HomeBanc Corp.'s sudden exit from the mortgage lending business left dozens of Georgia real-estate lawyers holding millions of dollars worth of bad checks, attorneys say.
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Near midnight last Thursday, HomeBanc filed for Chapter 11 bankruptcy in Wilmington, Del., out of cash and out of a business that had flourished in its hometown of Atlanta. Lawyers whose real-estate practices flourished along with HomeBanc had already begun worrying about the mortgage-funding checks from the big lender that they'd deposited in their escrow accounts.
In recent months, mortgage lenders have been collapsing in and out of bankruptcy as lenders shut off the flow of cash to make mortgage loans.
In Georgia, real-estate deals are funded right at the closing table. Lawyers had written checks to sellers out of those escrow accounts, and if HomeBanc's checks bounced, the shaking of the global credit markets occasioned by the downturn in the U.S. mortgage industry was going to hit home.
The checks bounced, and HomeBanc named about two dozen Georgia law firms on its list of unsecured creditors, people who stand to get what's left over after the failed mortgage company's top lenders get paid.
"It's pretty ugly right now," said Scott Logan, president of the Georgia Real Estate Closing Attorneys Association, a group for lawyers who make their living at the deal tables.
"I can only assume that there are some lawyers out there who are running to their banks and taking out equity loans and doing what they need to do to cover it, because those are just flat-out shortages in their escrow accounts," said Logan, with Atlanta's Fryer Law Firm.
Unlike many other states, Georgia's "good funds" law allows lawyers to take an ordinary check from a mortgage company, rather than a wire transfer or cashier's check. That may be why the collateral damage on the real estate bar is so much greater in HomeBanc's bankruptcy case than in the failure of other mortgage lenders, said H. Gilman Hudnall of Hudnall Cohn & Abrams, a two-time past president of the Georgia closing-attorneys group.
"Some lenders — HomeBanc was one of them — pretty much insisted on doing their funding by check," Hudnall said. Given HomeBanc's regular volume of business and the average size of real estate transactions, Logan estimated that Georgia lawyers are looking at a minimum of $10 million worth of collateral damage from HomeBanc's failure.
"Word on the street" in Atlanta puts the figure higher, said Sanford J. Gerber of Gerber & Gerber, a local real estate firm.
Lawyers with deals in the pipeline have to be able to write good checks themselves or face possible trouble with the State Bar of Georgia, which takes a dim view of attorneys who write rubber checks.
"It's putting attorneys in a very bad position," Gerber said.
An informal committee of real estate closing lawyers has filed papers to make an appearance in HomeBanc's bankruptcy case. Lawyers with that committee didn't return calls.
Getting an answer from the bankruptcy case takes time, Hudnall commented. According to Logan, many of the firms on HomeBanc's list don't have the luxury of time.
"There are firms in there that are one- or two-man shops and if you have one $150,000 loan with HomeBanc, you're in the ditch," Logan said.
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