The GMAC Bankruptcy – What Happens to 2.4 Million loans totaling $374 Billion? (And What When They Are Owned by Fannie/Freddie?
A most interesting document because it demonstrates to us all the important distinction THAT BANKS LARGELY DO NOT OWN THE LOANS THEY ARE FORECLOSING ON! While we have made the banks the bad guys in all this, the reality is they are merely debt collection agents acting on behalf of agents of the federal government. Consider this in the context of GMAC:
The Debtors service more than 2.4 million mortgage loans with an aggregate unpaid principal balance (“UPB”) of approximately $374 billion.3 Of these totals, the Debtors assert that they service approximately 370,000 mortgage loans with an aggregate UPB of approximately $59.8 billion for Freddie Mac.
The transfer of the Freddie Mac loan portfolio by the Debtors to a new servicer must be approved by Freddie Mac on terms acceptable to Freddie Mac and its conservator. Due to the size of the loan portfolio at issue, it is imperative that any replacement servicer have the operational expertise and capability (as well as the financial wherewithal) to service the loans in accordance with the requirements of Freddie Mac’s Single-Family Seller/Servicer Guide (the “Freddie Mac Guide”) and the related Purchase Documents (as that term is defined in the Freddie Mac Guide). Whether a proposed purchaser is sufficiently qualified to service Freddie Mac’s loan portfolio is a determination made by Freddie Mac only after exacting due diligence and consultation with its conservator. Recognizing the importance of Freddie Mac’s right to approve servicers of loans that it owns, the Freddie Mac Guide only permits a servicing transfer with Freddie Mac’s express consent. Indeed, Freddie Mac’s approval rights are acknowledged in the Nationstar Asset Purchase Agreement’s requirement that closing of the proposed sale is predicated on obtaining various consents from Freddie Mac.
As a threshold matter, the Debtors impermissibly seek to bifurcate a unitary, integrated contract that governs both origination and servicing of Freddie Mac loans and assign to Nationstar only those portions of the contract that the Debtors and Nationstar determine constitute the “Servicing Agreement” (as defined in the Nationstar APA). In addition to improperly severing the origination obligations from the servicing obligations, the Debtors compound the legal deficiencies in their Sale Motion by attempting to prune the servicing obligations to be assigned to Nationstar, expressly absolving Nationstar of certain servicing obligations in direct contravention of the applicable contract terms. Because the proposed assignment violates HERA as well as fundamental bankruptcy law precluding the division of integrated contracts, it fails to provide Freddie Mac with adequate assurance of future performance and cannot be approved as a matter of law.
Notwithstanding the lack of clarity regarding which Freddie Mac contracts are at issue, it appears that the Debtors are attempting to rewrite, and assign as rewritten, the Master Agreement (the “Master Agreement”), dated as of July 22, 2011, between GMAC, Freddie Mac, and Ally Bank. The Debtors do not even address the statutory requirements for the disposition of conservatorship estate assets under 12 U.S.C. § 4617. In particular, the Debtors seek to sever the Master Agreement’s origination-related obligations and assign to Nationstar some, but not all,8 of the Master Agreement’s servicing-related provisions.
In American Home, the Bankruptcy Court noted that although contracts must generally be assumed or rejected in their entirety, the parties had “stipulated that the Master [Servicing and Selling] Agreement is nonexecutory . . . . In other words, the parties agree that [Debtor] has no material, unperformed obligations under the Master Agreement the non-performance of which would constitute a material breach excusing [counterparty’s] further performance.” Id. at 93. There is no such stipulation here, and the Debtors do not dispute that the Master Agreement is executory. In addition, the Bankruptcy Court in American Home determined that, under New York law, “as with all contract interpretation, severability is a question of the parties’ intent, to be determined from the language employed by the parties, viewed in light of the circumstances surrounding them at the time they contracted.” Id. at 94 (emphasis added and quotation and citation omitted). The American Home Court then adopted a three-part test of severability under Florida law from the Eleventh Circuit in the case of Byrd v. Gardinier (In re Gardinier, Inc.), 831 F.2d 974 (11th Cir.1987):
The American Home court concluded that the parties’ agreement contained different functions and that the consideration for those functions was separate and distinct. Id. at 95-96. The American Home court spent significant time analyzing the third part of the Gardinier test, whether the obligations were interrelated. Id. at 96-104.
In sharp contrast to American Home, the parties here have specifically and expressly agreed that the Master Agreement is itself indivisible and is also part of a larger integrated contract. Servicers that service mortgages owned by Freddie Mac must comply with the Purchase Documents, as defined in the Freddie Mac Guide to include the Master Agreement, the Freddie Mac Guide, Guide Bulletins, Guide Amendments, Guide Plus Additional Provisions, and any additional agreements the servicer enters into with Freddie Mac, including specific Terms of Business applicable to the business relationship between that party and Freddie Mac. The integrated nature of these documents is further evidenced by the Master Agreement’s express incorporation of the Freddie Mac Guide. See Master Agreement at 1 (“The Master Agreement incorporates the provisions of the Freddie Mac Single-Family Seller/Servicer Guide (the ‘Guide’), and supplements the Guide.”). The Freddie Mac Guide expressly provides that it “governs the business relationship between a Seller and Freddie Mac relating to the sale and Servicing of Mortgages.”10 Additionally, a seller must service all loans that it has sold to Freddie Mac and/or has agreed to service for Freddie Mac in accordance with the standards set forth in the seller’s Purchase Documents.
These provisions evidence the parties’ intent that the servicing and origination obligations not be severed. They prohibit a transfer of servicing obligations without assumption of servicing and origination-related representations, covenants and warranties. Thus, unlike the agreements at issue in American Home, in this case the Master Agreement, the Freddie Mac Guide, and the Purchase Documents constitute a fully integrated, indivisible agreement. The Debtors can only assume and assign those agreements in their entirety, or not at all.