Valuation of Repo Collateral In Dysfunctional Markets
In 2011, the U.S. Court of Appeals for the Third Circuit (in In re American Home Mortgage Holdings, 637 F.3d 246 (3d Cir. 2011)) (AMH II) affirmed the Delaware Bankruptcy Court’s holding in In re American Home Mortgage Holdings, 411 B.R. 181 (Bankr. D. Del. 2009) (AMH I) that, in distressed or dysfunctional markets, the discounted cash flow (DCF) method is an appropriate method to value mortgage loans posted as repo collateral, and therefore, to fix the claim for damages of the non-debtor repo counterparty under §562 of the Bankruptcy Code.
Six years after AMH II, a Delaware Bankruptcy Court addressed this issue again in In re HomeBanc Mortgage, 573 B.R. 495 (Bankr. D. Del. 2017) with respect to a repo involving residential mortgage backed securities. Notwithstanding that HomeBanc involved the same time period involved in AMH, and similar though not identical underlying assets, it refused to accept the DCF method to value the repo collateral. While the HomeBanc opinion is in line with investors’ expectations, it did little to provide certainty to the valuation of repo collateral in bankruptcy.
On December 7, The New York Law Journal published an article authored by Financial Restructuring partner, Shmuel Vasser, analyzing the opinions and the issues they raise.