$500,000 in Secret Bonuses??????

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NickStone_IHB

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<p>This will mark the first time I have ever initiated a new thread on this forum, but I must say that what I read pissed me off.....</p>

<p>Here is a quote from The Advocate:</p>

<p>"All but 100 of Mortgage Lenders' 1,800 employees lost their jobs as a result of the bankruptcy. Many of the remaining 100, including top-tier executives, are sharing up to $500,000 in court-approved secret bankruptcy bonuses in addition to their pay for their final weeks on the job. Mortgage Lenders wants its loans sold and its doors shut by the end of April."</p>

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<p>$500,000.00 in COUR APPROVED SECRET BONUSES???? ARE YOU KIDDING. I guess the first point is obvious. If this was publised in The Advocate, it really isn't very secret. Apparently Mortgage Lenders Network USA Inc. recently went bankrupt and wound up stiffing their brokers around 2.5 million dollars in unpaid commissions. Under Delaware law, since the company is going through Chapter 11, the CEO cannot be held accountable for stiffing the employees. However, Connecticut (apparently where the main offices were) states that the CEO can be held accountable. The CEO is bitching that he may wind up behind bars and GMAC wants his comment sticken from the record.</p>

<p>------------------------------</p>

<p>Are court approved secret bonuses for top tier executives in a bankruptcy standardly done? I could not imagine that this is standard practice. When a company goes bankrupt, it is generally the creditors that are being served, not the former employers.</p>

<p>Maybe someone out there has more experience with this than I do... since this sounds ridiculous?</p>

<p>Also, on the Countrywide front, Mr. Mozilo (CEO) repeatedly goes on television touting how his company is going to be the sole survivor in this mess. Immediately after, he dumps approximately 1.5 million worth of his stock options on the market. He has done this around 9 times in the last 30 days. This sounds remarkably similar to Enron. Ironically, I checked the short ratio for Countrywide and it is quite low. (only around 6% of the shares outstanding are being shorted at this time).</p>

<p>Anyway... comments would be appreciated. Particularly regarding how often "secret bonuses" come into play in large scale bankruptcies.</p>
 
What is "The Advocate"? I'm no bankruptcy lawyer, but I know a little about commercial bankruptcy, and I doubt there are "court approved secret bankruptcy bonuses." If there are, I'd be hopping mad also. But the quote you inserted doesn't really make much sense in the first place, which causes me to be skeptical about the reliablity of "The Advocate."
 
<p>I don't know much about BKs but this doesn't seem right at all. I hope someone here does because I am very curious if they pay themselves before their employees. I hope that they do get jail time.</p>

<p>I don't want to seem like I am defending Mozillo but he also acquired 719,350 shares. I am pretty sure he is on a scheduled exercise option. It looks like it was bonus time because there are alot of stock options being acquired. This is typically when people dump them as soon as they get them. So plan on seeing more insider action. There many reasons as to why the short interest is so low. One being that they just haven't dropped that much. They do not have much "debt" and the profit is still there. They also quickly realized how much the pay option arms were going negative so they cut back drastically on funding them. They are diversified in actual banking with deposits and also have an insurance division. Now I still don't like the rate in which the foreclosures are increasing and I am wondering when this will start to hit the profit margins. Keep in mind a property that is REO is an asset. </p>
 
<p>To find the link, go to <a href="http://www.lenderimplode.com">www.lenderimplode.com</a> and click on the article for 4/5/7 titled "GMAC unit wants ex-CEO comments stricken". I tried to paste the link directly but couldn't do it.</p>

<p>Graphix:</p>

<p>Good point on the REO's being accounted for as assets, which could be booked as revenue neutral. However, if this were true, wouldn't the same hold true for all holders of subprime loans? The delinquencies would ultimately end up in failed foreclosure auctions winding up as REO's on someone's books. I know that most of the subprime originators went under so quickly simply because the Wall Street funding got cut off, leaving them with no credit to loan out. But someone has the REO's on their books.</p>
 
<p>Most of the subprime lenders got caught having to buy back loans. Since those loans were sold as mortgage backed securities (MBS) by someone like Merrill and the lender's credit line was with Merrill it made it happen all that much faster.</p>

<p>Now this is how MBS works in a very crude way and the numbers are no where near what is real but this is how I understand it. And this is why the crunch happened as rapidly as it did. Let's say you have an "A" $500k mortgage with a rate of 6% if you sell it the buyer will pay 2% or $10k. You also have a "C-" $500k mortgage with a rate of 9% if you sell it the buyer will pay 6% or $30k because over time the return is higher. So what Coutrywide and New Century do is take all these loans they have and sell them in what is called a pool or group of these mortgages in large batches of $10mil more or less. They take the average of A to C and get paid a fee based on how much A or C is in the pool. The one with more A would sell for a fee of 3% whereas the one with more C would sell for 5%. When a "C-" loan goes bad they need $500k + $30k the 6% + interest lost to the investor + a return fee. When an increase in buy backs happen you need to increase your reserves to make sure you have the capability to buy them plus the fees. The pool of mortgages from Coutrywide are mostly "A" with a minority of "C-" so they don't have that much to buy back. New Century's majority is "C" so they have a higher probability of loans going bad and higher fees to pay. Now here is the catch 22 when a certain percentage amount of that pool goes bad by the what ever the contract states then they will have to buy the entire whole pool not just a single loan. Hence the WTF do we do now we don't have that kind of cash! Then the credit lines get cut off so now they can't make money to pay for these loans. Of course if you are Countrywide you buy back the one loan, pay the fees and take the house back. Yes it is an asset because it is worth something, maybe not $500k but still something. If they sell it for $400k then they can write off the $100k and even send the ex-owner a 1099 for the $100k lost. </p>

<p>Wow it is really late so I hope that gibberish makes sense.</p>
 
<p>Graphix:</p>

<p>Your summary made perfect sense. Thank you. However, I still have one follow up question. When the "C" loans go back, and originators like New Century have to buy them back for the $500K + $30K + Interest Lost, I would assume that New Century would then also get assigned to the Deed of Trust as the new lender. Is this correct? Now of course the situation is different with many of these "Subprime Only" lenders, since they are all going bankrupt, leaving the creditor providers holding the bag and the paper. However, under normal circumstances, buying back the bad loans would also mean that they would get the collateral (house) as well.</p>

<p>I am asking this since none of the Subprime Only lenders seemed to be holding any REOs, even when they were financially healthy? They certainly weren't publishing the properties on their websites as REOs like the other lenders do. So when New Century was still alive, who was getting the NOD houses?</p>
 
<p>I still need to look into those bonuses. That info has to be public info.</p>

<p>Yes they would get an assignment of the deed but it takes forever. It takes months for the assignment from say New Century to the MBS pool. For example I saw one where they assigned the deed in 5/06 but the county didn't record it until 3/07. </p>

<p>I am not sure where you are getting your REO info from but the searches I do show plenty of subprime lenders owning property. Many to go under the name of the MBS pool though like "Deutsche Bank asset backed securites Argent Mortgage 2006-1HE". But Argent, Fremont, HSBC, Accredited and Option One all own a lot of property in OC and a lot more in the IE. Since Deutsche Bank was a major player in the MBS pools for the subprime lenders they own the most property in OC next to Bren. So yes for the lenders who go BK then buyer of the pool is left holding the bag but like you said the house is an asset. </p>
 
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