Financial difficulties in today’s climate have affected both consumers and corporations. The impact of the current credit crunch has walloped both borrowers, such as homeowners, and lenders like the large and small mortgage banks. In the latest example of just how precarious the financial situation has become, Fieldstone Mortgage Company, a sub-prime lender based out of Maryland, has filed for bankruptcy protection under Chapter 11.
The Chapter 11 filing essentially allows Fieldstone to reorganize its secured debts and pay off its creditors. Chapter 11 can be used by individuals or corporations, but are usually filed by corporations. Of the bankruptcy options available, Chapter 11 reorganizations are considered the most flexible for debtors to regain their healthy financial status.
Under Chapter 11 of the Bankruptcy Code, a corporation proposes a timeline and plan to pay off its debts and can continue to operate under conditional provisions. Creditors of the corporation form a committee to confirm or disapprove the plan for restructuring. In the Chapter 11 action a trustee is appointed who serves to facilitate a smooth flow between the corporation and the committee. In the event that a trustee is not appointed, the court can appoint an examiner who would investigate the debtor for any improprieties such as fraud, dishonesty and misappropriation, just to name a few.
In the case of Fieldstone, it has petitioned the court to obtain $3.8 million in financing to continue its operations under the proposed reorganization plan. The approval of the funding would essentially allow Fieldstone to continue to operate under the approval of the trustee in order to get the listed creditors paid. In its bankruptcy filing at the US District Court in Baltimore, Fieldstone listed debts totaling roughly $100 million and the assets listed fall between $1 million and $100 million. Most of the creditors listed are names we recognize in the mortgage industry such as Countrywide, Household Savings Bank Corporation (HSBC) and Morgan Stanley, which shows just how far reaching this sub-prime mortgage crisis has become.
It has been reported that Fieldstone made $5.5 billion in loans to sub-prime borrowers in 2006 alone. Huge volumes of sub-prime loans are now at the end of their term and adjusting to much higher interest rates. Consumers who cannot afford the higher payments are giving in to foreclosure and literally mailing in the keys to their homes. The billions of dollars in loans in default have ravaged the mortgage industry and shaken our economy. Banks are now much more careful in selecting who they will fund with a mortgage loan.