CONTINUING TURMOIL AND CRISIS IN SUBPRIME MORTGAGES – CHALLENGES AND OPPORTUNITIES OF THE SALE PROCESS Van C. Durrer, II S...
Overview <ul><li>Plan v. Sale Considerations </li></ul><ul><li>Intellectual Property Issues </li></ul><ul><li>Sale Conside...
Plan v. Sale Considerations <ul><li>Estates prefer immediate sales but licensing and operational issues create obstacles a...
Plan v. Sale Considerations <ul><li>Plan Approach (cont’d.) </li></ul><ul><ul><li>Segregation of Business/Bankruptcy Liabi...
Plan v. Sale Considerations <ul><li>Certainty of Close </li></ul><ul><ul><li>Financial Considerations </li></ul></ul><ul><...
Plan v. Sale Considerations <ul><li>Case Studies </li></ul><ul><ul><li>New Century—sale and extensive mutual transitional ...
Intellectual Property and Intangible Asset Issues <ul><li>Loan Servicing  </li></ul><ul><ul><li>Continuity </li></ul></ul>...
Role of Backup Service Provider <ul><li>Identification of all intangibles </li></ul><ul><li>Bundling similar intangibles t...
Sale Considerations <ul><li>Wasting Assets </li></ul><ul><ul><li>Declining Unpaid Balances (UPBs) </li></ul></ul><ul><ul><...
Sale Considerations <ul><li>Access to Data </li></ul><ul><ul><li>Finding and sorting out who owns what – Stipulation and F...
Regulatory Impact on Sales <ul><li>Licenses and Other State Law Issues </li></ul><ul><ul><li>Origination and Servicing Lic...
Auction Issues <ul><li>Transparency </li></ul><ul><ul><li>Open and fair process encourages bidding and ensures court appro...
Auction Issues <ul><li>Non-Monetary Considerations in Valuing Bids </li></ul><ul><ul><li>Due diligence expense reimburseme...
Key Valuation Issues <ul><li>Does the IP maintain its value in Bankruptcy? </li></ul><ul><li>What sort of liquidation disc...
Context Continuum ™
Other Auction Issues <ul><li>Investment Agreement Issues </li></ul><ul><ul><li>Servicing Retained v. Servicing Released </...
Auction Issues <ul><li>Holdback </li></ul><ul><ul><li>Escrow v. Adjustment </li></ul></ul><ul><ul><li>Triggers and Timing ...
Mortgage Loan Purchase Agreement Terms <ul><li>Exchange of Funds/Data </li></ul><ul><li>The Loan Originator executes with ...
Mortgage Loan Purchase and Servicing Agreement Issues <ul><li>Cure Issues </li></ul><ul><ul><li>What is being cured? </li>...
Mortgage Loan Purchase and Servicing Agreement Issues <ul><li>Severability </li></ul><ul><ul><li>If sale requires cure of ...
Mortgage Loan Purchase and Servicing Agreement Issues <ul><li>In AHM servicing sale to Wilbur Ross, Judge Sontchi (DE) app...
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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

  1. 1. 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
  2. 2. Overview <ul><li>Plan v. Sale Considerations </li></ul><ul><li>Intellectual Property Issues </li></ul><ul><li>Sale Considerations </li></ul><ul><li>Regulatory Impact on Sales </li></ul><ul><li>Auction Issues </li></ul><ul><li>Valuation Issues </li></ul><ul><li>Mortgage Loan Purchase Agreement Terms </li></ul><ul><li>Mortgage Loan Purchase and Servicing Agreement Issues </li></ul>
  3. 3. Plan v. Sale Considerations <ul><li>Estates prefer immediate sales but licensing and operational issues create obstacles and challenges to maximizing value </li></ul><ul><ul><li>Timing and Notice issues – Sale is Faster </li></ul></ul><ul><ul><li>Sub Rosa Plan Objection? </li></ul></ul><ul><ul><li>Certainty of close huge issue </li></ul></ul><ul><ul><li>More power in plan context to address transitional and operational issues especially in servicing rights or staged asset sales </li></ul></ul><ul><ul><li>Financial buyer’s willingness to pay more may outweigh adequate assurance/licensing uncertainties </li></ul></ul>
  4. 4. Plan v. Sale Considerations <ul><li>Plan Approach (cont’d.) </li></ul><ul><ul><li>Segregation of Business/Bankruptcy Liabilities </li></ul></ul><ul><ul><ul><li>Purchasers typically assume only “business” or operational liabilities </li></ul></ul></ul><ul><ul><ul><li>Estate remains responsible for “bankruptcy” liabilities (expenses related to administration of the bankruptcy estate) </li></ul></ul></ul><ul><ul><li>Other Considerations </li></ul></ul><ul><ul><ul><li>More expensive </li></ul></ul></ul><ul><ul><ul><li>Additional benefits and protections </li></ul></ul></ul><ul><ul><ul><li>Greater flexibility in timing/form of payment and structure of transaction </li></ul></ul></ul>
  5. 5. Plan v. Sale Considerations <ul><li>Certainty of Close </li></ul><ul><ul><li>Financial Considerations </li></ul></ul><ul><ul><ul><li>When is the payment made to the estate-at or prior to actual closing? </li></ul></ul></ul><ul><ul><ul><li>What is the danger to the estate of increased liability? </li></ul></ul></ul><ul><ul><li>Wasting asset issues </li></ul></ul><ul><ul><li>Complexity of Plan closing </li></ul></ul><ul><ul><ul><li>Negotiation of incidental plan terms </li></ul></ul></ul><ul><ul><ul><li>Disclosure and voting process </li></ul></ul></ul>
  6. 6. Plan v. Sale Considerations <ul><li>Case Studies </li></ul><ul><ul><li>New Century—sale and extensive mutual transitional service and sub-servicing arrangements </li></ul></ul><ul><ul><li>ResMAE—sale of tangible assets and “keep-well” pending plan confirmation and licensing </li></ul></ul><ul><ul><li>American Home Mortgage—hybrid approach involving separate “economic” and “legal” closings </li></ul></ul>
  7. 7. Intellectual Property and Intangible Asset Issues <ul><li>Loan Servicing </li></ul><ul><ul><li>Continuity </li></ul></ul><ul><ul><li>Control </li></ul></ul><ul><li>Other Intangibles </li></ul><ul><ul><li>IT/Software </li></ul></ul><ul><ul><li>Databases </li></ul></ul><ul><ul><li>Systems </li></ul></ul>
  8. 8. Role of Backup Service Provider <ul><li>Identification of all intangibles </li></ul><ul><li>Bundling similar intangibles together </li></ul><ul><li>Market valuation of the assets (see Valuation scenarios) </li></ul><ul><li>Monitor existing contracts </li></ul><ul><li>Manage the portfolio </li></ul><ul><li>Dispose of the assets in an orderly manner </li></ul>
  9. 9. Sale Considerations <ul><li>Wasting Assets </li></ul><ul><ul><li>Declining Unpaid Balances (UPBs) </li></ul></ul><ul><ul><li>Employee departures </li></ul></ul><ul><ul><li>Necessity of ongoing funding to make advances </li></ul></ul><ul><li>Servicing Expenses/Trustee Issues </li></ul><ul><ul><li>Servicer receives payments from borrower (servicers pay themselves percent of monthly payment and forward rest to Investor) </li></ul></ul><ul><ul><li>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 </li></ul></ul><ul><ul><li>Other Servicer advances – liquidity concerns </li></ul></ul>
  10. 10. Sale Considerations <ul><li>Access to Data </li></ul><ul><ul><li>Finding and sorting out who owns what – Stipulation and Funding Issues </li></ul></ul><ul><li>Interests of Secured and Unsecured Creditors </li></ul><ul><ul><li>Are there liens on all of the assets being sold? </li></ul></ul><ul><ul><li>Different secured lenders (e.g., banks, equipment lien holders) may have different interests. </li></ul></ul><ul><ul><li>Allocation of consideration </li></ul></ul><ul><ul><li>“ Home run” vs. “Sure thing” </li></ul></ul><ul><ul><li>Costs of sale-who pays and what is covered? </li></ul></ul>
  11. 11. Regulatory Impact on Sales <ul><li>Licenses and Other State Law Issues </li></ul><ul><ul><li>Origination and Servicing Licenses Required </li></ul></ul><ul><ul><li>State Licensing Procedures </li></ul></ul><ul><ul><ul><li>Pre- and post-closing </li></ul></ul></ul><ul><ul><ul><li>Notice v. approval </li></ul></ul></ul><ul><ul><li>Options for Unlicensed Purchasers </li></ul></ul><ul><ul><ul><li>Lease back purchased assets necessary for debtor to provide servicing pending approval (special caveat) </li></ul></ul></ul><ul><ul><ul><li>Purchase equity of already-licensed debtor through reorganization plan; fund operational costs pending close </li></ul></ul></ul><ul><ul><ul><li>Bifurcate economic and legal closings </li></ul></ul></ul>
  12. 12. Auction Issues <ul><li>Transparency </li></ul><ul><ul><li>Open and fair process encourages bidding and ensures court approval thus maximizing value for the estate </li></ul></ul><ul><ul><ul><li>Equal access to information (this includes sharing information requested by and provided to a single bidder with all bidders) </li></ul></ul></ul><ul><ul><ul><li>Coordination with creditors’ committee </li></ul></ul></ul><ul><ul><ul><li>Some access to estate’s analysis of bids especially contract assumption and non-monetary terms </li></ul></ul></ul><ul><ul><ul><li>Meaningful pre-auction negotiation with bidders to smooth out differences </li></ul></ul></ul>
  13. 13. Auction Issues <ul><li>Non-Monetary Considerations in Valuing Bids </li></ul><ul><ul><li>Due diligence expense reimbursement </li></ul></ul><ul><ul><li>Difference in approach (plan v. sale or designation rights) </li></ul></ul><ul><ul><li>Human capital costs </li></ul></ul><ul><ul><li>The ugly underbelly of holdbacks </li></ul></ul><ul><li>Selection of Executory Contracts and Leases </li></ul><ul><ul><li>Executory (§365) v Non-Executory (§363) </li></ul></ul><ul><ul><ul><li>“ Executory Contracts” are contracts where material performance remains on the part of both parties </li></ul></ul></ul>
  14. 14. Key Valuation Issues <ul><li>Does the IP maintain its value in Bankruptcy? </li></ul><ul><li>What sort of liquidation discount is experienced when IP is sold in an orderly disposal? </li></ul><ul><li>How do you value these assets in a liquidation scenario? </li></ul><ul><li>Is there a formula to establish the descending value of these assets in liquidation? </li></ul><ul><li>How do you market and dispose of these assets most cost-effectively and time-effectively? </li></ul>
  15. 15. Context Continuum ™
  16. 16. Other Auction Issues <ul><li>Investment Agreement Issues </li></ul><ul><ul><li>Servicing Retained v. Servicing Released </li></ul></ul><ul><ul><li>Negotiation intensive–tension between buyback of servicing rights v. replacement with qualified servicer (adequate assurance) </li></ul></ul><ul><li>Human Capital </li></ul><ul><ul><li>Delicate balance between minimizing costs and maximizing business value </li></ul></ul><ul><ul><li>Continuity of a critical mass of management is necessary under some states’ licensing </li></ul></ul>
  17. 17. Auction Issues <ul><li>Holdback </li></ul><ul><ul><li>Escrow v. Adjustment </li></ul></ul><ul><ul><li>Triggers and Timing </li></ul></ul><ul><ul><li>Reconciliation process (exclusive remedy?) </li></ul></ul><ul><ul><li>Bid Improvement by Holdback Reduction </li></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul><ul><ul><ul><li>New Century—Residential Mortgage Solution LLC won auction of mortgage loans by eliminating holdback </li></ul></ul></ul>
  18. 18. Mortgage Loan Purchase Agreement Terms <ul><li>Exchange of Funds/Data </li></ul><ul><li>The Loan Originator executes with a number of investors and terms vary </li></ul><ul><ul><li>Mortgage file held in trust for investor </li></ul></ul><ul><ul><li>Investor has repurchase and “premium recapture rights” if purchased loans default or are prepaid in certain time (e.g., 90 or 120 days) </li></ul></ul><ul><ul><li>Servicer required to provide information to investor </li></ul></ul><ul><ul><li>These details matter for securitization purposes </li></ul></ul>
  19. 19. Mortgage Loan Purchase and Servicing Agreement Issues <ul><li>Cure Issues </li></ul><ul><ul><li>What is being cured? </li></ul></ul><ul><ul><ul><li>Recapture Obligations? </li></ul></ul></ul><ul><ul><ul><li>Premium Recapture? </li></ul></ul></ul><ul><ul><ul><ul><li>These obligations can exceed the value of the servicing rights </li></ul></ul></ul></ul><ul><ul><ul><li>Information failures? </li></ul></ul></ul><ul><ul><li>Adequate Assurance? </li></ul></ul><ul><ul><ul><li>Can purchaser service? </li></ul></ul></ul><ul><ul><ul><li>Is it qualified under relevant state and federal regulations? </li></ul></ul></ul>
  20. 20. Mortgage Loan Purchase and Servicing Agreement Issues <ul><li>Severability </li></ul><ul><ul><li>If sale requires cure of EPD (early payment default) claims, sale will not be viable </li></ul></ul><ul><ul><li>Can servicing rights (on “servicing-retained” deal) be severed from Mortgage Loan Purchase and Servicing Agreement (MLPSA) and sold separately from other MLPSA provisions? </li></ul></ul><ul><ul><li>“ 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? </li></ul></ul>
  21. 21. Mortgage Loan Purchase and Servicing Agreement Issues <ul><li>In AHM servicing sale to Wilbur Ross, Judge Sontchi (DE) applied In re Gardinier (11 th Cir.) test regarding severability: </li></ul><ul><ul><li>Nature and purpose of agreements different? </li></ul></ul><ul><ul><li>Separate and distinct consideration? </li></ul></ul><ul><ul><li>Parties’ obligations interrelated? </li></ul></ul><ul><ul><li>Held that servicing rights severable even within single document </li></ul></ul><ul><ul><li>Indemnification and waterfall provisions found to be unenforceable anti-assignment provisions </li></ul></ul><ul><ul><li>Interplay with safe harbor provisions </li></ul></ul>

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