Two area banks yesterday filed suit against the mortgage banking affiliate of Equity Programs Investment Corp. (EPIC), seeking more than $10 million on behalf of owners of mortgage-backed securities issued by EPIC for whom the banks acted as trustees.
The suit follows a lawsuit filed earlier this week by one of the companies that insured mortgages syndicated by EPIC, the troubled real estate investment affiliate of Community Savings & Loan. The suit asks that the insurance company's commitments at EPIC Mortgage Inc. be rescinded because EPIC allegedly made incomplete and inaccurate representations in its application for insurance.
The immediate impact of the lawsuits on negotiations that are under way to devise a rescue plan for EPIC could not be determined, although sources said further legal efforts by creditors to recoup losses might trigger a bankruptcy.
EPIC attorney James Deerin refused comment on the lawsuits yesterday, saying only that "negotiations are ongoing" to work out a solution to the company's problems.
EPIC, which set up tax-sheltered housing partnerships, disclosed recently that it was delinquent on some $1.4 billion in mortgages and mortgage-backed securities. The announcement set off a run on deposits at Community, which is under a Maryland order to obtain federal deposit insurance. The run was stopped when withdrawals from Community were halted for 20 days by Maryland Gov. Harry Hughes.
Maryland officials, investment banks and the insurance companies have been working for the last two weeks to figure out a plan for propping up EPIC. Meanwhile, the various concerns that invested in EPIC securities have been reviewing possible actions to force EPIC to hand over interest and other payments it has missed.
According to the suit filed yesterday in U.S. District Court in Alexandria, EPIC rebuffed numerous efforts by the National Bank of Washington and First National Bank of Maryland to obtain information about what EPIC is doing to meet its obligations to certificate holders for whom the banks are trustees.
"EPIC has refused to inform the trustees where the funds generated by the mortgaged properties are presently being held, has refused to undertake to insure such funds are not diverted to uses other than the payment of the amounts due to the certificate holders and has refused to take effective action to compel its affiliates to turn over those funds," the suit states.
NBW processes payments on mortgages worth $408 million for 59 different holders, while First National handles payments on $516.4 million for 47 holders, the companies said. At this point in the month, they should have received about $11 million in payments, according to the suit.
In order to get as much of that money as is available, the lawsuit asks the court to appoint a federal equity receiver to oversee the servicing of the mortgages. Another alternative proposed by the suit is to remove EPIC from control of those mortgage payments and to have those payments go straight to the banks or to a court-controlled escrow fund.
The banks' move represents "what you would expect a trustee to do in this situation," said Michael Moleski, an analyst with Moody's Investors Service who has been monitoring the situation. "All they're trying to do is to make sure that nobody comes in and divvies up the stuff [EPIC's remaining funds] without accounting for their investors."
Moleski and other observers were uncertain as to what impact the lawsuit would have on the continuing negotiations, spearheaded by the investment firm of Dean Witter Reynolds, to devise a bailout for EPIC.
However, one source close to the banks said, "The filing of the suit should not hinder a workout of the EPIC situation but represents an effort by the trustees to maintain the status quo while those efforts continue."
Another wild card was thrown into the complex situation on Monday when the United Guaranty Residential Insurance Co. filed suit in North Carolina against EPIC Mortgage and all the companies that have secured insurance or commitments for insurance for loans originated by EPIC after Jan. 1.