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Banks’ New Pull on Collateral: A Wachovia–Accredited Home Lenders Case Study

The law firm of ""Susman Godfrey"":http://www.susmangodfrey.com/default.aspxid=1, a litigation powerhouse of 82 trial attorneys with offices in Houston, Dallas, Los Angeles, Seattle, and New York, argues that a by-product of the national credit crunch is that banks are ""cutting the collateral cord"" and often pulling the rug out from under collaborative partners.
""As large banks go cap-in-hand to the Federal government, they're often at the same time going knife-to-throat with their borrowers and business partners,"" the firm said. In many cases, nervous about the deteriorating value of borrowers' collateral, they are seizing any pretext to grab it and sell it, notes Eric Mayer, a partner at Susman Godfrey.
Mayer recently won by stipulation a temporary restraining order against ""Wachovia"":http://www.wachovia.com on behalf of mortgage originator ""Accredited Home Lenders"":http://www.accredhome.com (AHL). AHL had borrowed $750 million from Wachovia to originate mortgages, with Wachovia holding the loans as collateral. As the current value of that collateral declined, Wachovia made repeated margin calls on AHL -- a total of over $110 million this year, all of which AHL paid promptly, Mayer said.
This summer, however, when AHL struck a deal to sell the loans to a third party for at least 85.875 percent of the unpaid principal balance, Wachovia attempted to scotch the deal by writing down the collateral value, imposing a particularly onerous $35.7 million margin call and then declaring AHL in default -- apparently calculating that if AHL were driven out of business, Wachovia could sell the collateral at a higher price, Mayer explained. A Superior Court judge in San Diego put a hold on that action in August with a temporary restraining order.
""The so-called credit crunch is a matter not only of banks offering no new credit, but also of them cutting off the air supply for their existing customers,"" Mayer observes. ""We're seeing more and more of this behavior -- banks moving quickly to yank collateral and then sell it, putting customers who met their obligations at risk of failure. This cut-them-off-and-kill-them mentality is contributing to the downward spiral in asset prices and is putting viable companies out of business.""
Mayer has litigated commercial matters at Susman Godfrey since 1988. He is a member of the firm's newly formed financial fraud task force, aimed at tackling the many claims and issues arising out of the current financial crisis. Representative cases include Metropolitan Mortgage, et al. v. Ernst & Young; Argent Classic Convertible Arbitrage Fund L.P. v. Countrywide Financial Corporation; Folsom v. IndyMac Bancorp, Inc.; American Association for Justice v. Wachovia; and Accredited Home Lenders v. Wachovia. For more information about these actions and the firm's financial fraud task force, ""click here"":http://susmangodfrey.com/xid=299.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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