Attached files
file | filename |
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8-K/A - 8-K/A - DITECH HOLDING Corp | d466949d8ka.htm |
EX-99.3 - EX-99.3 - DITECH HOLDING Corp | d466949dex993.htm |
Exhibit 99.2
Reverse Mortgage Solutions, Inc.
and Subsidiaries
Consolidated Unaudited Financial Statements
September 30, 2012
Contents
Reverse Mortgage Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2012 |
December 31, 2011 |
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ASSETS |
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CURRENT ASSETS |
||||||||
Cash (including $1,125,000 restricted) |
$ | 20,698,174 | $ | 10,819,148 | ||||
Accounts receivable |
6,572,408 | 3,921,727 | ||||||
Due from related entities |
497,000 | 596,942 | ||||||
Servicer advances, net |
17,235,498 | 10,212,141 | ||||||
Investment in real estate held for sale |
147,648 | 366,879 | ||||||
Prepaid expenses |
479,502 | 286,502 | ||||||
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|
|
|
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TOTAL CURRENT ASSETS |
45,630,230 | 26,203,339 | ||||||
PROPERTY AND EQUIPMENT, NET |
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Equipment |
1,760,259 | 1,361,017 | ||||||
Furniture and fixtures |
864,775 | 570,119 | ||||||
Leasehold improvements |
414,430 | 229,559 | ||||||
Computer software |
600,390 | 390,440 | ||||||
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|
|
|
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3,639,854 | 2,551,135 | |||||||
Less: accumulated depreciation and amortization |
(1,220,875 | ) | (786,042 | ) | ||||
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|
|
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TOTAL PROPERTY AND EQUIPMENT, NET |
2,418,979 | 1,765,093 | ||||||
OTHER ASSETS |
||||||||
Residential mortgage loans held for investment, net of an allowance for loan losses of $3,509,533 and $2,142,195 |
4,784,208,120 | 2,777,701,407 | ||||||
Other real estate owned, net |
16,119,067 | 10,373,051 | ||||||
Mortgage servicing rights |
11,506,328 | 11,815,190 | ||||||
Deferred tax asset |
17,115,670 | 8,809,084 | ||||||
Investment in joint venture |
23,936 | 48,382 | ||||||
Deposits |
22,006 | 21,756 | ||||||
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|
|
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TOTAL OTHER ASSETS |
4,828,995,127 | 2,808,768,870 | ||||||
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TOTAL ASSETS |
$ | 4,877,044,336 | $ | 2,836,737,302 | ||||
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See Notes to Consolidated Financial Statements
3
Reverse Mortgage Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets Continued
September 30, 2012 |
December 31, 2011 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable and accrued expenses |
$ | 12,161,198 | $ | 6,520,082 | ||||
Warehouse lines of credit |
110,357,989 | 88,744,526 | ||||||
Taxes payable |
2,965,288 | 1,019,076 | ||||||
Deferred income |
3,369,129 | | ||||||
Other current liabilities |
1,528,606 | 971,296 | ||||||
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|
|
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TOTAL CURRENT LIABILITIES |
130,382,210 | 97,254,980 | ||||||
LONG-TERM LIABILITIES |
||||||||
Liability to GNMA Trusts |
4,722,050,766 | 2,721,300,071 | ||||||
Capital lease obligationlong-term portion |
96,586 | | ||||||
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TOTAL LONG-TERM LIABILITIES |
4,722,147,352 | 2,721,300,071 | ||||||
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TOTAL LIABILITIES |
4,852,529,562 | 2,818,555,051 | ||||||
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STOCKHOLDERS' EQUITY |
||||||||
Convertible Preferred stock, 8% cumulative; $0.00000001 par value; authorized 10,000,000 shares including 9,615,385 shares designated as Series A Preferred stock; issued and outstanding 9,615,384 shares at $1.04 per share of Series A Preferred stock |
| | ||||||
Common stock, $0.00000001 par value; authorized 23,000,000 shares; issued and outstanding 7,500,000 and 8,333,333 |
| | ||||||
Additional paid-in capital |
10,000,000 | 10,000,000 | ||||||
Retained earnings |
14,514,774 | 8,182,251 | ||||||
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TOTAL STOCKHOLDERS' EQUITY |
24,514,774 | 18,182,251 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ | 4,877,044,336 | $ | 2,836,737,302 | ||||
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See Notes to Consolidated Financial Statements
4
Reverse Mortgage Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
NET INTEREST INCOME |
||||||||
Interest income |
$ | 108,194,339 | $ | 100,517,726 | ||||
Interest expense |
94,103,686 | 91,022,635 | ||||||
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|
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Net interest income |
14,090,653 | 9,495,091 | ||||||
Provision for loan losses |
1,665,529 | 744,195 | ||||||
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|
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TOTAL NET INTEREST INCOME AFTER PROVISION |
12,425,124 | 8,750,896 | ||||||
FAIR VALUE GAINS (LOSSES) |
||||||||
Change in fair value of mortgage servicing rights |
(336,438 | ) | 1,353,385 | |||||
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|
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TOTAL FAIR VALUE GAINS (LOSSES) |
(336,438 | ) | 1,353,385 | |||||
NONINTEREST INCOME |
||||||||
Loan administration fees |
13,557,392 | 8,079,162 | ||||||
Asset management fees |
9,977,336 | 3,647,238 | ||||||
Software development fees |
4,325,132 | 2,031,205 | ||||||
Loan origination fees |
345,800 | 121,765 | ||||||
Consulting fees and other income |
243,870 | 70,421 | ||||||
Gain on sales of investment in real estate |
54,107 | 208,209 | ||||||
Gains on sales of mortgage loans |
6,570 | 19,635 | ||||||
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TOTAL NONINTEREST INCOME |
28,510,207 | 14,177,635 | ||||||
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NONINTEREST EXPENSES |
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Personnel expenses |
18,168,921 | 11,398,235 | ||||||
Retail loan origination expenses |
1,501,634 | 632,021 | ||||||
Loan servicing expenses |
1,144,450 | 588,754 | ||||||
Professional fees |
946,023 | 616,699 | ||||||
Rent and occupancy |
643,440 | 522,574 | ||||||
Telephone, postage and delivery |
563,002 | 400,654 | ||||||
Advertising and promotional expenses |
415,220 | 244,392 | ||||||
Depreciation and amortization |
435,300 | 531,541 | ||||||
Travel and entertainment |
455,654 | 359,160 | ||||||
Software and equipment expenses |
394,334 | 239,014 | ||||||
Other general and administrative expenses |
1,043,830 | 766,123 | ||||||
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TOTAL NONINTEREST EXPENSES |
25,711,808 | 16,299,167 | ||||||
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INCOME BEFORE INCOME TAXES |
14,887,085 | 7,982,749 | ||||||
PROVISION FOR INCOME TAXES |
5,554,562 | 2,826,985 | ||||||
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NET INCOME |
$ | 9,332,523 | $ | 5,155,764 | ||||
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See Notes to Consolidated Financial Statements
5
Reverse Mortgage Solutions, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders Equity
Nine Months Ended September 30, 2012 | ||||||||||||||||||||
Capital Stock, Issued | Additional Paid-In Capital |
Retained Earnings |
Total Stockholders' Equity |
|||||||||||||||||
Convertible Preferred |
Common | |||||||||||||||||||
Balance, December 31, 2011 |
$ | | $ | | $ | 10,000,000 | $ | 8,182,251 | $ | 18,182,251 | ||||||||||
Net income |
| | | 9,332,523 | 9,332,523 | |||||||||||||||
Cash dividend paid |
| | | (3,000,000 | ) | (3,000,000 | ) | |||||||||||||
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Balance, September 30, 2012 |
$ | | $ | | $ | 10,000,000 | $ | 14,514,774 | $ | 24,514,774 | ||||||||||
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See Notes to Consolidated Financial Statements
6
Reverse Mortgage Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, | ||||||||
2012 | 2011 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 9,332,523 | $ | 5,155,764 | ||||
Items not requiring (providing) cash: |
||||||||
Interest income and premium amortization on reverse mortgage loans |
(108,015,784 | ) | (99,075,605 | ) | ||||
Interest expense and premium amortization on liability to GNMA trusts |
91,975,529 | 89,934,068 | ||||||
Change in fair value of mortgage servicing rights |
336,438 | (1,351,784 | ) | |||||
Deferred income tax benefit |
(8,306,586 | ) | (6,498 | ) | ||||
Depreciation and amortization |
435,300 | 531,541 | ||||||
Provision for loan losses |
1,665,529 | 744,195 | ||||||
Changes in: |
||||||||
Accounts receivable |
(2,650,681 | ) | (1,435,674 | ) | ||||
Due from related entities |
99,942 | 3,404,568 | ||||||
Servicer advances, net |
(7,023,357 | ) | (5,302,569 | ) | ||||
Prepaid expenses |
(193,000 | ) | (19,515 | ) | ||||
Accounts payable and accrued expenses |
5,581,368 | (2,175,367 | ) | |||||
Taxes payable |
1,946,212 | 155,221 | ||||||
Deferred income |
3,369,129 | | ||||||
Other current liabilities |
557,311 | 1,147,463 | ||||||
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Net cash used in operating activities |
(10,890,127 | ) | (8,294,192 | ) | ||||
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INVESTING ACTIVITIES |
||||||||
Purchases of reverse mortgage loans |
(1,981,183,530 | ) | (514,796,072 | ) | ||||
Repayments of reverse mortgage loans |
75,281,255 | 42,842,890 | ||||||
Security deposits placed |
(250 | ) | | |||||
Additions to property and equipment |
(933,052 | ) | (771,022 | ) | ||||
Sales of investments in real estate |
219,231 | 694,220 | ||||||
Investment in joint venture |
24,446 | (10,415 | ) | |||||
Acquisition of mortgage servicing rights |
(27,576 | ) | (10,000 | ) | ||||
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Net cash used in investing activities |
(1,906,619,476 | ) | (472,050,399 | ) | ||||
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FINANCING ACTIVITIES |
||||||||
Proceeds from securitizations of reverse mortgage loans |
2,000,890,267 | 477,957,282 | ||||||
Repayments of liability to GNMA trusts |
(92,115,101 | ) | (45,522,525 | ) | ||||
Net change in warehouse lines of credit |
21,613,463 | 47,975,580 | ||||||
Cash dividend paid |
(3,000,000 | ) | | |||||
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Net cash provided by financing activities |
1,927,388,629 | 480,410,337 | ||||||
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INCREASE IN CASH |
9,879,026 | 65,746 | ||||||
CASH, BEGINNING OF PERIOD |
10,819,148 | 12,944,394 | ||||||
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CASH, END OF PERIOD |
$ | 20,698,174 | $ | 13,010,140 | ||||
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NON CASH TRANSACTION |
||||||||
Capital lease for acquisition of property and equipment |
$ | 184,554 | $ | |
See Notes to Consolidated Financial Statements
7
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: Nature of Operations and Basis of Presentation
Nature of Operations
Reverse Mortgage Solutions, Inc. (RMS or the Company), a Delaware Corporation, was incorporated on February 21, 2007. The Company is a technology-focused reverse mortgage company that was formed to build a proprietary suite of origination, servicing and securitization software solutions specifically for the reverse mortgage market. The Company has utilized its proprietary systems to become a mortgage servicer, asset manager, capital markets participant and consultant in the reverse mortgage market.
RMS is approved as a HUD/FHA Title I and Title II Non-Supervised Lender. It is also a Fannie Mae approved Home Equity Conversion Mortgage (HECM) Seller/Servicer, as well as an approved Ginnie Mae (GNMA) Issuer, Servicer and Master Servicer for reverse mortgage HMBS. At September 30, 2012 and December 31, 2011, the Company serviced more than 79,000 and 61,000 reverse mortgage loans with outstanding balances of $12.4 billion and $8.9 billion, respectively, located in all fifty states and Puerto Rico.
The Company has a loan servicing operations center in Spring, Texas. The staff at this office primarily services reverse mortgage loans. An office in Houston, Texas houses the Companys real estate owned (REO) asset management operations. A loan originations office is located in Hiram, Georgia, and the Companys information technology center is located in Palm Beach Gardens, Florida.
RMS Asset Management Solutions, LLC is a wholly-owned subsidiary of the Company, incorporated on October 1, 2009 in the State of Delaware as a limited liability company. It provides property management services for investor-owned REO properties.
Mortgage Asset Systems, LLC is a wholly-owned subsidiary of the Company, incorporated on March 12, 2007 in the State of Delaware as a limited liability company. It provides consulting services to software customers; however, it was not active in 2012 or 2011.
Specialty Servicing Solutions, LLC is a wholly-owned subsidiary of the Company, incorporated on June 17, 2009 in the State of Delaware as a limited liability company. The Company offers specialty servicing to investors; however, it was not active in 2012 or 2011.
RMSI Consulting, LLC is a wholly-owned subsidiary of the Company, incorporated on June 17, 2009 in the State of Delaware as a limited liability company. It will provide various mortgage related consulting services; however, it has not done any business as of September 30, 2012.
REO Leasing Solutions, LLC is a wholly-owned subsidiary of the Company, incorporated on June 17, 2009 in the State of Delaware as a limited liability company. It will provide property management services for both forward and reverse REO properties, but it was not active in 2012 or 2011.
Mortgage Consultants of America Corporation (MCA) is a wholly-owned subsidiary of the Company that was acquired in a stock purchase transaction on February 9, 2012. MCA was incorporated in the State of Texas on September 25, 1990; however, it has been inactive for several years. It will provide consulting services to the mortgage industry. The Company acquired MCA from a related party. Refer to Note 8 for additional information.
8
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Central Asset Review, LLC is a wholly-owned subsidiary of the Company, incorporated on April 9, 2012 in the State of Delaware as a limited liability company. It will provide claims review services for reverse mortgage investors; however, it has not done any business through the date of this report.
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair statement of financial position, results of operations and cash flows. The information included in these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes included in our Annual Report for the year ended December 31, 2011. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Use of Estimates
In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to prepayment speeds, borrower mortality rates and default rates used in the valuation of mortgage servicing rights, the allowance for loan losses and the amortization of premiums on reverse mortgage loans held for investment and the liability to GNMA trusts.
Reclassifications
Amounts in the prior periods financial statements have been reclassified whenever necessary to conform to the current periods presentation.
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued new guidance regarding balance sheet offsetting disclosures effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The guidance should be applied retrospectively for all comparative periods presented. The amendments require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
In May 2011, the FASB issued new accounting guidance for fair value measurements. This new accounting guidance clarifies existing fair value measurement requirements and changes certain fair value measurement principles and disclosure requirements that will be effective on January 1, 2012. The Company does not expect the adoption of this accounting guidance to have a material impact on its consolidated financial statements.
In April 2011, the FASB issued new accounting guidance for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes the requirement to consider a transferors ability to fulfill its
9
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
contractual rights from the criteria when determining effective control and is effective prospectively to any transactions occurring on or after January 1, 2012. The Company does not expect the adoption of this accounting guidance to have a material impact on its consolidated financial statements.
Note 2: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
| Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| Level 2Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. |
| Level 3Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
In general, the Company estimates the fair value of financial instruments based upon quoted market prices or quoted market prices for similar instruments, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
Fair value is used on a recurring basis for MSRs. Refer to Note 4 for disclosure of fair value information related to MSRs. Fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purpose by applicable accounting guidance on disclosures about fair value of financial instruments. Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value.
Fair Value of Financial Instruments
The carrying amount and estimated fair value of the Companys financial assets and liabilities as of September 30, 2012 and December 31, 2011.
September 30, 2012 | December 31, 2011 | |||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||
Financial assets |
||||||||||||||||
Reverse mortgage loans held for investment |
4,784,208,120 | 4,983,350,120 | 2,777,701,407 | 2,918,193,112 | ||||||||||||
Financial liabilities |
||||||||||||||||
Warehouse lines of credit |
110,357,989 | 110,357,989 | 88,744,526 | 88,744,526 | ||||||||||||
Liability to GNMA trusts |
4,722,050,766 | 4,867,074,766 | 2,721,300,071 | 2,808,686,103 |
10
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A description of the methods and significant assumptions used in estimating the fair value of the Companys financial instruments that are not measured at fair value on a recurring basis is provided below.
| Reverse mortgage loans held for investmentThese loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The Companys valuation considers assumptions that a market participant would consider in valuing the loans, including but not limited to, assumptions for prepayments, credit and discount rate. |
| Warehouse lines of creditThe estimated fair value of the warehouse lines of credit approximates its carrying amount due to the short-term nature of the liability. |
| Liability to GNMA trustsThis liability is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The Companys valuation considers assumptions that a market participant would consider in valuing the liability, including but not limited to, assumptions for prepayments, credit and discount rate. |
Note 3: Reverse Mortgage Loans Held for Investment, Net
Reverse mortgage loans held for investment consist of HECM reverse mortgage loans that have been transferred to GNMA securitization trusts as well as those that are held by the Company but have not yet been transferred to GNMA trusts. The mortgage loans transferred to the GNMA securitization trusts are pledged as collateral to the mortgage-backed debt issued by the trusts and are not available to satisfy the claims of the general creditors of the Company.
The components of the carrying amount of reverse mortgage loans held for investment is summarized in the following table:
September 30, 2012 |
December 31, 2011 |
|||||||
Reverse mortgage loans, principal balance |
$ | 4,500,680,042 | $ | 2,641,436,994 | ||||
Unamortized premiums |
287,037,611 | 138,406,608 | ||||||
Allowance for loan losses |
(3,509,533 | ) | (2,142,195 | ) | ||||
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|
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Reverse mortgage loans held for investment, net |
$ | 4,784,208,120 | $ | 2,777,701,407 | ||||
|
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|
The principal balance of HECM reverse mortgage loans pledged as collateral to the GNMA securitization trusts as of September 30, 2012 and December 31, 2011 was $4,386.2 million and $2,545.2 million, respectively.
The principal balance of HECM reverse mortgage loans pledged as collateral to the warehouse lines of credit as of September 30, 2012 and December 31, 2011 was $104.7 million and $94.2 million, respectively.
11
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for reverse mortgage loans held for investment.
Nine Months Ended September 30, |
||||||||
2012 | 2011 | |||||||
Balance at beginning of period |
$ | 2,142,195 | $ | 1,099,239 | ||||
Provision for loan losses |
1,665,529 | 744,195 | ||||||
Charge-offs |
(298,191 | ) | (75,885 | ) | ||||
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|
|
|
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Balance at end of period |
$ | 3,509,533 | $ | 1,767,549 | ||||
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|
Note 4: Mortgage Servicing Rights
Mortgage servicing assets (MSRs) arise from mortgage servicing contracts where the benefits of servicing are expected to more than adequately compensate the servicer for performing the servicing. Mortgage servicing liabilities arise from mortgage servicing contracts where the estimated future revenues are not expected to adequately compensate the servicer for performing the servicing. The Company has elected to measure all MSR assets and liabilities at fair value.
The changes in the carrying amounts of MSRs for nine months ended September 30, 2012 and 2011 are summarized as follows:
Nine Months Ended September 30, |
||||||||
2012 | 2011 | |||||||
Fair value at beginning of the period |
$ | 11,815,190 | $ | 10,737,449 | ||||
Additions: |
||||||||
Cost of MSRs purchased from other servicers |
27,576 | | ||||||
Fair value of purchased MSRs in excess of cost |
47,234 | | ||||||
Fair value of other MSRs assumed without cash payment |
448,833 | | ||||||
Changes in fair value: |
||||||||
Due to loan pay-offs and realization of cash flows |
(832,505 | ) | (359,483 | ) | ||||
Due to changes in valuation inputs or model assumptions |
| 1,721,268 | ||||||
|
|
|
|
|||||
Fair value at end of the period |
$ | 11,506,328 | $ | 12,099,234 | ||||
|
|
|
|
The measurement of fair value for the MSRs is classified as Level 3 in the fair value hierarchy. The fair value of the MSRs is estimated using the present value of projected cash flows over the estimated period of net servicing income. The fair value was estimated using a 15% discount rate and annual servicing costs of $144 per loan. Loans were stratified using age/gender tranches, which is the most dominant characteristic affecting the mortality of reverse mortgage loans.
Note 5: Warehouse Lines of Credit
The Company has a $75,000,000 revolving mortgage warehouse line of credit with Texas Capital Bank expiring May 21, 2013. During 2010 and 2011, interest on the credit line was computed at a rate equal to the note rate on the underlying mortgage collateral, with a floor of 4.5% and was subject to adjustment. The balance of outstanding borrowings at September 30, 2012 and December 31, 2011 was $72,554,840 and $69,668,555, respectively. On November 1, 2012, the agreement was renewed and extended. The amount available on the line of credit is still $75 million and expires on October 31, 2013. Interest on the
12
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
renewed and extended credit line is computed at a rate equal to the underlying mortgage note rate minus 0.5%, with a floor rate of 4.0%. On December 28, 2012, the Bank approved a temporary increase in the maximum borrowing amount to $100,000,000. The temporary increase expires on May 21, 2013.
The Company has a $40,000,000 revolving mortgage warehouse line with Community Trust Bank, which by its original terms expired on August 4, 2012. Prior to the expiration date, the Bank extended the maturity date to November 30, 2012. On October 30, 2012, the Company and the Bank entered into a Temporary Amendment and Forbearance Agreement whereby the termination date was extended to January 31, 2013 and the maximum borrowing amount was increased to $55,000,000. On January 9, 2013, the Bank further extended the termination date to March 31, 2013. Interest on the credit line is computed at a rate equal to 30-Day LIBOR plus 3.5%, with a floor of 4.5% and is subject to adjustment. The balance of outstanding borrowings at September 30, 2012 and December 31, 2011 was $26,190,470 and $19,075,971, respectively.
The Company has a $50,000,000 revolving mortgage warehouse line of credit with UBS Real Estate Securities, Inc. expiring on August 15, 2013. UBS has granted a temporary increase in this warehouse credit line to $75,000,000. The temporary increase expires on February 11, 2013. Interest on the credit line is computed at a rate equal to One-Month LIBOR plus 2.75%. The balance of outstanding borrowings at September 30, 2012 and December 31, 2011 was $11,612,678 and $0, respectively.
The mortgage warehouse credit line with Texas Capital Bank is secured by a Money Market Demand Account on deposit with the Bank, in which a minimum deposit equal to 1.5% of the total available credit line must be maintained. These lines of credit are guaranteed jointly and severally by the common stockholders and contain covenants that require, among other things, the maintenance of certain tangible net worth, liquidity, and minimum year-to-date profit. The Company is in violation of certain of these covenants as of September 30, 2012 and December 31, 2011. The Company has received waivers of such violations from Texas Capital Bank and UBS Real Estate Securities, Inc. A forbearance agreement was reached with Community Trust Bank. That agreement is still active, but it will terminate effective March 31, 2013.
Refer to Note 3 for information regarding HECM reverse mortgage loans pledged as collateral to the warehouse lines of credit.
Note 6: Liability to GNMA Trusts
When the Company transfers HECM reverse mortgage loans to GNMA securitization trusts, the Company accounts for the transfer as a secured borrowing and recognizes a liability to the GNMA trusts, which is accounted for at amortized cost.
Provided in the table below is a summary of the components of this liability.
September 30, 2012 |
December 31, 2011 |
|||||||
Liability to GNMA trusts, principal balance |
$ | 4,393,401,314 | $ | 2,552,282,789 | ||||
Unamortized premiums |
328,649,452 | 169,017,282 | ||||||
|
|
|
|
|||||
Liability to GNMA trusts |
$ | 4,722,050,766 | $ | 2,721,300,071 | ||||
|
|
|
|
At September 30, 2012 and December 31, 2011, the average remaining life of the liability to GNMA trusts was 4.6 years and 4.7 years, respectively.
13
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7: Stockholders Equity
The Certificate of Incorporation of the Company was amended and restated as of March 29, 2007. Upon filing of the amended and restated Certificate, the following classes of stock, number of shares, and par value were authorized.
| 23,000,000 shares of Common stock, par value of $0.00000001 per share, consisting of 20,500,000 shares of voting Common stock and 2,500,000 shares of non-voting Common stock. The number of shares issued and outstanding as of September 30, 2012 is 7,500,000 voting Common stock shares. |
| 10,000,000 shares of Preferred stock, par value $0.00000001, consisting of 9,615,385 shares designated as Series A Preferred stock. As of September 30, 2012, 9,615,384 shares of Series A Preferred stock were issued and outstanding. |
On April 3, 2012, Series A Preferred stockholders signed an amendment agreeing to allow a distribution to all shareholders as though the Class A Shares had converted to common stock. A total dividend payment of $3,000,000 was made in April 2012 to both common and preferred stockholders. As of September 30, 2012, the Series A Preferred stock had approximately $2,100,000 of cumulative dividends in arrears that had not been accrued. The Company, each Purchaser, and the other stockholders of the Company have executed a Right of First Refusal and Co-Sale agreement pertaining to these preferred shares.
Pursuant to a Stock Repurchase Agreement dated April 30, 2010, the Company repurchased all outstanding shares of common stock owned by one of the Companys shareholders. Immediately prior to the execution of this agreement, this shareholder owned 2,500,000 shares of the Companys voting common stock.
Note 8: Related Party Transactions
The Company leases its Spring, Texas Operations Center from Paymaker, Inc., which is owned 50% by H. Marc Helm who is the President and CEO of RMS. The lease includes usage of all work cubicles, furniture, wiring, printers, and file servers in the rental areas and allocated storage space.
In March 2007, the Company entered into a Monitoring Agreement with JAM Equity Partners, LLC (JAM). Affiliates of JAM own 9,519,230 shares of the Companys outstanding Series A Preferred Stock. Mr. Michael Sekits, a Member of JAM, also serves on the Companys Board of Directors. Pursuant to this agreement, the Company engaged JAM to provide financial, managerial and operational advice in connection with the Companys day-to-day operations and other management services. The Company agreed to pay JAM or its designated affiliate a fee of $25,000 per quarter for services rendered under this agreement. A total of $100,000 was paid during 2012.
JAM also has equity investments in two reverse mortgage origination companies, American Advisors Group (AAG) and Security One Lending (S1L), from which RMS purchases closed loans. RMS securitizes the acquired loans for sale in the secondary market. These purchases are made under terms and conditions that are similar to transactions where RMS purchases loans from unrelated mortgage originators. During the nine months ended September 30, 2012, RMS purchased loans with principal balances from AAG and S1L totaling approximately $227 million and $319 million, respectively.
RMS holds a demand note receivable from AAG with a principal balance of $300,000 at September 30, 2012 and December 31, 2011. The demand promissory note is dated September 9, 2010. The loan was made to assist this company in expanding its loan warehouse credit facility to support higher origination volumes. Interest accrues at 8.5% and is payable monthly. Interest payments are current as of September
14
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
30, 2012. The Company also had accounts receivable from AAG and S1L totaling $497,000 at September 30, 2012, which is included in due from related entities on the consolidated balance sheet. Management believes all balances due from AAG and S1L are fully collectible.
On February 9, 2012, RMS purchased 100% of the outstanding capital stock of Mortgage Consultants of America Corporation (MCA). The stock was purchased for a total price of $100 from the spouse of H. Marc Helm who is the President and CEO of RMS. MCA is a Texas corporation that has been inactive for several years. It had no tangible assets and no liabilities at the date of acquisition.
Note 9: Commitments and Contingencies
Litigation
The Company is involved in claims and legal proceedings arising from the normal course of business. Management believes that the final outcome of any of these matters will not have a material impact on the Companys financial position or results of operations.
Capital Lease
The Company signed a four-year lease expiring in March 2015 to pay for certain equipment and software. The Company will incur monthly payments of $5,636 per month during the four year lease term.
Future minimum capital lease payments required under the lease for the years ended December 31 are as follows:
2012 |
$ | 16,906 | ||
2013 |
67,626 | |||
2014 |
67,626 | |||
2015 |
16,906 | |||
|
|
|||
Total minimum lease payments |
169,064 | |||
Amount representing interest |
(12,929 | ) | ||
|
|
|||
Present value of minimum lease payments |
156,135 | |||
Less: Current maturities of capital lease obligations |
(59,549 | ) | ||
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|
|||
Long-term capital lease obligations |
$ | 96,586 | ||
|
|
Note 10: Subsequent Events
The Company evaluated subsequent events after the balance sheet date of September 30, 2012 through January 14, 2013, the date which the financial statements were available to be issued.
On August 31, 2012, RMS and its stockholders entered into a definitive stock purchase agreement with Walter Investment Management Corp. (Walter), whereby Walter will acquire all of the Companys outstanding capital stock. Consideration in the transaction consists of cash of $95 million and Walter stock valued at $25 million. The transaction was closed on November 1, 2012. It is anticipated that the Company will continue to operate from its current headquarters in Spring, Texas under existing management subsequent to the acquisition.
The Company is not in compliance as of September 30, 2012 and December 31, 2011 with the net worth and net worth to total assets requirements of the government-sponsored enterprises for which the Company performs servicing. In connection with its acquisition of RMS on November 1, 2012, Walter issued a corporate guaranty to satisfy these requirements.
15
Reverse Mortgage Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On October 1, 2012, RMS received notification from a client company that its subservicing contract will be terminated effective December 1, 2012. Approximately 10,000 reverse mortgage loans being subserviced by RMS pursuant to this contract were transferred to another mortgage servicer in January 2013.
16