General Electric has warned that litigation over the quality of subprime mortgages sold by its WMC Mortgage unit could force the business into bankruptcy.
The plaintiff in the case, TMI Trust Co., has alleged it lost more than $425 million on about $800 million worth of WMC mortgage loans. In a trial that began in January, lawyers have finished presenting evidence and closing arguments are scheduled for June 12.
GE said in a regulatory filing last week that there is a possibility WMC “will file for bankruptcy in the event of a finding of liability in the TMI case.”
“This appears to be the first time GE has said it’s exploring bankruptcy for the defunct mortgage business,” CNN Money said, noting that “WMC has emerged in recent months as one of the biggest headaches in GE’s vast business empire.”
GE set aside another $1.5 billion in April to cover potential losses from a Justice Department investigation into WMC loans originated between Jan. 1, 2005, and Dec. 31, 2007. The WMC bankruptcy warning suggests “GE’s losses on the mortgage business could continue to rise,” according to CNN Money.
The regulatory filing said WMC estimates possible losses of up to $500 million above its reserves. However, GE said the estimate “involves significant judgment” given the “range of uncertainties and unpredictable outcomes inherent in litigation.”
Barclays agreed in March to pay $2 billion for allegedly deceiving investors about the quality of its pre-crisis mortgage deals.
WMC was reportedly the nation’s sixth-biggest subprime lender when it was acquired by GE in 2004. Federal bank regulators ranked it as one of the worst subprime mortgage lenders in major metro areas, with more than 10,000 foreclosures between 2005 and 2007.
GE sold WMC’s operations in December 2007 but retained warranty obligations for loans WMC had sold to investors.
Even if WMC files for bankruptcy, GE may still be on the hook for the mortgage unit’s problems. “That’s not going to change with the entity filing for bankruptcy,” said Douglas Baird, a law professor at the University of Chicago. “The subsidiary can just disappear.”