Washington Mutual Inc. has reached a deal with First Magnus Financial Corp. that will allow it to keep more than $1 billion in mortgage loans that it bought from the failed, Tucson-based mortgage lender.
In documents filed with the U.S. Bankruptcy Court in Tucson, First Magnus said it agreed not to fight for control over the loans. A fight would have forced Washington Mutual, the country’s largest thrift, to sell the loans at a potential loss.
In return, Seattle-based Washington Mutual agreed to drop a disputed claim on a separate pool of $3.15 million in First Magnus mortgages. First Magnus, which collapsed into bankruptcy last month and is going out of business, said the agreement allows it to sell those loans and use the proceeds to complete the wind-down of its operations.
First Magnus is one of a slew of mortgage lenders that collapsed in the wake of the subprime mortgage meltdown. It blamed problems in the secondary mortgage market for its decision to shut down.
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Under loan repurchase agreements reached in 2004 and 2007, First Magnus sold mortgage loans to Washington Mutual and entered into agreements to repurchase the loans in the future.
On Sept. 12, several weeks after First Magnus filed for bankruptcy, Washington Mutual notified First Magnus that it intended to retain mortgage loans with repurchase prices of $1.03 billion and $54.4 million.
Under the repo agreements, First Magnus had the right to object, which would have required Washington Mutual to sell them at a public or private sale, according to court documents.
Selling them on the open market, First Magnus said, would result in “a significant deficiency,” which would then become an unsecured claim against First Magnus.
First Magnus said that by not objecting, “it will eliminate a significant amount of claims against its estate ...”
First Magnus has asked a bankruptcy judge for permission to withhold its objection to Washington Mutual’s keeping the loans. A hearing on the matter is scheduled for Oct. 2.
The mortgage crisis has also taken a toll on Washington Mutual, which said this month it will stop purchasing mortgages from others and instead move to expand its direct retail-lending business.
The shift will result in 1,000 job cuts — approximately 8 percent of the company’s work force — by mid-November. But Washington Mutual also plans to hire 1,000 loan consultants over the next few months as part of the expansion of its own retail-lending business.
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