By Jennifer Lanning Drey
Portland, Ore. Aug. 28 - The bankruptcy protections claimed by a growing number of mortgage companies with subprime exposure are allowing distressed debt investors to capitalize on asset-backed securities that have little or no link to a Chapter 11 filing, according to participants in the sector.
"Every time one of these subprime lenders files for relief, [their securitizations] trade downward," said Stephen Selbst, a partner with McDermott Will & Emery LLP and head of the company's bankruptcy practice.
The devaluation often has more to do with the fact that investors associate the name with a bankruptcy filing than it does with the actual underlying credit quality of the securities, which may not have been affected by the Chapter 11 filing.
"That's potentially an opportunity for investors," Selbst said.
That's because asset-backed securities that are available to investors are based on underlying pools of loans that have already been transferred from the mortgage companies to a trust, as standard procedure.
By being held in the trust, the securities are separate from the company's Chapter 11 filing and, therefore, untouchable by creditors in a company's bankruptcy case, making them less of a risky investment than they may seem at first mention.
"We think that investors who are able to take a step back and look beyond the headlines will be able to fish excellent opportunities out of the sea of subprime bad news, Advantus Capital investment analysts Joseph Scanlan and Sean Timonen said in an August report.
The analysts also affirmed that the market dislocation has "given astute buyers access to the subprime arena at severely reduced prices," in the report.
Additionally, with defaults on subprime mortgage loans remaining in the news, the valuations of a number of asset-backed securities are likely to continue to decline and additional mortgage lenders to file for bankruptcy protection.
Eight mortgage companies have filed for Chapter 11 bankruptcy protection since the sub-prime crisis erupted and one, SouthStar Funding LLC, filed for Chapter 7 protection.
"There's more to come. People talk about whether we're at the bottom of the housing market - we are not," Selbst said.
Mortgage company bankruptcy filings in 2007
| Company | Filing date | Filing type | Court | Case number
|
| Quality Home Loans | 8/21/2007 | Chapter 11 | Central District of California | 07-13006
|
| First Magnus Financial Corp. | 8/21/2007 | Chapter 11 | District of Arizona | 07-10578
|
| Aegis Mortgage Corp. | 8/13/2007 | Chapter 11 | District of Delaware | 07-11119
|
| HomeBanc Corp. | 8/9/2007 | Chapter 11 | District of Delaware | 07-11079
|
| American Home Mortgage Investment Corp. | 8/6/2007 | Chapter 11 | District of Delaware | 07-11047
|
| Alliance Bancorp | 7/17/2007 | Chapter 7 | District of Delaware | 07-10942
|
| MILA, Inc. | 7/2/2007 | Chapter 11 | Western District of Washington | 07-10359
|
| New Century Financial Corp. | 4/2/2007 | Chapter 11 | District of Delaware | 07-10416
|
| People's Choice Home Loan, Inc. | 3/20/2007 | Chapter 11 | Central District of California | 07-10765
|
| ResMAE Mortgage Corp. | 2/12/2007 | Chapter 11 | District of Delaware | 07-10177
|
| Mortgage Lenders Network USA, Inc. | 2/5/2007 | Chapter 11 | District of Delaware | 07-10146
|
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