In Bankruptcy News

Ditech Holding Corporation, a servicer of thousands of both reverse and forward mortgages, filed bankruptcy earlier this year for the second time in 14 months. This time around, Ditech sought a purchaser for both its reverse and forward mortgage servicing businesses. Sales appeared pending to Reverse Mortgage Services for the reverse portfolio and New Residential for the forward mortgage portfolio. On Wednesday, August 28, both sales were dealt a blow when the judge overseeing the bankruptcy denied Ditech’s proposal to make the sales “free and clear” of any claims by homeowners’ claims.

Over 4,000 homeowners whose mortgages are being serviced by Ditech have filed claims with various state and federal agencies alleging that Ditech had improperly handled their accounts, in some cases failing to credit payments or misapplied payments. One woman claims that despite making payments for 22 years, she now owes more than when she started, according to Ditech’s records.

A sale “free and clear” in bankruptcy allows an asset to be sold free of any claims against it. As applied to the reverse and forward mortgage portfolios, this would mean all those claims by homeowners could not be asserted against the buyers of the portfolios. The Ditech sale was opposed by several state attorneys general, consumer protection groups and the United States Trustee, the division of the Department of Justice charged with monitoring bankruptcies across the nation.

The proposed bankruptcy plan pitted commercial and trade lenders against consumers. The plan had been backed by the unsecured creditors’ committee (a committee made up of the largest unsecured creditors of the debtor) and banks and other commercial lenders. Consumers would undoubtedly have been overwhelmed had it not been for the state and federal agencies and the Trustee’s office.

For more information, see this article in the Wall Street Journal.

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