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NEW YORK, Feb 6 (Reuters) - Mortgage Lenders Network USA Inc., once the 15th-largest U.S. lender to people with weak credit, plans to seek court permission to liquidate after a surge in defaults and an "inadvertent" error in pricing a new loan led to its bankruptcy, court papers filed on Tuesday show.
The firm filed for Chapter 11 protection from creditors on Monday with the U.S. bankruptcy court in Delaware.
In a Tuesday filing, Daniel Scouler, the firm's chief restructuring officer, said Mortgage Lenders had obtained an agreement from one lender, Residential Funding Co., to provide operating cash, but plans to ask the court to let it reject leases and contracts and to sell machinery and office equipment.
"These funds, along with other assets of the debtor, will be used to fund the debtor's plan of liquidation which the debtor anticipates filing during the second quarter," Scouler, a principal at Chicago restructuring firm Scouler Andrews LLC, said in the filing.
Mortgage Lenders employs 267 people in Middletown, Connecticut, where it is based, and at its servicing unit in Wallingford, Connecticut, down from 1,780 employees nationwide in November, Scouler said in the filing.
Mortgage Lenders had made $3.31 billion of subprime loans in the third quarter of 2006, according to National Mortgage News.
A Mortgage Lenders spokesman said the privately-held firm would not comment on the filing until later this week.
Subprime lenders are struggling with declining home sales and prices, and with rising defaults. Many are seeking buyers. Two sizable lenders -- California's Ownit Mortgage Solutions Inc. and Texas' Sebring Capital Partners LLC -- closed in December.
In his filing, Scouler said a surge in consumer defaults in the fourth quarter forced Mortgage Lenders to buy back more loans it sold despite its recent tightening of lending standards.
He also said Mortgage Lenders made a "significant mistake" in pricing a new loan for more creditworthy borrowers. Because of the error, the firm made $600 million to $700 million of loans that it could sell to investors only at a loss, he said.
The error, he said in the filing, caused a funding "crisis" as providers of "warehouse" lines of credit cut the company off.
In January regulators in at least nine states ordered Mortgage Lenders to stop making loans and to obtain replacement financing for unfunded loans, he said.
That same month, Wachovia Corp.'s WB.N banking unit won a $7.65 million judgment against the company.
"These events in late January 2007 effectively foreclosed any possibility for the debtor to salvage its loan origination business," Scouler said in the filing.