ResCap gets court OK to suspend funding of home equity draw requests

By Caroline Salls

Pittsburgh, May 24 - Residential Capital, LLC received court approval to notify home equity borrowers that it will suspend funding draw requests under some home equity lines of credit (HELOCs), according to a Wednesday filing with the U.S. Bankruptcy Court for the Southern District of New York.

"The debtors cannot risk borrowers drawing on the maximum availability, which currently exceeds $2 billion," the company said in its motion.

GMAC Mortgage will continue to honor draws on some HELOC loans originated and retained by Ally Bank in its held-for-investment portfolio under a servicing agreement, the order said.

Ally Bank will not seek a claim against the Residential Capital estates for funding these advances.

Residential Capital cited restricted liquidity in its Chapter 11 cases as the cause of the proposed funding suspension notifications.

According to the motion, the company continued to honor HELOC draw requests before its bankruptcy filing out of its own funds in connection with those trusts for which the revolving period had ended.

ResCap said it closely managed this process to reduce exposure and to minimize future draw requests.

Despite these efforts, the company said the costs to the debtors of continuing to fund the draw requests has become unsustainable for several reasons.

Shared payments

After the revolving period for debtor-sponsored securitization trusts, the debtors and the securitization trusts must share repayments of principal and interest made by HELOC borrowers.

As a consequence, the company said it receives a fraction of every dollar that borrowers repay on the HELOCs, "which in turn represents only a fraction of every dollar of draws that the debtors have funded after the revolving period."

For other securitization trusts where the debtors have funding obligations, the company said similar funding problems exist because the debtors rely on repayments of principal and interest made by HELOC borrowers to reimburse themselves for funding draws.

"There is virtually no end in sight to this growing cash outlay," the company said in the motion.

No trust borrowing

In the past, Residential Capital said it had the ability to draw on a GMACM Home Equity Notes 2004 Variable Funding trust to finance home equity line draws.

However, the company said the debtors can no longer borrow under this facility, which is currently amortizing.

As a result, the company projected as of Feb. 29 that its net forecasted cash needs for HELOC advances would total more than $85 million for the following 12 months.

The company said it does not know what impact its bankruptcy filing will have on borrower's draw and payment behavior, and it must consider the possibility that borrowers will look to draw on available lines rather than seek new lines from another lender.

Modest cash

In addition, ResCap said it filed its bankruptcy cases "with a modest amount of unencumbered cash."

The company said it effectively has "no choice but to immediately suspend the funding of HELOC draws."

"As debtors in possession, the debtors must make every effort to preserve their cash and limit burdensome obligations under the HELOCs that do not provide a material benefit to their estates, especially when the debtors' liquidity and post-petition funding could not support such substantial monetary demands," the motion said.

ResCap said it will continue to explore possible alternative funding arrangements with counterparties that shift the funding obligation to a non-debtor third party.

The company said in the motion that it intends to continue acting as servicer under HELOC securitization trust documents and applicable servicing or subservicing agreements.

Residential Capital, a New York-based real estate finance company, filed for bankruptcy on May 14. The case number is 12-12020.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.