Unbeknownst to the ratings agencies, trustees, and investors, franchise-lender Enterprise Mortgage Acceptance Corp. (EMAC) had been providing financing on an ongoing basis to certain distressed borrowers that might have otherwise been in default, thus skewing the actual performance of its servicing portfolio and the viability of its borrowers, sources said. The extent of the impact is unclear at this point.

"Essentially, they were making these loans so that their servicing portfolio looked favorable to the securitization market, like rating agencies and investors, so that they could keep securitizing, while all the while, they pretty much had distressed companies in the servicing portfolio," an investor told ASR.

According to industry sources, General Motors Acceptance Corp. Commercial Mortgage has made these findings since assuming EMAC's servicing platform in April, when EMAC failed to make its servicing advances (see ASR 4/23/01). Officials at GMAC did not return calls regarding EMAC.

Just before the transfer, delinquencies in the 1998-1 pool spiked from below 10% to more than 20%, while delinquencies in the 1999-1 deal went from about 13% to 18%, according to Fitch. From a source independent of Fitch, the spike in delinquencies and defaults was atrributed partly to EMAC no longer funding the borrowers' operations

It is said that GMAC is restructuring some of the workouts, which can have both positive and negative impacts on the portfolio.

"The quandary in doing that is that, if you delay this any further, the borrower might file bankruptcy," said an investor monitoring the situation. "But if you let this go through, the investors certainly don't get as good as a workout. I think what [GMAC] did was the right thing. They said Stop the presses. We need to redo this whole thing.'"

Meanwhile, recoveries on as much as $100 million in loans to Convenience USA are looking grim, sources said. Convenience USA filed for bankruptcy protection under Chapter 11 in May.

EMAC is said to have been associated with the formation of Convenience USA in 1998, providing the company's financing.

"Convenience USA was set up at the suggestion of some of the principals at EMAC," one source said. "Their strategy was to buy a bunch of gas stations, do an IPO and spend the rest of their lives on the beach."

Officials at Convenience USA did not return phone calls as of press time.

EMAC shut its origination unit in March. The company has three securitizations outstanding - series 1998-1, 1999-1 and 2000-1 none of which have been downgraded. However, all of EMAC's notes are on watch with negative implications by Fitch. Moody's Investors Service, which rated the latter two deals, has also placed those transactions on watch. Both agencies took action in April, following EMAC's failure to advance servicing. Standard & Poor's did not rate the transactions.

Morgan Stanley was lead manager on all three deals.

FMAC's line of credit,

sound structure

In other news, the new Franchise Mortgage Acceptance Corp. is reportedly sporting a $30 million revolving line of credit with Greenwich Capital Markets, to cover servicing advances.

Servicing advances are compensated at the prime rate, currently 6.75%, and are reimbursed at the top of the waterfall, and considered fairly low risk.

Last year, former parent company Bay View Capital made roughly $30 million in servicing advances related to the FMAC portfolio of securitized loans, an industry source noted. FMAC's agreement with Greenwich is unconditional for one year, plus two additional years under a discretionary lending facility.

Sources also noted that FMAC had $10 million in cash when the deal with Bay View was closed.

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