AHMSI Is Fighting Lawsuit
New York-In another sign of growing tension between investors in mortgage securities and servicers of subprime loans, Carrington Capital Management has prepared a lawsuit against American Home Mortgage Servicing Inc., alleging that the firm exacerbated losses on the sale of foreclosed homes.
The complaint, which was served on AHMSI last week, argues that AHMSI engaged in an "egregious failure to honor unique certificate holder rights that Carrington specifically bargained for," granting Carrington a larger role in making decisions about the sale of foreclosed homes, or REO, than an investor would normally have. Carrington claims those special rights were negotiated with the original servicer, Option One, which was later acquired by AHMSI.
In the complaint, Carrington argues that in September of last year, AHMSI "encountered financing difficulties" in making servicing advances on delinquent loans to investors. As a result, the complaint claims that AHMSI sped up the sale of REO at fire-sale prices late last year as the company came under pressure to pay down a credit line.
Carrington argues that under the pooling and servicing agreements, AHMSI's managing of the REO sales should be considered an "event of default" by the servicer, allowing AHMSI's servicing contract to be terminated.
The PSA requires an investor to get the backing of 25% of certificate holders in a deal to sue the servicer, but Carrington argues that because of its "unique rights," the lawsuit should be allowed to proceed without the backing of more senior investors.
Carrington seeks a court order prohibiting AHMSI from selling REO "except in accordance with Carrington's directions." Carrington also is seeking monetary and punitive damages.
Carrington is being represented by Sean O'Shea and other attorneys from O'Shea Partners.
Attorneys for AHMSI deny the claims and say that the servicer, owned by billionaire investor Wilbur Ross, will vigorously defend itself in court.
"The Carrington lawsuit is not about foreclosures. It's about the sale of vacant, foreclosed property in a declining real estate market. Those properties are sold at market prices, as American Home is required to do," said Brian Otero, an attorney at Hunton & Williams representing AHMSI.
Prior to the lawsuit, Carrington tried to have AHMSI removed as servicer and have the servicing rights transferred to Carrington itself. However, the trustee on the MBS transactions rebuffed this request.
A person familiar with Carrington's position on the dispute said that Carrington, in seeking to delay REO sales, is effectively trying to delay its recognition of losses in a move that would disadvantage investors holding more senior securities.
The lawsuit, which had not yet been formally filed with the courts at the time this article was written, was expected to be filed in Stamford, Conn.