Aegis Mortgage Corp. files for bankruptcy

MARY FLOOD, Copyright 2007 Houston Chronicle | Monday, August 13, 2007 Comments 0 E-mail Print  Page 1 of 1

 Aegis Mortgage Corp. filed for bankruptcy in Delaware on Monday, seeking protection from its creditors.  The filing comes one week after New York-based American Home Mortgage Investment Corp. did the same.  Using Chapter 11 of the bankruptcy code, Houston-based Aegis and affiliated companies claim the “extreme changes in market conditions, coupled with the rapid decline in the secondary mortgage market” severely affected its operations and led to this filing.  On Aug. 6, the company that dealt heavily in high-risk residential mortgages stopped originating loans. A day later, it laid off 782 of its 1,302 employees. Then on Aug. 8, the state of Connecticut issued a then-moot cease and desist order to make sure Aegis made no further loans there.  “We are working to wind down our business affairs as expeditiously as possible, with the goal of preserving Aegis’s value for the benefit of all parties concerned. We are deeply disappointed that the rapid decline in market conditions compelled us to take this action,” said Dan Gilbert, Aegis chief executive officer, in a written release.  The brief news release also said “due to the extreme and unprecedented conditions Aegis presently faces in the marketplace, including the accelerated demand for capital, we were compelled to take the necessary and responsible step of seeking Chapter 11 protection.”  The company listed about $625 million in debt with almost $16 million in unsecured claims owed to Morgan Stanley, more than $14 million owed to Countrywide, more than $10 million to EMC and more than $8 million owed to each Aurora Loan Services and Goldman Sachs.  Ray Nimmer, bankruptcy professor and dean of the University of Houston Law Center, said he is not surprised that a company in this business would be filing for bankruptcy now or that its court papers and public statements would be filled with adjectives about how unexpected and dire market changes caused this collapse.  “The first question people ask about a bankruptcy is why? Why did it happen? What the company basically is doing is laying out the case that it wasn’t due to any huge mistakes by anybody, but due to the market,” Nimmer said.  He said that when oil companies went bust in the ’80s, a lot of similarly dramatic language was used in bankruptcy petitions to basically say “It wasn’t us, it was the market.”  “We’re starting to see real indications of the softness of this business model,” Nimmer said, noting that the failure of mortgage companies lending to high-risk homeowners has obviously shaken investors. “The bottom line is when there is high risk and high return, there is also a high likelihood of failure.”  He said the bankruptcy code’s Chapter 11, designed to reorganize troubled companies, is often used to liquidate companies as well. He said it allows for more time and more flexibility in the sales of assets than the Chapter 7, the code’s chapter for just liquidation. The current management is also allowed to stay on longer under the reorganization chapter.  According to the court papers, Aegis is a full-service residential mortgage company that had lending operations in 49 states and offices in 24 states. It generated about $800 million in monthly loan originations and serviced about $3.6 billion in mortgage loans.  Some of its business was with borrowers with good credit scores, but a majority was with “sub-prime” or higher risk borrowers with lesser credit scores.

The court papers indicated these risky borrowers started to default on their loans and Aegis was hit with requests to repurchase some loans it had sold and with “unprecedented” calls for capital due Aug. 3.  The company was forced to stop issuing mortgages Aug. 6, the Monday after the capital calls. On Aug. 8, Connecticut got a cease and desist order against Aegis, followed shortly by the states of Massachusetts, California, Iowa and Tennessee, the court papers indicate.  The list of equity security holders shows that Madeleine, LLC in New York, affiliated with Cerberus Capital Management, holds nearly 81 percent of Aegis. Aegis affiliates are included in this bankruptcy petition.  Company spokeswoman Pat Wente said no one at the company would be commenting beyond the brief written news release.  The company is represented by Delaware lawyer Laura Davis Jones, a former debtor’s counsel in a Continental Airlines bankruptcy case, who practices with the Wilmington firm Pachulski Stang Ziehl Young Jones & Weintraub. Jones could not be reached for comment Monday afternoon.

mary.flood@chron.com

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