American Home Mortgage, a mortgage servicing firm controlled by investor Wilbur Ross, has been sued for dumping homes it controls at firesale prices.
The basic issue is this: As foreclosures accelerate, the company is on the line to pay the bondholders — basically, it steps in itself and is forced to assume the home payments. Not a good position to be in right now. With limited ability to tap the credit markets, it apparently liquidated a ton of homes late last year at “firesale” prices, in order to make payments.
The company’s major creditor, a hedge fund, is suing, saying the firm had no right to do so unilaterally. We have no idea how this will ultimately work out, as it will probably depend on the fine print of AHM’s relationship with the hedge fund, Carrington Capital Management.
But think of what it says about the housing market. In order for AHM to sell off a lot of homes, it had to sell at prices that were deemed to be below market. Sound familiar? It’s easy to talk about the price of assets in the abstract, but when you actually have to sell — and really mark the asset to market — we find that the price is often significantly less than what you were previously calling the market price.