More than 350 bankrupt partnerships established by Equity Programs Investment Corp. (EPIC) filed a plan of reorganization yesterday, raising hopes that the tangled affairs of the real estate tax-shelter organizer can be sorted out by April.
In what is believed to be the largest real estate liquidation ever, the plan calls for the orderly sale of more than 20,000 houses in order to pay off about $1.4 billion of mortgage debt accumulated by the EPIC partnerships.
If approved by the federal bankruptcy court in Alexandria, the plan would allow dozens of savings and loans around the country to avoid writing off millions of dollars in loans they made to the failed EPIC partnerships. The state of Maryland, which took over EPIC last fall when it seized control of its parent, Community Savings & Loan, also stands to save an estimated $50 million to $70 million in potential losses at EPIC as a result of the proposal.
Officials involved with the negotiations to save the EPIC partnerships hailed the filing as a significant step forward in their efforts. However, the plan still needs the approval of other creditors and parties involved, and final acceptance by the bankruptcy court.
EPIC set up tax-sheltered investment partnerships to buy single-family houses around the county -- purchases that were financed by mortgage loans and mortgage-backed securities sold to institutional investors.
Most of these partnerships filed for bankruptcy after defaulting on their mortgage debt last fall, and have not made any payments on their loans for six months.
Intense negotiations followed between lawyers for the partnerships, creditors, Maryland, and the companies that insured the EPIC mortgages over a plan for bringing these partnerships out of bankruptcy and resuming payments to the lenders.
Negotiators have said they are working under an April 30 deadline, which is when federal regulators have said a temporary agreement not to require thrifts to list their EPIC loans as troubled assets will expire.
The plan submitted yesterday to the bankruptcy court resembles one made public by members of a committee of major EPIC creditors, although it differs in some important respects.
Backers said the chief intent of the plan is to avoid a fire sale of the EPIC houses, many of which are located in depressed real estate markets.
Under the plan, the houses would be sold off over a five-to-seven-year period by a manager hired by the lenders, insurers, Maryland, and the limited partners.
During this time, creditors would agree to take a cut in the interest rate paid on the mortgages and securities -- from an average of about 13.8 percent to 8.5 percent -- although they would still be allowed to accrue interest at an 11 percent rate.
The monthly payments would be met through a combination of rent, income from sale of the houses, and contributions from the mortgage insurance companies, which are trying to cut a potential exposure of $350 million.
"The whole purpose of the workout is to avoid putting 20,000 houses on the market all at once. If you did that, it would take years to dispose of them all and would have an adverse effect on their values," said William J. Perlstein, a creditors' committee lawyer, which joined the partnerships in filing the plan.
A representative of the Maryland Deposit Insurance Fund (MDIF), the state agency overseeing Community, said that the state still supports the workout plan, although he refused to comment further.
The plan does make some changes to a plan the state agreed to in October.
Maryland, which took over responsibility for insuring deposits at Community, stands to lose an estimated $120 million in funds loaned by the thrift to the various EPIC partnerships, much of which was unsecured by any property or securities.
State officials estimated in the fall that this amount could be cut in half by a successful EPIC workout, and sources yesterday said this figure is still roughly accurate, albeit a little optimistic.
One potentially controversial aspect of the plan is an agreement by the parties to assign all claims against EPIC to Maryland. Former executives of EPIC and Community have been named in a number of lawsuits, including a multimillion-dollar civil suit by the state. Under the bankruptcy plan submitted yesterday, Maryland would agree to return some of the proceeds realized in a successful suit to EPIC creditors and other parties.
One expected source of opposition to the plan will be the limited partners, who generally stand to lose their investment unless there is money left over after the sale of the houses and payment of the mortgages and other debts.
Murray Drabkin, lawyer for the court-appointed committee representing the limited partners, said he had not seen the plan and could not comment. He said he was not permitted to attend many of the meetings at which the plan was drawn.
"They proceeded to hold the meetings without us and proceeded to carve up the limited partners' interest without the official commitee being present," Drabkin said.