In the midst of ongoing attempts to sell its servicing platforms, Reverse Mortgage Solutions’ parent company is facing new legal hurdles.

At a hearing taking place in the U.S. Bankruptcy Court for the Southern District of New York on Wednesday – where there was reportedly standing room only – counsel for Ditech and the sale’s opponents argued over the ability for Ditech to maintain its Chapter 11 plan if it manages to go through with the sale of its mortgage businesses, as first reported by Law360.

Both the New York AG and a consumer creditors committee were present to argue against the sale. 

Bankruptcy strategy

Under the umbrella of its Chapter 11 bankruptcy strategy, Ditech has proposed the sale of RMS, to Mortgage Assets Management, LLC (MAM). Its forward mortgage business, Ditech Financial, is planned to be sold to real estate investment company New Residential Investment Corp (NRZ). Ditech named stalking horse bidders for both companies in June before announcing them the ‘successful’ bidders last month.

In addition to the sale, Ditech also told the presiding judge that its plan includes an additional $5 million to pay out claims that it foreclosed illegally on bankrupt customers, while also forcing others into foreclosure by mishandling their payments. The creditors committee, which represents a portion of the affected mortgage holders, responded by saying it had yet to approve a settlement and is therefore continuing to oppose confirmation of Ditech’s attempted sales.

Ditech has cited a 2005 amendment to the U.S. Bankruptcy Code which states that a debtor is allowed to sell its assets “free and clear” of legal claims, but counsel for the New York Attorney General, U.S. Trustee’s Office and individual mortgage holders contend that the 2005 amendment specifically prevents mortgage originators and servicers from using it to circumvent or extinguish any claims that arise from mortgage fraud and misconduct.

Opposition mounts

The assembled opposition argued during the hearing that this was the first instance since the amendment’s passage that features a mortgage company attempting a “free and clear” asset sale, Law360 said.

Ditech also argued that any sale of its assets would be impossible unless it was free and clear, and claimed to have been in contact with nearly 100 potential buyers while failing to find one that was willing to assume the liability of legal claims. NRZ also made the closing of the forward business’ sale conditional on it being free and clear.

“The consumer creditor committee is asking the court to roll the dice,” Ditech counsel Sunny Singh reportedly told the judge.

Creditors committee lawyer Victor Noskov also added that the $5 million set aside for consumer claims was inadequate, arguing that Ditech had not properly evaluated what the relevant claims are worth, and that it was less than the additional $11 million MAM has promised Ditech for RMS if the sale goes through free and clear. Ditech’s counsel defended the figure, saying it was determined based on past payouts the company has made in similar situations.

Additional legal arguments were expected to take place Thursday. MAM has not made any public statements concerning whether or not its planned purchase of RMS has been affected by the ongoing legal proceedings related to Ditech.

Other difficulties

This follows a continually unfolding odyssey of legal and financial issues that have afflicted Ditech, and by extension, RMS. Most recently, 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.