issues
      • Transparency
        • Open and fair process encourages bidding and ensures court approval thus maximizing value for the estate
          • Equal access to information (this includes sharing information requested by and provided to a single bidder with all bidders)
          • Coordination with creditors’ committee
          • Some access to estate’s analysis of bids especially contract assumption and non-monetary terms
          • Meaningful pre-auction negotiation with bidders to smooth out differences
    • Auction Issues
      • Non-Monetary Considerations in Valuing Bids
        • Due diligence expense reimbursement
        • Difference in approach (plan v. sale or designation rights)
        • Human capital costs
        • The ugly underbelly of holdbacks
      • Selection of Executory Contracts and Leases
        • Executory (§365) v Non-Executory (§363)
          • “ Executory Contracts” are contracts where material performance remains on the part of both parties
    • Key Valuation Issues
      • Does the IP maintain its value in Bankruptcy?
      • What sort of liquidation discount is experienced when IP is sold in an orderly disposal?
      • How do you value these assets in a liquidation scenario?
      • Is there a formula to establish the descending value of these assets in liquidation?
      • How do you market and dispose of these assets most cost-effectively and time-effectively?
    • Context Continuum ™
    • Other Auction Issues
      • Investment Agreement Issues
        • Servicing Retained v. Servicing Released
        • Negotiation intensive–tension between buyback of servicing rights v. replacement with qualified servicer (adequate assurance)
      • Human Capital
        • Delicate balance between minimizing costs and maximizing business value
        • Continuity of a critical mass of management is necessary under some states’ licensing
    • Auction Issues
      • Holdback
        • Escrow v. Adjustment
        • Triggers and Timing
        • Reconciliation process (exclusive remedy?)
        • Bid Improvement by Holdback Reduction
          • New Century—Carrington improved original price of approx. $140 million for purchase of servicing business in part through reduction of holdback, assumption of cure costs, and assumption of paid time off (PTO) obligations
          • New Century—Residential Mortgage Solution LLC won auction of mortgage loans by eliminating holdback
    • Mortgage Loan Purchase Agreement Terms
      • Exchange of Funds/Data
      • The Loan Originator executes with a number of investors and terms vary
        • Mortgage file held in trust for investor
        • Investor has repurchase and “premium recapture rights” if purchased loans default or are prepaid in certain time (e.g., 90 or 120 days)
        • Servicer required to provide information to investor
        • These details matter for securitization purposes
    • Mortgage Loan Purchase and Servicing Agreement Issues
      • Cure Issues
        • What is being cured?
          • Recapture Obligations?
          • Premium Recapture?
            • These obligations can exceed the value of the servicing rights
          • Information failures?
        • Adequate Assurance?
          • Can purchaser service?
          • Is it qualified under relevant state and federal regulations?
    • Mortgage Loan Purchase and Servicing Agreement Issues
      • Severability
        • If sale requires cure of EPD (early payment default) claims, sale will not be viable
        • Can servicing rights (on “servicing-retained” deal) be severed from Mortgage Loan Purchase and Servicing Agreement (MLPSA) and sold separately from other MLPSA provisions?
        • “ Stand-alone” servicing agreements may be entered into concurrently with Mortgage Loan Purchase Agreement (MLPA); can these servicing rights be transferred independent of such agreements even where cross-defaulted?
    • Mortgage Loan Purchase and Servicing Agreement Issues
      • In AHM servicing sale to Wilbur Ross, Judge Sontchi (DE) applied In re Gardinier (11 th Cir.) test regarding severability:
        • Nature and purpose of agreements different?
        • Separate and distinct consideration?
        • Parties’ obligations interrelated?
        • Held that servicing rights severable even within single document
        • Indemnification and waterfall provisions found to be unenforceable anti-assignment provisions
        • Interplay with safe harbor provisions