After finding itself dragged into court by hedge fund manager Bruce Rose of Greenwich-based Carrington Capital, Irving, Tex.-based mortgage servicer American Home Mortgage Servicing, Inc. fired its own volley back at both Rose and Carrington on Thursday, suing for alleged acts of racketeering and a scheme to profit illegally from holding REO hostage at the servicing firm. American Home is owned by legendary investor Wilbur Ross’ WL Ross & Co., and is the nation's largest independent residential mortgage servicer.
The allegations made in the complaint by AHMSI against Rose and Carrington show just how complex relations between servicers and investors can be, amid increasing pressure from lawmakers and regulators to find solutions to the nation's housing mess.
At the heart of the case are allegations by AHMSI that claim Carrington intentionally delayed recognition of losses by not allowing American Home to sell REO properties at market prices. The case brings civil RICO charges against Rose and Carrington because both sent, continue to send, interstate wire communications with allegedly false statements about the actual value of the REO properties in question.
It’s a move that American Home says has cost the servicer millions in interest lost as it has been forced to advance principal and interest to investors, while the REO remains unsold and on its books; while AHMSI is eventually reimbursed for P&I advanced to investors, it does not recover the interest that must be paid on its credit facilities to fund the advances. By keeping REO on its books, too, AHMSI alleges that Carrington was effectively siphoning funds that should have otherwise gone to senior bondholders into its own junior bond position.
Representatives at Carrington Capital did not immediately return a call asking about the charges in the suit.
Carrington’s MBS investing scheme, where it sought to carve out a junior MBS class with so-called ‘special rights’ that gave it unique rights to direct the servicer’s actions, were first reported by HousingWire two weeks ago. See previous story.
According to the complaint filed by American Home, Rose and employees in his hedge funds used a variety of tactics to keep REO on the servicer’s books: some of the alleged schemes included forcing AHMSI to list REO properties at prices well above market appraisals, as well as taking weeks to respond to good-faith offers on properties and even firing certain REO brokers mid-stream in the sales process as part of what AHSMI alleges was part of a scheme to “impede the process of selling a property.”
AHMSI also alleges that Rose and Carrington went so far as to attempt to wrest servicing away from American Home -- Carrington has its own servicing shop, after purchasing the business from failed subprime lender New Century Mortgage -- as part of an attempt to keep the scheme under wraps. Had Carrington been successful, AMSHI alleges that the hedge fund “would then have had no need to send fraudulent pricing advice to the servicer, for Carrington Mortgage Servicing would have been able directly to establish pricing that would delay the recognition of defendants’ losses in the mortgage pools.”
In addition to Rose personally, Carrington Capital and its inter-linking group of mortgage businesses are also named for conspiracy and by acting in cahoots to establish a so-called ‘RICO enterprise’ – civil RICO charges will allow American Home to ask for three times damages.
American Home was first sued by Carrington Capital on Feb. 9 for breach of contract and fiduciary duty, with the investor alleging the REO sales hoisted $100 million in losses on the hedge fund. Sources familiar with the case at American Home say that the servicer will shortly file a notice to dismiss the original suit, citing a clause in the original pooling & servicing agreements that stipulates at least 25 percent of the mortgage certificate holders must agree to sue a servicer before any such suit can be effected. Carrington doesn’t own 25 percent of the interest in the mortgage investments they are suing over, the sources said.
Editor’s note: Teri Buhl is an investigative journalist covering Wall Street who has written for the New York Post Sunday Business and Trader Monthly. Contact her at firstname.lastname@example.org.