The ongoing sale process of Reverse Mortgage Solutions (RMS) may be at risk after a federal judge has denied its parent company’s proposed bankruptcy plan.

In a hearing taking place at the Bankruptcy Court for the Southern District of New York on Wednesday, a federal judge denied the proposed bankruptcy reorganization plan petitioned by the counsel of Ditech Holding Corporation.

This puts the sale process of both Ditech’s forward and reverse mortgage businesses to previously-approved stalking horse bidders at risk of taking place, according to original reporting by Bloomberg and court documents obtained by RMD.

The decision

After hearing evidence earlier this month from counsel for both Ditech Holding Corporation and an opposing coalition made up of a consumer creditors committee and state attorneys general, federal bankruptcy Judge James Garrity Jr. denied the plan that would have allowed Ditech to sell its forward and reverse mortgage businesses “free and clear” of consumer claims against them alleging wrongdoing and improper foreclosures.

In his written decision, Judge Garrity contends that the proposed reorganization plan does not provide sufficient ability for borrowers to “assert rights of recoupment” against Ditech, nor does it satisfy the requirements of the Bankruptcy code while demonstrating that it is “fair and equitable” to consumers holding claims against the company.

“For those reasons, [Ditech’s] request to confirm the [bankruptcy] plan is denied,” Garrity writes.

Next steps

According to Bloomberg, Judge Garrity made a brief court appearance on Wednesday and addressed counsel for Ditech. He told them that a hearing would be scheduled for next week, “to see how we can move forward,” he said.

The ability to engage in unobstructed sales of both the forward and reverse mortgage servicing business was apparently contingent on approval of the bankruptcy plan to be made “free and clear” of the current legal claims levied against the parent company by both affected mortgage borrowers and state regulators, according to Ditech counsel Sunny Singh in a hearing earlier this month. However, that may not be a term at least where RMS is concerned.

Ditech had previously classified real estate investment firm New Residential as the approved bidder for the forward mortgage business, and Mortgage Assets Management as the approved bidder for RMS. Now, since a free and clear sale of the assets has been denied, those sales are now in jeopardy, according to experts.

“A decision that keeps the claims attached to the assets means that New Residential is likely out and will no longer purchase the assets and anybody else who comes along will likely pay a much smaller amount,” David C. Smith, a finance professor at the University of Virginia told Bloomberg. “At the end of the day, that means a lot less cash comes into the estate to pay claimants.”

The greatest scrutiny surrounding the bankruptcy plan was primarily focused on the forward mortgage servicing business. In the past 12 months, over 4,000 homeowners have filed complaints with federal agencies concerning the loan servicer, including allegations that it failed to credit legitimate payments which led to improper foreclosures.

The RMS sale

Mortgage Assets Management (MAM) is a privately-held company and has yet to make any public comment concerning their proposal to purchase RMS, though Garrity writes in his decision that MAM filed a pleading in support of Ditech’s request to approve the bankruptcy plan for a “free and clear” sale of the business.

Additionally, unlike New Residential’s proposed purchase of the forward business, MAM agreed to assume certain claims and defenses related to previous RMS servicing errors under Ditech’s ownership, according to Judge Garrity. Garrity also details that unlike New Residential’s purchase of the forward business, a sale “free and clear” of consumer claims is “not a condition to closing” MAM’s purchase of RMS.

If the sale for RMS continues, the purchase price will be reduced by $10 million in accordance with the proposed plan, Garrity says. However, Ditech’s initial argument at this month’s earlier hearing stated that both the forward and reverse sales would be at equal risk of taking place at all if the plan was denied.

Recent history

This follows a continually unfolding odyssey of legal and financial issues that have afflicted Ditech, and by extension, RMS. Most recently, Ditech objected to paying borrower damages in the interim prior to Judge Garrity’s decision.

Creditors and individual borrowers mounted an effort in court earlier this month in an attempt to halt the sale of Ditech’s forward and reverse mortgage business “free and clear” of existing legal obligations. NRZ related that Ditech’s legal complications had the possibility of delaying the timetable of the purchase of its forward business, though NRZ’s CEO related confidence that the sale would go through as planned.

Ditech’s planned sale of RMS has also invited scrutiny from Bank of America over concerns that some elderly borrowers would not have their pre-existing mortgages serviced, and by the New York State Attorney General who contends that Ditech is attempting to circumvent statutory protections for homeowners by selling its mortgage businesses.

In April, it was revealed that a loophole in Ditech’s bankruptcy proceedings invited scrutiny from both consumer advocacy groups and the Department of Justice. In the midst of the financial difficulties that Ditech is embroiled in, RMS seems to be relatively insulated from the larger problems of its parent company, at least from an operational perspective.

In 2018, Ditech emerged from its first bankruptcy filing after having previously done business under the name Walter Investment Management Corporation. Walter acquired RMS in 2012 and Security One Lending in 2013, and in 2017, Walter decided to stop originating Home Equity Conversion Mortgages (HECMs). RMS then turned to servicing only and closed its retail channel.

Read the initial reporting by Bloomberg.