4,500 AHM borrowers face tax liabilities, foreclosure

BY DANIEL WAGNER | daniel.wagner@newsday.com

5:49 PM EDT, September 12, 2007

Freddie Mac, a government-backed mortgage buyer, has filed court papers claiming bankrupt Melville-based lender American Home Mortgage's handling of the loans it continues to service have exposed more than 4,500 borrowers to increased tax liability and possible foreclosure.

There is "the imminent risk that borrowers' insurance policies may lapse for non-payment, and real property tax bills will go unpaid, resulting in increased tax liabilities and possible tax foreclosure sales," Freddie Mac wrote in a Monday filing with the U.S. Bankruptcy Court in Delaware.

Freddie Mac is the common name for the Federal Home Loan Mortgage Corp.

The dispute concerns $796.8 million in loans that Freddie Mac owned and American Home services. Shortly before American Home's bankruptcy early last month, Freddie Mac attempted to recapture the servicing rights on those 4,547 loans.

Even after Freddie Mac's representatives appeared at American Home's loan servicing center in Irving, Texas, the lender refused to turn over files associated with the loans. The U.S. District Court for Northern Texas ordered American Home to deliver the files because Freddie Mac was "substantially likely to succeed" in obtaining them.

In the end, American Home filed for bankruptcy protection before handing over the files -- placing Freddie Mac in the same position with numerous other creditors who are also fighting to recapture the servicing rights for loans they own. American Home has said that its servicing portfolio is among its most valuable assets, and the company wishes to keep it intact to maximize its value at an auction scheduled for later this month.

But unlike other creditors, Freddie Mac was successful in capturing about $7 million in "custodial account funds" -- monies that are put in escrow as borrowers pay down their mortgages and which are used to pay insurance premiums and real property taxes.

This is standard practice for the vast majority of mortgages, said Jeffrey Zwerling, a mortgage expert and attorney with the Garden City firm Zwerling, Schachter and Zwerling. He said when the custodial funds are separated from loan portfolios, services "don't know who to pay when."

"Without the Mortgage Loan Files ... neither Freddie Mac nor its designee will be able to pay Freddie Mac's borrowers' insurance premiums or periodic real property tax liabilities," the filing says. It says that without access to the $7 million, American Home will be equally unable to pay the borrowers' insurance premiums or property taxes.

American Home declined to comment on the case through its publicity representation. A lawyer for Freddie Mac did not return calls seeking comment.

The matter will be taken up Sept. 20 before U.S. Bankruptcy Judge Christopher Sontchi.