WMC Mortgage, a leading subprime originator during the boom era, could be placed in bankruptcy by parent company General Electric if it loses a legal proceeding regarding indemnifications on mortgage-backed securities.
TMI Trust Co. alleged it had losses of $425 million regarding $800 million of subprime mortgages, GE said in a May 1 Securities and Exchange Commission filing.
A bench trial started in the U.S. District Court for the District of Connecticut in January. The evidentiary portion of the trial has been completed and final arguments are scheduled for June 12.
There is “the possibility WMC will file for bankruptcy in the event of a finding of liability in the TMI case,” the filing said. It was raised in the context of GE settling a Financial Institutions Reform, Recovery and Enforcement Act proceeding brought by the Department of Justice. That investigation started in December 2015 for loans originated between Jan. 1, 2005, and Dec. 31, 2007.
In the first quarter, GE took a $1.5 billion reserve regarding this ongoing investigation. GE is unable “to develop a meaningful estimate of any additional loss beyond the amount of our current reserve” because of the wide range of penalties seen in other DOJ FIRREA settlements, it said in the filing, which then went on to raise the possibility of bankruptcy if WMC loses the TMI case.
“It is possible, however, that the ultimate liability of GE Capital and/or WMC could be higher than our current reserve if a negotiated settlement of the FIRREA investigation cannot be reached at a level commensurate with the reserve, or if we face adverse litigation outcomes if a negotiated settlement cannot be reached,” the filing then stated.
GE sold WMC’s operations in December 2007, but the company retained representation and warranty obligations for loans it sold to investors as well as to deal with repurchase claims for early payment defaults.
WMC had $298 million of remaining claims submitted before the filing of a lawsuit and $3.11 billion of claims asserted in litigation as of March 31.
At end of the first quarter, there were three other active cases, all of which were filed in New York State Supreme Court. WMC had pending settlements on two of those cases, while the third was dismissed in April.
WMC had $342 million of reserves set up to handle loan repurchase claims on March 31, while it paid out $74 million during the period.