UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
IXI ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
I I TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-9742
HARBOURTON FINANCIAL SERVICES L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1573349
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2530 S. Parker Road,Suite 500, Aurora, CO 80014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 745-3661
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Preferred Units New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At March 21, 1997, registrant had 41,169,558 Preferred Units
outstanding including 5,334,580 Preferred Units held by non-
affiliates of the registrant with an aggregate market value of
such units of approximately $6,001,403 based upon a closing sales
price of $1.125.
Documents incorporated by reference: None
The exhibit index begins at page 48 of this Form 10-K.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 36
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant 37
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management 43
Item 13. Certain Relationships and Related Transactions 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 48
Signatures 93
Exhibit Index 48
PART I
Item 1. Business
General
Organization
Harbourton Financial Services L.P. ("HBT" or the "Partnership")
was created pursuant to a Certificate of Limited Partnership
filed with the Secretary of the State of Delaware on August 12,
1987 and a limited partnership agreement (the "HBT Agreement")
dated as of August 12, 1987. Harbourton Mortgage Corporation
(the "General Partner") was incorporated in the State of Delaware
on August 12, 1987 (as amended and restated). The General
Partner manages the business and affairs of HBT and has exclusive
authority to act on behalf of HBT. HBT's termination date is
December 31, 2050 unless dissolved sooner or terminated pursuant
to the HBT Agreement.
Harbourton Assignor Corporation ("Assignor Limited Partner") is
the sole limited partner of HBT. Pursuant to the HBT Agreement,
the Assignor Limited Partner holds for the benefit of the holders
of the Preferred Units all of the limited partnership interests
underlying such Preferred Units. Each Preferred Unit is
evidenced by a beneficial assignment certificate, which is issued
by the Assignor Limited Partner and HBT in fully registered form.
Each holder of a Preferred Unit is entitled to all of the
economic rights and interests in the underlying limited
partnership interest held by the Assignor Limited Partner, and
each holder of a Preferred Unit has the right to direct the
Assignor Limited Partner on voting and certain other matters with
respect to such underlying limited partnership interests.
As of December 31, 1996, HBT consists primarily of HBT and its
wholly-owned subsidiaries Harbourton Mortgage Co., L.P. ("HMCLP")
and Harbourton Funding Corporation ("HFC") and its 50% interest
in HTP Financial, L.P. ("HTP") (collectively referred to as the
"Partnership"). HBT, through its subsidiary HMCLP, is a full-
service mortgage banking operation that originates and services
mortgage loans.
Intent to Sell Remaining Partnership Assets
On January 31, 1997 pursuant to Section 8.10 of the HBT Agreement
(as amended and restated) the Board of Directors of the General
Partner had determined that there is a substantial risk that an
Adverse Tax Consequence (as defined below) will occur within one year
and that it is in the best interests of the Partnership and the
holders of beneficial interests in the Partnership (collectively,
"Unitholders") to sell or otherwise dispose of all of the assets
of the Partnership and to liquidate the Partnership as soon as
reasonably practicable. Pursuant to Section 8.10 of the HBT
Agreement, in the event that the General Partner reasonably
believes that within one year there is a substantial risk of the
Partnership being treated for federal income tax purposes as a
corporation (an "Adverse Tax Consequence") as a result of, among
other things, a reclassification of the Partnership as a
corporation under the Revenue Act of 1987 (the " 1987 Act") for
its first taxable year beginning after December 31, 1997, the
General Partner may take certain actions, including the
liquidation of the Partnership, upon not less than 30 days prior
written notice to the Partners and the Unitholders unless, prior
to the taking of such action, the Unitholders shall have voted
against such action by a vote of at least two-thirds of all
Limited Partnership Interests in the Partnership.
Platte Valley Servicing Co., L.P. ("PVSC"), Harbourton Holdings,
L.P. ("Harbourton") and Harbourton General Corporation ("HGC")
are the owners of approximately 85% of the issued and outstanding
Preferred Units, and thus, there is no expectation that such vote
will be taken.
See Management's Discussion and Analysis for a further discussion
of management's intent to sell the remaining Partnership assets.
Business Activities
The Partnership's primary business has been focused on mortgage
banking which consists of (i) mortgage loan servicing activities,
including the acquisition and sale of mortgage servicing rights,
(ii) the origination and purchase of mortgage loans, including
the securitization and sale of the mortgage loans with the
related servicing rights retained or released, and (iii)
investments in other mortgage-related securities.
Mortgage Servicing Activities
The Partnership services and subservices a mortgage loan
portfolio totaling approximately $3.7 billion at December 31,
1996. A mortgage loan servicing portfolio represents the
contractual right to administer a pool of mortgage loans for the
owner of the loans. In return for such services, the servicer
receives a monthly servicing fee and the right to receive other
forms of compensation.
The servicing of a mortgage loan generally involves collecting
the monthly mortgage, property tax and insurance payments from
the borrower, paying the principal and interest portion of such
monthly payment to the owner of the mortgage loan, maintaining
insurance and tax escrow funds, and paying real estate taxes and
hazard insurance premiums to the appropriate recipients when due.
The mortgage loan servicer may also be required to manage the
foreclosure of the loan in the event of a default, disburse
insurance proceeds in the event of damage to the mortgaged
property, analyze the tax and insurance escrow account to ensure
that adequate funds are being reserved, and generally deal with
the variety of administrative details that can arise between the
borrower and the owner of the mortgage loan.
As compensation for servicing the mortgage loans, the servicer
generally receives a fee based on the outstanding mortgage
balances. The fee is typically paid through retention by the
servicer of a portion of the interest payments on the mortgage
loans. The servicer may maintain, on behalf of the mortgagor,
property tax and insurance payments in a custodial account, and
the servicer may derive benefits from the account balances. The
servicer may also benefit from the mortgage principal and
interest balances because the servicer may in certain
circumstances hold collected payments before having to remit such
payments to the mortgage owner or other recipient. Additional
compensation (ancillary income) takes the form of late fees and
other miscellaneous fees. The principal operational costs
related to mortgage servicing are charges associated with
personnel, occupancy costs, electronic data processing, and
foreclosures.
In addition to the need to efficiently manage operational costs,
the amount of revenue and profit that may be received from
investments in servicing portfolios is materially affected by the
rates at which the balances of underlying mortgage loans are paid
and the default risk associated with various servicing
agreements. Rapid prepayments by borrowers reduce aggregate
mortgage loan balances and consequently, reduce the dollar amount
of servicing fees. Prepayment rates vary based upon market
interest rate fluctuations and a wide variety of other factors.
Prepayments on a pool of mortgage loans are influenced by a
variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers,
unemployment, and mortgagors' net equity in the mortgaged
properties. The timing and level of prepayments cannot be
predicted with any degree of certainty. Generally, prepayments
on mortgage loans will increase during a period of falling
mortgage interest rates and decrease during a period of rising
mortgage interest rates. Accordingly, servicing income earned by
the Partnership is negatively impacted during a period of
declining mortgage interest rates and favorably impacted during a
period of rising interest rates.
The adverse impact on the servicing portfolio from declining
interest rates may be offset by a positive impact on mortgage
production operations due to increased mortgage loan originations
(as discussed below). In comparison, during periods of rising
interest rates, prepayments decline causing mortgage loan
origination volume to decrease. Accordingly, this adversely
impacts the mortgage production operations, which may be
mitigated by the favorable impact on the servicing portfolio.
Ownership of servicing portfolios also involves considerations
associated with the default risk that vary depending upon, among
other things, the quality and character of the underlying
mortgage loans and the terms of the various servicing contracts.
For mortgage loans serviced on behalf of Government National
Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), or Federal Home Loan Mortgage Association
("Freddie Mac") programs, payments of principal and interest on
the mortgage loans are generally guaranteed or insured, except
that the amount payable under the agency insurance or guarantee
is typically subject to certain reductions for amounts that the
servicer is obligated to pay in respect of foreclosure costs
(such as interest, attorneys fees, and other expenses), and
further, in the case of the Veterans Administration ("VA")
guaranteed mortgage loans, the VA has the authority to limit its
obligations to the reimbursement of the lesser of a percentage of
the defaulted loan's outstanding principal or a specified
guaranteed amount and the servicer then takes the market risk of
disposing of the property to recover the unreimbursed principal
plus unpaid interest and foreclosure costs.
Mortgage Loan Production
During 1996, the Partnership originated approximately $3.2
billion of mortgage loans. The Partnership primarily originates
and purchases mortgage loans insured by the Federal Housing
Administration ("FHA"), mortgage loans partially guaranteed by
the VA, conventional mortgage loans, nonconforming jumbo loans,
home equity loans and nonconforming credit loans (e.g., B paper
loans). The Partnership's guidelines for underwriting FHA-
insured loans and VA-guaranteed loans comply with the criteria
established by such agencies. The Partnership's guidelines for
underwriting conventional conforming loans comply with the
underwriting criteria employed by FNMA and/or Freddie Mac. The
Partnership's guidelines for underwriting conventional non-
conforming and non-conforming credit loans are based on the
underwriting standards employed by private mortgage insurers and
private investors for such loans.
The Partnership has originated and purchased mortgage loans
throughout the United States on both a wholesale and retail
basis. During 1996, the Partnership's production operations
consisted of approximately 35 branches.
During 1996, the production volume was comprised of approximately
87% wholesale originations. On a wholesale basis, the
Partnership originates loans through and purchases loans from
mortgage loan brokers and correspondents. Loans produced on a
wholesale basis comply with the Partnership's and investor's
underwriting criteria. In addition, quality control personnel
review loans for compliance with these criteria. Mortgage loan
brokers and correspondents qualify to participate only after a
review by the Partnership's management of their reputation,
mortgage lending expertise, and financial wherewithal.
Approximately 2,500 mortgage brokers and correspondents qualify
to participate in the Partnership's wholesale business. The
remaining 13% of the originations are originated on a retail
basis, which consists of originating loans directly with the
mortgagor. Loans produced on a retail basis comply with the
Partnership's and investor's underwriting criteria. In addition,
quality control personnel review loans for compliance with these
criteria.
The sale of originated mortgage loans to third parties may
generate a gain or loss to the Partnership. Gains or losses
result primarily from three factors. First, mortgage loans may
be originated at a price (i.e., interest rate and discount) which
is higher or lower than the Partnership would receive if it
immediately sold the mortgage loan in the secondary market.
These pricing differences occur principally as a result of
competitive pricing conditions in the wholesale loan origination
market. Second, gains or losses may result from changes in
interest rates which result in changes in the market value of the
mortgage loans, or commitments to purchase mortgage loans, from
the time the price commitment is given to the borrower or
correspondent until the time that the mortgage loan is sold by
the Partnership. Third, the value of the originated servicing
associated with the mortgage loans may be recognized in
accordance with Statement of Financial Accounting Standards No.
122, Accounting for Mortgage Servicing Rights-An Amendment of
SFAS No. 65 ("SFAS No. 122") or realized by selling the
originated product on a servicing released basis.
In order to offset the risk that a change in interest rates will
result in a decrease in the value of the Partnership's current
mortgage loan inventory or its commitments to purchase or
originate mortgage loans ("Locked Pipeline"), the Partnership
enters into hedging transactions. The Partnership's hedging
policies generally require that substantially all of its
inventory of conforming and government loans and the maximum
portion of its Locked Pipeline that it believes may close be
hedged with forward contractsor options. The inventory is then
used to form the MBS that will fill the forward delivery
contracts and options. The Partnership is exposed to interest-
rate risk to the extent the portion of loans from the Locked
Pipeline that actually closes at the committed price is less than
the portion expected to close in the event of a decline in rates
and such shortfall in closings is not covered by forward contacts
and options. The Partnership determines the
portion of its Locked Pipeline that it will hedge based on
numerous factors, including the composition of the Partnership's
Locked Pipeline, the portion of such Locked Pipeline likely to
close, the timing of such closings, and changes in the expected
number of closings affected by changes in interest rates.
Mortgage-Related Securities
The Partnership also has investments in other mortgage-related
securities and trusts. "Mortgage-related securities" are
securities that, directly or indirectly, represent participation
in, or are secured by and payable from, mortgage loans secured by
single family and multifamily residential real property and
commercial property. The cash flow generated by the mortgage
assets underlying an issue of mortgage-related securities is
applied first to make the required payments on such mortgage-
related securities and second to pay the related administrative
expenses. The residual cash flow in a mortgage-related
securities transaction generally represents the excess cash flow
remaining after making such payments (the "residual cash flows"
or collateralized mortgage obligation ["CMO"] residual
interest").
Additionally, the Partnership owns investment securities
consisting of a 100% interest in an interest-only strip
derivative of a pool of FNMA mortgage-backed securities. The
Partnership receives monthly payments of interest on this
investment.
Further, the Partnership owns investments in securitized
mortgage acceptance trusts ("SMATs") which are investments that
indirectly entitle the Partnership to the residual cash flows
generated by mortgage-related assets underlying an issuance of a
mortgage-related securities transaction. In a mortgage-related
securities transaction, the residual cash flows generated
represent the excess cash flows after all required payments
including administrative expenses have been disbursed pursuant to
the terms of the mortgage related securities transaction. As
owner of these residual cash flows the Partnership retains the
option to call or redeem the underlying collateral once the
balance falls below a minimum required amount.
The SMATs investment provide a partial hedge against the
Partnership's mortgage servicing portfolio since the value of the
hedge increases during periods of declining interest rates.
Conversely, the value of the Partnership's mortgage servicing
portfolio decreases during periods of declining interest rates.
Competition
The mortgage banking activities in which the Partnership is
engaged are highly competitive. The Partnership competes with
financial institutions, such as banks, savings and loan
associations, other mortgage bankers, insurance companies, and
securities firms, in acquiring, holding and selling mortgage
loans and the related mortgage servicing rights, purchasing and
selling bulk mortgage servicing rights and servicing mortgage
loans. Many of the Partnership's mortgage banking competitors
are significantly larger, have a larger market share, and have
financial resources substantially greater than those of the
Partnership.
Regulation of Mortgage Banking
Mortgage banking is a highly regulated industry. HMCLP is
subject to the rules and regulations of, and examinations by, the
Department of Housing and Urban Development ("HUD"), FNMA,
Freddie Mac, FHA, VA, GNMA and state regulatory authorities with
respect to originating, processing, underwriting, selling,
securitizing and servicing residential mortgage loans. In
addition, there are other Federal and state statutes and
regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on
HMCLP, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers,
regulate payment features, in some cases, fix maximum interest
rates, fees and loan amounts and regulate servicing. FHA lenders
are required annually to submit to the Federal Housing
Commissioner audited financial statements and are also subject to
examination by the Federal Housing Commissioner at all times to
assure compliance with FHA regulations, policies and procedures.
FNMA, Freddie Mac, GNMA and FHA require the maintenance of
specified net worth levels. Among other Federal consumer credit
laws, mortgage origination activities are subject to the Equal
Credit Opportunity Act, Federal Truth-In-Lending Act, Real Estate
Settlement Procedures Act, the Fair Housing Act, the Home
Mortgage Disclosure Act, and the regulations promulgated
thereunder which variously prohibit discrimination, unlawful
kickbacks and referral fees, and abusive escrow practices and
require the disclosure of certain information to borrowers
concerning credit and settlement costs and servicing. Many of
the aforementioned regulatory requirements are designed to
protect the interests of consumers, while others protect the
owners or insurers of mortgage loans. Failure to comply with
these requirements can lead to loss of approved status,
termination of servicing contracts without compensation to the
servicer, demands for indemnification or loan repurchases, class
action lawsuits and administrative enforcement actions which may
involve civil money penalties or treble damages.
Various state laws affect HMCLP's mortgage banking operations.
HMCLP is licensed to do business in those states where their
operations require such licensing. Certain states require that
interest must be paid to mortgagors on funds deposited by them in
escrow to cover mortgage-related payments such as property taxes
and insurance premiums.
Restrictions on Business Expansion
Section 7704 of the Internal Revenue Code (the "Code") provides,
in general, that a publicly traded partnership will be taxed as a
corporation for federal income tax purposes unless at least 90%
of the partnership's gross income is "qualifying income," as
described below. An "existing partnership," however, will not be
taxed as a corporation until the partnership's first taxable year
beginning after December 31, 1997, as long as it does not add a
"substantial new line of business." An "existing partnership" is
defined to include a partnership with respect to which a
registration statement indicating the partnership was to be a
publicly traded partnership was filed with the Securities and
Exchange Commission on or before December 17, 1987, and includes
the Partnership. "Qualifying income" includes certain interest,
dividends, certain real property rents, and gains from the sale
or disposition of a capital asset or property described in
Section 1231(b) of the Code which is held for the production of
"qualifying income."
HBT has treated itself as a publicly traded partnership for
federal income tax purposes since its inception. HBT, as an
entity, currently is not subject to federal income tax because it
is an "existing partnership." Instead, each Unitholder takes
into account his distributive share of all items of Partnership
income, gain, loss, deduction, and credit for the taxable year of
HBT ending within or with the taxable year of the Unitholder in
computing his federal income tax liability for the taxable year,
regardless of whether the Unitholder has received any cash
distributions from HBT. Pursuant to the HBT Agreement, HBT may
not enter into a "substantial new line of business" as such term
is defined in the applicable provision of the Code. See further
discussion of Federal Income Tax Consequences of Liquidation in
Management's Discussion and Analysis of Financial Condition and
Results of Operations Recent Developments.
Employees
At February 28, 1997 the Partnership employed 650 persons, 485 of
whom were engaged in production activities, 112 were engaged in
loan administration activities, and 53 were engaged in other
activities.
Item 2. Properties
The primary executive and administrative offices of the
Partnership and its subsidiaries are located in leased space at
2530 South Parker Road, Aurora, Colorado, and consists of
approximately 33,000 square feet. The lease term extends through
May 31, 2001. The Partnership also owns an office facility of
approximately 37,000 square feet located in Scottsbluff,
Nebraska, which is used to house the Partnership's loan servicing
operations. In addition, at February 28, 1997, the Partnership
leased office space throughout the United States for each of its
35 production branch offices varying in size and lease terms.
Item 3. Legal Proceedings
On March 18, 1997, HMCLP and certain other affiliates were sued
in Federal Court in the Eastern District of Virginia by a
mortgage loan borrower alleging, on behalf of the borrower and on
behalf of alleged class of similarly situated borrowers from HMCLP
since March 17, 1996, that certain payments made by HMCLP to a
broker in connection with the plantiff's loan, and loans to
members of the purported class, violated Section 8 of RESPA.
Management has not had an opportunity to review thoroughly the
complaint or to formulate a response but management expects to
defend the suit vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
The Partnership's Preferred Units are listed on the New York
Stock Exchange ("NYSE") under the symbol "HBT".
The table below sets forth the high and low prices for the
Partnership's Preferred Units for the quarters indicated, as
reported by the NYSE.
Quarter Ended High Low
March 31, 1995 1.875 1.000
June 30, 1995 2.250 1.500
September 30, 1995 2.125 1.500
December 31, 1995 1.875 1.375
March 31, 1996 2.375 1.375
June 30, 1996 2.375 1.625
September 30, 1996 1.875 1.375
December 31, 1996 1.875 1.500
No cash distributions were declared or distributed by the
Partnership during the years ended December 31, 1996 and 1995 due
to the fact that the Partnership incurred tax losses for each of
these years. At December 31, 1996, the number of outstanding
units totaled approximately 41.2 million. Approximately 35.9
million units are held by Harbourton and its affiliates and
certain TMC parties. The Partnership's remaining 5.3 million
were held by 2,039 Unitholders of record at December 31, 1996.
Item 6. Selected Financial Data (in thousands data)
<TABLE>
Earnings Data
For the years ended December 31,
1996 1995 1994 1993 1992
(a) (a) (a) (a)
<S> <C> <C> <C> <C> <C>
Total Revenues $84,480 $53,414 $36,551 $41,797 $14,549
Net Income 5,461 11,624 4,834 11,525 2,787
Net Income Per Unit: $.13 $.31 $.16 $.38 $.09
Weighted Average
Preferred Units 41,414 37,310 30,088 30,088 30,088
Outstanding
Distributions
Declared per $.00 $.00 $.05 $.57 $1.02
Preferred Unit (b)
</TABLE>
(a) The historical consolidated results of operations
presented herein primarily represent the following: a) HMCLP
and Western for the periods prior to June 30, 1994, b) HMCLP and
Western plus a 50% equity interest in TMC for the period from
July 1, 1994 through March 31, 1995, c) HMCLP, Western, HBT and
TMC, from April 1, 1995 through December 31, 1995 and d) HMCLP,
Western, HBT, TMC and a 50% equity interest in HTP from January
1, 1996 to December 31, 1996. See Management's Discussion and
Analysis for further discussion of these transactions.
(b) Distributions declared per Preferred Unit reflect the
historical distributions made by HBT (formerly JHM Mortgage
Securities L.P.) for the period through March 14, 1995 and the
reorganized HBT subsequent to March 14, 1995, based on the
weighted average Preferred Units during those periods. These
distributions have no relation to the operations and weighted
average Preferred Units presented above, which are presented on
the basis of the reorganization, as further described in
Management's Discussion and Analysis and the notes to the
consolidated financial statements.
<TABLE>
Balance Sheet Data
As of December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Selected Assets
Mortgage loans held $214,609 $232,073 $45,237 $157,858 $86,732
for sale, net
Investment in loans
repurchased 40,127 -- -- -- --
from GNMA pools,
net
Advances receivable, 5,709 21,016 22,252 16,751 12,939
net
Mortgage servicing 41,773 75,846 33,899 22,194 17,567
rights, net
Bulk and flow sales 52,658 -- -- -- --
of servicing
receivables
Total Assets $384,120 $356,095 $116,201 $217,749 $129,085
Selected Liabilities
Lines of credit &
short-term $212,388 $232,144 $54,065 $158,578 $93,659
borrowings
Servicing facility 54,400 37,215 22,333 6,596 8,679
Notes payable - 38,412 581 600 9,095 --
affiliates
Partners' Capital $58,932 $54,507 $25,769 $31,241 $18,632
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is management's discussion and analysis of the
financial condition and results of operations of the Partnership.
The discussion and analysis should be read in conjunction with
the financial statements included herein.
Recent Developments
Liquidation of Partnership and Subsequent Events
On January 31, 1997, pursuant to the HBT Agreement (as amended
and restated) the Board of Directors of the General Partner had
determined that there is a substantial risk that an Adverse Tax
Consequence (as defined below) will occur within one year and
that it is in the best interests of the Partnership and the
holders of beneficial interests in the Partnership (collectively,
"Unitholders") to sell or otherwise dispose of all of the assets
of the Partnership and to liquidate the Partnership as soon as
reasonably practicable. Pursuant to Section 8.10 of the HBT
Agreement, in the event that the General Partner reasonably
believes that within one year there is a substantial risk of the
Partnership being treated for federal income tax purposes as a
corporation (an "Adverse Tax Consequence") as a result of, among
other things, a reclassification of the Partnership as a
corporation under the Revenue Act of 1987 (the " 1987 Act") for
its first taxable year beginning after December 31, 1997, the
General Partner may take certain actions, including the
liquidation of the Partnership, upon not less than 30 days prior
written notice to the Partners and the Unitholders unless, prior
to the taking of such action, the Unitholders shall have voted
against such action by a vote of at least two-thirds of all
Limited Partnership Interests in the Partnership. PVSC,
Harbourton and HGC are the owners of approximately 85% of the
issued and outstanding Preferred Units, and thus, there is no
expectation that a vote will be taken.
Under existing tax law, the Partnership is treated as a
partnership and is not separately taxed on its earnings. Rather,
income (or loss) of the Partnership is allocated to the
Unitholders pursuant to the terms of the HBT Agreement and is
included by them in determining their individual taxable incomes,
subject to certain special rules applicable to publicly traded
partnerships. By contrast, a corporation is subject to tax on
its net income and any dividends or liquidating distributions
paid to stockholders are then subject to a second tax at the
stockholder level. Accordingly, under current tax law, the
Partnership enjoys a tax advantage over a similarly situated
entity which is taxed as a corporation.
The 1987 Act generally requires publicly traded partnerships to
be taxed as corporations. However, under the 1987 Act existing
partnerships, such as the Partnership, were allowed to continue
to be treated as partnerships for federal income tax purposes for
all taxable years commencing on or prior to December 31, 1997.
Thereafter, the Partnership will be treated as a corporation for
federal income tax purposes unless contrary legislation is
enacted prior to December 31, 1997.
From time to time, legislation has been introduced in Congress
that would have the effect of extending the December 31, 1997
grandfather date or eliminating altogether the relevant
provisions of the 1987 Act. However, to date no such legislation
has passed both houses of Congress and, in the best judgment of
the General Partner, it is doubtful that any such legislation
will be enacted prior to December 31, 1997. Accordingly, the
General Partner believes that there is a substantial risk that an
Adverse Tax Consequence will occur for the Partnership's first
taxable year beginning after December 31, 1997.
Pursuant to Section 8.10 of the HBT Agreement, the General
Partner has the right to take one of several actions in the event
that it believes there is a substantial risk that an Adverse Tax
Consequence will occur within one year. For instance, the
General Partner has the power to (a) modify, restructure or
reorganize the Partnership as a corporation, a trust or other
type of legal entity, (b) liquidate the Partnership, (c) halt or
limit trading in the Units or cause the Units to be delisted from
the NYSE, or (d) impose restrictions on the transfer of Units.
In addition, the General Partner can continue the Partnership and
allow it to be treated as a corporation for federal income tax
purposes.
The General Partner believes that the consolidation taking place
in the mortgage banking industry makes it difficult for the
Partnership to compete effectively with market participants that
are larger and more readily able to recognize substantial
economies of scale in their operations than the Partnership. The
General Partner believes that the loss of partnership tax
treatment will eliminate an offsetting competitive advantage
which the Partnership has. These factors weigh in favor of
liquidating the Partnership rather than attempting to continue
the Partnership's business in its present or some other form.
Although no assurances can be given, the General Partner believes
that substantially all of the Partnership's assets can be
disposed of in an orderly fashion by the end of 1997. The
Partnership has developed the following liquidation plan:
Liquidation of Assets
The disposition of the Partnership's significant assets can be
summarized into the following categories: i) wholesale
production operations, ii) retail production operations, iii)
remaining servicing assets, iv) servicing operation, and v) other
assets. Subsequent to December 31, 1996, the Partnership began
the process of liquidating its assets as follows:
Wholesale Production Operations
On February 28, 1997, the Partnership's subsidiary, HMCLP,
executed a Purchase and Sale Agreement to sell its wholesale loan
production branch operations to CrossLand Mortgage Corp.
("CrossLand"), a subsidiary of First Security Corporation, for
approximately $4 million in cash. In addition, HMCLP will
receive an earnout payment based on the aggregate principal
amount of loans generated, between $1.5 billion and $4.0 billion,
from the transferred facilities during the thirteen months
following the anticipated closing date of March 31, 1997. If the
aggregate principal amount of loans generated is less than $1.5
billion, the Partnership will not receive an earnout payment. If
CrossLand maintains the same volume of wholesale loan
originations as HMCLP experienced in 1996 (approximately $2.8
billion), this earnout payment would total approximately $3.3
million resulting in total proceeds received from CrossLand of
approximately $7.3 million. If the Partnership receives total
proceeds from CrossLand of approximately $7.3 million, this would
approximate the Partnership's cost basis assigned to the fixed
assets associated with its wholesale production operation, excess
cost of identifiable tangible and intangible assets acquired, and
deferred acquisition, transaction and borrowing costs. The
purchase will not include the wholesale mortgage loan pipeline
being processed by HMCLP at the time of the sale. Pursuant to
the Purchase and Sale Agreement, these excluded loans will be
processed and closed for HMCLP's account by CrossLand pursuant to
an administrative services agreement between the parties.
Retail Production Operations
On March 18, 1997, HMCLP executed a Purchase and Sale Agreement
under which it sold a majority of its retail loan production
branch operations to an unaffiliated third party for an amount
approximately equal to the net book value of the fixed assets
owned by the retail branches. The purchase did not include the
retail mortgage loan pipeline being processed by HMCLP at the
time of the sale. Pursuant to the Purchase and Sale Agreement,
these excluded loans will be processed and closed for HMCLP's
account by the unaffiliated third party pursuant to an
administrative services agreement between the parties. The
Partnership is continuing to explore the disposition and sale of
its remaining retail branches.
Remaining Servicing Assets
As of December 31, 1996, the Partnership's servicing portfolio
totaled approximately $3.4 billion. On March 20, 1997, the
Partnership executed a letter of intent, with an unrelated third
party, for the sale of the Partnership's servicing rights related
to non-recourse FNMA and Freddie Mac loans and GNMA loans with
unpaid principal balances totaling approximately $1.5 billion. The
transfer of the servicing responsibilities is expected to occur
in June 1997. Net proceeds from the sale are expected to be
approximately $26.4 million and will be used to reduce the
Partnership's servicing facility. See Note 10 to the accompanying
consolidated financial statements.
The Partnership, with the assistance of Bayview Trading Group,
Inc., is continuing to market the remaining servicing portfolio
of approximately $1.9 billion. Based on preliminary discussions
with potential buyers for such servicing, the Partnership
estimates to receive net proceeds of
approximately $20.2 million. The net proceeds received for the
sale fo the remaining servicing portfolio could be impacted by
changes in market conditions including, without limitation, changes
in prevailing interest rates.
The net book basis associated with the servicing discussed above
totaled approximately $39.7 million net of related foreclosure
reserves of approximately $2.1 million at December 31, 1996.
Servicing Operation
The Partnership's National Servicing Center located in
Scottsbluff, Nebraska is currently in the process of being
marketed for sale with the assistance of Bayview Financial
Trading Group, Inc. The Partnership's Servicing Center,
including the operations, facilities, fixed assets and employees
is being marketed for sale along with the Partnership's GNMA pool
buyout and reinstatement unit, and its streamline refinance
capability. The book basis of the remaining facilities and fixed
assets was approximately $1.8 million at December 31, 1996.
Mortgage Loans Held for Investment
During the first quarter of 1997, the Partnership sold the
majority of its mortgage loans held for investment portfolio
totaling approximately $3.0 million to an unrelated third party
for approximately $2.8 million. An unrealized loss of
approximately $0.2 million was provided for in the accompanying
December 31, 1996 consolidated financial statements. It is
anticipated that any additional mortgage loans repurchased
subsequent to 1996 and the remaining portfolio will be marketed
and sold in a similar fashion.
CMO Bonds, Residual Interests, Investment Securities and SMATs
During the first quarter of 1997, the Partnership sold its CMO
bond and residual interest portfolio, except for certain non-
economic residual interests, totaling approximately $1.2 million
to unrelated third parties for approximately $3.1 million. An
unrealized gain of approximately $1.9 million was provided for,
in accordance with SFAS No. 115, in the accompanying December 31,
1996 consolidated financial statements. The Partnership is
continuing to market for sale its remaining portfolio. The book
basis of the remaining portfolio was approximately $0.5 million
at December 31, 1996.
Investment in Loans Repurchased from GNMA Pools
The Partnership is currently in the process of negotiating a
sales transaction with an unrelated third party to acquire a
substantial portion of its investment in loans repurchased from
GNMA pools. Based on preliminary discussions with potential
buyers for such assets, the Partnership expects to sell these
assets for an amount that approximates its net book value at
December 31, 1996.
Other
The Partnership is currently in the process of marketing its
remaining assets (not discussed above) for sale. The book basis
of the remaining fixed assets was approximately $2.0 million at
December 31, 1996. The remaining fixed assets will more than
likely be sold at liquidation value which could be significantly
less than the book basis value. In addition, the
Partnership will market and dispose of its remaining operating
receivables and operating payables. The book basis of the
operating receivables may differ from the amounts realized from
such a sale and the book basis of the operating payables may
differ from the actual settled amounts. Accordingly, the
realizability of various items upon liquidation could differ
materially from its carrying value as a going concern.
Wind Down of Operations
Upon completion of the disposition of the Partnership's assets,
the Partnership will be required to wind down the operations of
the disposed units including, without limitation, the production,
servicing and related general administration functions including
financial reporting and accounting. Upon completion of the wind
down functions, the Partnership will be required to terminate
employees not hired in connection with the acquisition of the
business units. Towards this end, the Partnership has announced
and provided notice of termination (in accordance with the
Worker's Adjustment and Retraining Notification Act, WARN) to all
employees located in its corporate headquarters located in Aurora,
Colorado (approximately 140 employees). Additional announcements
may be needed based on the outcome of the disposition of the
related business units. Accordingly, the Partnership will
provide for severance costs during 1997 which will include a
component to induce certain employees to remain until the
liquidation is complete in order to ensure the Partnership meets
all its obligations to its investors and creditors.
Liquidating Distribution
Once the assets of the Partnership have been sold and the
Partnership's creditors have been paid in full, or adequate
provision for such payment has been made, the General Partner
will cause the partnership to pay liquidating distributions to
Unitholders upon the surrender of their Units. While the exact
timing and nature of any liquidating distributions cannot be
precisely determined at this time, the Partnership will not make
any distributions prior to the fourth quarter of 1997. However,
because of the nature of the Partnership's business, it is
possible that Unitholders may receive a portion of their
distributions in the form of an interest in another entity, such
as a liquidating trust. Any such interests will not, in all
likelihood, be transferable by a Unitholder.
During 1997 the Partnership will incur additional expense and
liabilities associated with its liquidation, including, without
limitation, expenses incurred in connection with the disposition
of its business operations and its winding down. In order for
distributions to be made to the Unitholders, the General Partner
will have to make provision for the post-1997 liabilities of the
Partnership, by means of a liquidating trust, an arrangement with
another entity, or other procedure. The post-1997 liabilities
represent obligations of the Partnership which will survive
beyond December 31, 1997, such as indemnification or repurchase
obligations with respect to mortgage loans or servicing rights
sold or to be sold in prior periods or in 1997 or indemnification
obligations with respect to business operations sold or to be
sold in 1997. The amount of such additional expenses
to be incurred by the Partnership in 1997 is unknown at this time
and is dependent in part on factors beyond the Partnership's
control, such as the timing and difficulty of the disposition of
the Partnership's assets and the winding-down process. In
addition, the net amount ultimately available for distribution
from the liquidated Partnership depends on many unpredictable
factors, such as the amounts realized on the sale of the
remaining assets, carrying costs of the assets prior to sale,
collection of receivables, settlement of claims and commitments,
the amount of revenue and expenses of the Partnership until
completely liquidated and other uncertainties.
Federal Income Tax Consequences of Liquidation
Any taxable gain or loss recognized by the Partnership on the
sale of its assets in connection with the liquidation will be
allocated among the Partners for income tax purposes in
accordance with the HBT Agreement. Assuming that a Partner's
interest in the Partnership is liquidated entirely for cash
during 1997, then the Partner will realize gain or loss to the
extent that the cash received is greater or less than the
Partner's adjusted income tax basis in his or her partnership
interest, and the Partner will be permitted to claim any losses
from the Partnership which were previously suspended under the
rules regarding losses from passive activities. Special rules
would apply, however, if a Partner did not receive a full
distribution in cash of his or her interest in the Partnership
during the year. After the payment of all debts, liabilities and
obligations, allocations of income and associated liquidating
distributions will be allocated to the General Partners,
Preferred and Subordinated Unitholders in accordance with the HBT
Agreement. Management is currently unable to determine what if
any liquidating distributions will be made to Subordinated
Unitholders.
Significant Transactions Occurring During the Year Ended December
31,1996
Bulk and Flow Sales of Servicing
On October 4, 1996, the Partnership executed a Purchase and Sale
Agreement with Source One Mortgage Services Corporation, an
unrelated third party, for the sale of the Partnership's
servicing rights related to high coupon GNMA loans with unpaid
principal balances totaling approximately $2.8 billion. The
Partnership took advantage of favorable market conditions in
deciding to sell its GNMA portfolio. The transfer of the
servicing responsibilities occurred on November 1, 1996.
The sale of the servicing rights was recognized by the
Partnership during the three months ended December 31, 1996. The
Partnership recognized a net gain on the transaction of
approximately $2.7 million. The expected proceeds from the
sale were $50.4 million of which $40.2 million was outstanding at
December 31, 1996. The receivable is included in the borrowing
base supporting the Partnership's servicing facility (see Note 10
to the accompanying financial statements. During the first quarter
of 1997 approximately $21.4 million was received and used to reduce
the Partnership's servicing facility. The remaining net
proceeds are expected to be received pursuant to the terms of the
Purchase and Sale Agreement of which substantial portion of the
receivable will be received upon completion of various tasks
associated with the GNMA pool recertification process.
During the year ended December 31, 1996, the Partnership entered
into a bulk servicing sale agreement, with an unrelated third
party, to sell the servicing rights related to a portion of its
conventional servicing portfolio with unpaid principal balances
totaling approximately $244.9 million. The Partnership recognized
a gain on sale of approximately $0.2 million. In addition, the
Partnership entered into a flow servicing contract, with the same
party, to sell the servicing rights related to a certain portion
of the conventional loans it originated. The Partnership sold
the servicing rights to mortgage loans with unpaid principal
balances totaling approximately $540.4 million resulting in a
$6.0 million receivable under this flow servicing contract as of
December 31, 1996, of which $5.2 million has been collected
subsequent to year end.
Sale of Investment in Loans Repurchased from GNMA Pools
During the year ended December 31, 1996, the Partnership entered
into a transaction to sell its investment in certain loans
repurchased from GNMA pools to an unrelated third party. At
December 31, 1996, the Partnership had receivables from such
sales totaling approximately $5.7 million. The loans were sold
with recourse on a servicing retained basis.
Debt Refinancing
On July 30, 1996, the Partnership refinanced its credit
facilities which resulted in a $75 million revolving
servicing facility which converts to a five-year term facility
after one year; a $375 million revolving warehouse credit
facility consisting of two tranches: (i) a $300 million
revolving committed warehouse facility and (ii) a $75 million
discretionary facility for early funding programs; and a
revolving working capital facility of approximately $45 million
to provide financing for servicing advances and repurchased loans
held for sale. This refinancing allowed the Partnership to
manage its liquidity for its servicing and production operations
and to repay its borrowings to affiliates.
Event Subsequent to the Year Ended December 31, 1996
On March 18, 1997,HMCLP and certain other affiliates were sued in
Federal Court in the Eastern District of Virginia by a mortgage
loan borrower alleging, on behalf of the borrower and on behalf
of an alleged class of similarly situated borrowers from HMCLP
since March 17, 1996, that certain payments made by HMCLP to a
mortgage broker in connection with the plaintiff's loan, and loans
to members of the purported class, violated Section 8 of RESPA.
Management has not had an opportunity to review thoroughly the
complaint or to formulate a response but management expects to
defend the suit vigorously.
Business Strategy During 1996
The Partnership's primary business currently has been focused on
mortgage banking which consists of (i) mortgage loan servicing
activities, including the acquisition and sale of mortgage
servicing rights, (ii) the origination and purchase of mortgage
loans, including the securitization and sale of the mortgage
loans with the related servicing rights retained or released, and
(iii) investments in other mortgage-related securities.
The Partnership's concentration in mortgage banking consists
primarily of mortgage servicing and originations. Accordingly,
the Partnership is subject to the risks associated with these
operations. These risks include, (i) the possible adverse effect
of regulatory changes, since virtually all aspects of the
Partnership's business are subject to Federal and state
regulation; (ii) the adverse effect on loan originations and
servicing costs of downturns in real estate cycles or general
economic conditions; (iii) the continued need to maintain
financing availability to fund warehouse lines, finance bulk
acquisitions of servicing rights and to fund advance
requirements; (iv) the need for efficient and sound operations to
achieve profitability and to avoid excessive foreclosure losses
and underwriting problems; (v) the servicer's responsibility in
connection with GNMA pools (which constitute most of the
Partnership's servicing) for foreclosure expenses not reimbursed
by FHA or VA (such as attorneys fees, unreimbursed interest and
other expenses), provided further that VA has the authority to
limit its obligation to the reimbursement of the lesser of a
percentage of the defaulted loan's outstanding principal or a
specified maximum guaranteed amount (a so-called "VA no-bid") and
the servicer then takes the market risk of disposing of the
property to recover the unreimbursed principal plus unpaid
interest and foreclosure costs; and (vi) market and interest rate
risk associated with the origination and secondary marketing of
mortgage loans, such as the adverse effects of changes in
interest rates after the mortgage originator has issued
commitments to the mortgage borrower or the secondary market
purchaser. The Partnership, to a limited degree, has also been
subject to the risks associated with its derivative securities
investments, including, without limitation, other factors (such
as foreclosure rates and pay-offs from home sale activity) which
affect the rate of prepayment on the mortgage loans underlying
the derivative security, actual operating expenses with respect
to the underlying mortgage-backed security, potential tax
liabilities and market conditions unique to such securities.
During the first quarter of 1997, the Partnership sold its CMO
bond and residual interest portfolio, except for certain non-
economic residual interests, which were recorded at fair market
value at December 31, 1996 in accordance with SFAS No. 115.
Mortgage Servicing Portfolio
At December 31, 1996, the Partnership's servicing and
subservicing portfolio consisted of residential mortgage loans
with underlying principal balances of approximately $3.4 billion
and $0.3 billion, respectively. The value and income from
mortgage servicing rights are affected by, among other things,
changes in both short-term and long-term interest rates.
Generally, mortgage servicing portfolios increase in value as
interest rates increase (benefits from escrows being used in
compensating balance arrangements increase when short-term rates
rise and the expected income stream from servicing lengthens as
prepayments slow when long-term rates increase). The benefit
from increases in short-term rates generally is partially offset
by the increased financing costs on borrowings incurred to fund
the acquisition of mortgage servicing rights and other working
capital requirements. Decreases in rates generally have the
opposite effect of decreasing the value and income from mortgage
servicing rights. The Partnership has attempted to mitigate this
negative impact by adding loans to its existing servicing
portfolio through (i) refinancing a portion of the prepaying
loans, (ii) originating new loans and retaining the servicing,
and (iii) purchasing servicing from third parties. In contrast,
in periods of decreasing long-term rates, which stimulate new
home financing and the refinancing of existing mortgage loans,
the Partnership has looked to loan production operations to
provide an increased contribution to earnings as mortgage
originations rise.
Since its inception the Partnership has acquired several bulk
servicing portfolios with unpaid principal balances totaling
approximately $6.8 billion at the time of acquisition (in
thousands):
<TABLE>
Effective Transfer of Upaid Principal
Acquisition Date Servicing Date Balance Acquired
<S> <C>
March 31, 1992 March 31, 1992 $ 644,276
August 31, 1992 October 1, 1992 586,335
July 30, 1993 November 1, 1993 791,856
July 30, 1993 July 30, 1993 282,693
June 30, 1994 September 1,1994 1,045,439
June 30, 1994 July 1, 1994 636,096
June 30, 1994 July 1, 1994 304,375
March 14, 1995 March 14, 1995 1,063,303
June 30, 1995 June 30, 1995 23,615
August 31, 1995 November 1 and
December 1, 1995 1,435,450
November 30, 1995 November 30, 1995 22,130
Total $6,835,568
</TABLE>
Mortgage Loan Originations
During 1996, the Partnership originated approximately $3.2
billion mortgage loans which is summarized as follows (in
thousands except number of loans):
<TABLE>
Number of Principal
Loan Type Loans Balance
<S> <C> <C>
Conventional 12,178 $1,289,842
Government ARMs 4,121 452,778
Government Fixed 9,085 963,126
Other 4,147 512,825
Total 29,531 $3,218,571
</TABLE>
During 1996, the Partnership's mortgage loan production
operations consisted of 35 branches throughout the United States.
During 1996, the production volume was comprised of approximately
87% wholesale originations. On a wholesale basis, the
Partnership originated loans through and purchased loans from
mortgage loan brokers and correspondents. The remaining 13% of
the originations were originated on a retail basis, which
consisted of originating loans directly with the mortgagor.
The sale of originated mortgage loans to third parties may
generate a gain or loss to the Partnership. Gains or losses
result primarily from three factors. First, mortgage loans may
be originated at a price (i.e., interest rate and discount) which
is higher or lower than the Partnership would receive if it
immediately sold the mortgage loan in the secondary market.
These pricing differences occur principally as a result of
competitive pricing conditions in the wholesale loan origination
market. Second, gains or losses may result from changes in
interest rates which result in changes in the market value of the
mortgage loans, or commitments to purchase mortgage loans, from
the time the price commitment is given to the borrower or
correspondent until the time that the mortgage loan is sold by
the Partnership or until it enters into a forward delivery
commitment. Third, the value of the originated servicing
associated with the mortgage loans may be recognized in
accordance with SFAS No. 122 or realized by selling the
originated production on a servicing released basis.
The Partnership's production has been continuously subjected to
economic evaluation to determine the best execution for its
disposition (i.e., servicing released versus servicing retained).
During 1996, the Partnership retained approximately 34% of its
originated servicing.
Typically, the purchaser of mortgage loans for resale, such as
the Partnership, endeavors to minimize its interest rate
risk on commitments made to customers by entering into forward
sale commitments on mortgage-backed securities and mortgage
loans. Net commitment positions are constantly adjusted by
entering into new commitments to sell or by buying back
commitments to sell. The Partnership's hedging policies require
the amount of forward commitments and options outstanding to be
sufficient to protect its interest rate exposure on
mortgage loans held in inventory plus a portion of the
mortgage loans that the Partnership has committed to make to
customers and for which the rate has been locked. The aggregate
amount of commitments is reduced for hedging purposes by an
estimate of mortgage loans in the pipeline for which rates have
been locked which are not expected to close based on historical
experience and current market conditions. The Partnership's
projection of the portion of loans that it expects to close is
based on numerous factors including the composition of the
Partnership's locked pipeline, the portion of such locked
pipeline likely to close, the timing of such closings, and
changes in the expected number of closings affected by changes in
interest rates. The forward sale commitments are utilized in
an effort to mitigate the Partnership's risk resulting from
potential changes in market interest rates between the time that
it commits to make or purchase a mortgage loan at an agreed price
and the time that the mortgage loan is closed and sold. The use
of forward commitments as a strategy to minimize interest rate
risk requires the Partnership to make certain assumptions and
projections about future interest rate and general economic
trends.
As part of the production operations, the Partnership is subject
to certain repurchase and indemnification obligations under its
agreements with the investors to which it sells mortgage loans.
These agreements generally provide that the Partnership will
repurchase from the investor mortgage loans in which
an origination (i.e., underwriting) defect is discovered. The
investor, however, may require the Partnership to indemnify them
against losses that result from a an origination
defect rather than repurchase the loan. The Partnership's
historical liability to repurchase mortgage loans from investors
and indemnify investors for mortgage loan losses has not been
significant. However, at December 31, 1996, the
Partnership has recorded a reserve for future repurchases and
indemnities totaling approximately $1.8 million. The increase in
this liability is required as a result of (i) the increase in
origination volume and (ii) the acceleration of
assertions of claims in the beginning of 1997
after the Partnership's February announcement of its plan to
liquidate during 1997. The reserve was based on management's
evaluation of information currently available.
Mortgage-Related Securities
The Partnership has investments in other mortgage-related
securities and trusts. "Mortgage-related securities" are
securities that, directly or indirectly, represent participation
in, or are secured by and payable from, mortgage loans secured by
single family and multifamily residential real property and
commercial property. The cash flow generated by the mortgage
assets underlying an issue of mortgage-related securities is
applied first to make the required payments on such mortgage-
related securities and second to pay the related administrative
expenses. The residual cash flow in a mortgage-related
securities transaction generally represents the excess cash flow
remaining after making such payments (the "residual cash flows"
or "CMO residual interest").
Additionally, the Partnership owns investment securities
consisting of a 100% interest in an interest-only strip
derivative of a pool of FNMA mortgage-backed securities. The
Partnership receives monthly payments of interest on this
investment.
Further, the Partnership owns investments in Securitized
Mortgage Acceptance Trusts ("SMATs") which are investments that
directly or indirectly entitle the Partnership to the residual
cash flows generated by mortgage related assets underlying an
issuance of a mortgage related securities transaction. In a
mortgage related securities transaction, the residual cash flows
generated represent the excess cash flows after all required
payments including administrative expenses have been disbursed
pursuant to the terms of the mortgage related securities
transaction. As owner of these residual cash flows, the
Partnership retains the option to call or redeem the underlying
collateral once the balance falls below a minimum required
amount. These investments are classified as trading securities
since the Partnership is actively seeking to sell these
investments. Fair market value of these investments generally
represents the estimated amount for which such investments could
be exchanged in a transaction between willing parties. Fair
value is based on estimated future cash flows utilizing estimates
of the value of the underlying collateral, future prepayment
rates, timing of the anticipated call date, and other factors
impacting the value of the underlying collateral. Projected cash
flows are discounted using estimates of discount rates
established in market transactions for instruments with similar
underlying characteristics and risks. The Partnership's SMAT
investment had no value at December 31, 1996.
Liquidity and Capital Resources
The Partnership's available liquidity and uses can generally be
categorized into Mortgage Servicing and Mortgage Loan Production.
Servicing
A source of liquidity and cash flow available to the Partnership
is its owned portfolio of servicing rights on mortgage loans, net
of its servicing facility, with underlying principal
balances aggregating approximately $3.4 billion at December 31,
1996. Currently, there is a liquid and active market for the
sale and acquisition of servicing rights.
The Partnership's liquidity is affected by the level of loan
delinquencies and prepayments due to the servicer's advance
requirements on the loans it services. The Partnership is also
required as a servicer to fund advances for mortgage and hazard
insurance and tax payments on the scheduled due date in the event
that sufficient escrow funds are not available. The
Partnership's sources of liquidity to meet these advance
requirements are internally generated operating cash flows, its
existing lines of credit, and defaulted loan repurchase and sale
transactions with affiliated parties.
The Partnership has a maximum availability of $75 million to
finance or refinance the origination or acquisition of mortgage
servicing rights up to 65% of the market value of the servicing
portfolio as determined by an independent third party appraiser.
The servicing facility is subject to quarterly mandatory
prepayments in an amount equal to the amount by which the
aggregate monthly amortization payment then due exceeds 65% of
the appraised value of the qualified servicing portfolio as
determined by an independent third party appraisal. No such
mandatory prepayments occurred during 1996. The line
availability must be utilized by July 28, 1997.
The Partnership repurchased defaulted loans and resold them to
affiliated parties, under a repurchase/buyout and sale program
with such affiliates, and repurchased additional defaulted loans
prior to foreclosure sale and sold the loans on a servicing
retained basis to such affiliated parties. The servicing
contract does not require the Partnership to advance payments to
the investor (the security holder) if the payments are not
received from the mortgagor or from the guarantor or insurer,
therefore, significantly reducing remittance day advance
requirements.
During 1996, the Partnership began repurchasing defaulted loans
for its own account. At December 31, 1996, the Partnership had a
net investment outstanding totaling approximately
$40.1 million of mortgage loans (with average
interest rates in excess of 9.5%) which it has financed through
an affiliated party. This transaction is reflected in investment
in loans repurchased from GNMA pools and notes payable-affiliates
in the accompanying consolidated financial statements. At
December 31, 1996, the Partnership had borrowed approximately
$36.6 million from an affiliate to fund its investment in loans
repurchased from GNMA pools. These borrowings generally bear
interest at LIBOR plus 2.25%.
Production
One of the Partnership's other primary liquidity requirements is
the financing of its mortgage loan originations and purchases,
until funded by secondary market investors, and the cost of its
loan originations. The Partnership finances its short-term loan
funding requirements principally through warehouse lines of
credit. At December 31, 1996, the maximum amount of borrowing
available under the existing warehouse facility was $300 million.
In addition, the decision to sell mortgage loans servicing
retained versus servicing released influences the Partnership's
liquidity. When mortgage loans are sold on a servicing released
basis, the investor pays the Partnership for the value of the
servicing related to the mortgage loan, thereby increasing the
Partnership's cash flow. Alternatively, when mortgage loans are
sold on a servicing retained basis, the investor does not pay the
Partnership for the value of the servicing related to the
mortgage loan, thereby decreasing the Partnership's initial cash
flow. On servicing retained loan sales, the Partnership receives
cash flow as servicing fee income over the life of the loan. The
following table summarizes the amount of loans sold retained and
released during the years ended December 31, 1996 and 1995 (in
thousands):
<TABLE>
<S> <C> <C>
1996 1995
Released $2,132,129 $650,991
Retained 1,099,970 684,715
$3,232,099 $1,335,706
</TABLE>
Partners' Capital
During the second quarter of 1996, the Partnership purchased from
an unaffiliated third party approximately 0.7 million publicly
traded Preferred Units for approximately $1.1 million. These
units were redeemed thus reducing the publicly traded units and
total outstanding units to approximately 5.3 million units and
41.2 million units, respectively. Accordingly, partners' capital
decreased by approximately $1.1 million during the three months
ended June 30, 1996 due to the transaction.
Other
The Partnership has investments in SMATs which are investments
that indirectly entitle the Partnership to the residual cash
flows generated by mortgage-related assets underlying an issuance
of a mortgage-related security transaction. During the first
quarter of 1996, the Partnership realized a $2.4 million gain
(recognized in income in 1995) through the sale of a portion of
its SMATs portfolio. The unsold SMAT had a carrying value and
fair value of $0 at December 31, 1996.
Additionally, during the year ended December 31, 1996, the
Partnership sold a residual interest and recorded and realized
a gain of approximately $2.5 million.
Further, the Partnership has a subordinated line of credit
available from Harbourton which generally bears interest at rates
ranging from prime to prime plus 2% or LIBOR plus 1%.
Borrowings at December 31, 1996 totaled approximately $1.2
million.
Interest Rate Volatility
The Partnership's results of operations are affected by changes
in interest rates. During periods of declining interest rates,
servicing is adversely impacted by increases in the prepayments
of mortgage loans. The adverse impact on the servicing portfolio
from declining interest rates may be offset by a positive impact
on mortgage production operations due to increased mortgage loan
origination. In comparison, during periods of rising interest
rates, mortgage prepayments decline causing mortgage loan
origination volume to decrease, and conversely the value of the
servicing portfolio is enhanced due to the lower number of
payoffs causing the expected income stream from servicing to
lengthen.
More specifically, lower interest rates and the resulting
increased run-off (the decline in mortgage loans serviced from
increased payoffs) have the following significant negative
impacts on servicing:
1. Reduction in the value of mortgage servicing rights.
Servicing values decrease due to a reduction in the
expected future net income associated with the
declining servicing portfolio.
2. Increased amortization and impairment write-downs. An
extended period of higher than expected prepayments
will cause an increase in the amount of amortization
and/or impairment adjustments to be recognized on
mortgage servicing rights due to a decline in the
estimated fair value.
3. Reduction in the benefit rate from custodial balances.
Lower rates reduce the compensating balance benefit
derived from escrows associated with the serviced
mortgage loans. The reduced benefit rate is somewhat
offset by increased custodial balances due to an
increase in the principal and interest payoff balances
held by the servicer, and an overall reduction in the
Partnership's borrowing cost.
4. Increase in prepayment costs. Prepayment costs
increase due to the increased volume of loans
prepaying.
5. Increase in servicing costs. Servicing costs increase
due to increased operating costs associated with
administering the number of payoffs.
Conversely, periods of rising interest rates have a positive
effect on the servicing portfolio through a reduction in the
overall run-off of the servicing portfolio, which (1) increases
the value of the servicing rights, (2) decreases the amortization
of purchased servicing rights, (3) increases the benefit from
custodial balances, and (4) decreases the prepayment costs and
servicing costs associated with loan prepayments.
Seasonality
The mortgage loan origination business is generally subject to
seasonal trends. The trends reflect the general pattern of sales
and resales of homes, although refinancings tend to be less
seasonal and more closely related to changes in interest rates.
These sales typically peak during the spring and summer seasons
and decline to lower levels from mid-November through February.
Results of Operations
The results of operations during the year ended December 31,
1996, consist primarily of HBT and its wholly-owned subsidiaries
HMCLP and HFC and its 50% interest in HTP Financial, L.P.
(collectively referred to as the "Partnership"). Prior to
January 1, 1996, the results of operations presented in the
consolidated financial statements herein, reflect a series of
transactions completed during the year ended December 31, 1995;
a) the Exchange Transaction, b) the TMC Transaction and c) the
Western Transaction. The following is a brief discussion
relating to the accounting and reporting implementation of these
transactions:
Exchange and TMC Transactions
On March 14, 1995, the existing Unitholders of HBT approved the
issuance of 21.5 million Preferred Units of HBT (a 75.7%
controlling interest in HBT) in exchange for 100% ownership
interest in HMCLP and HFC (the "Exchange Transaction"). Because
of the change in control of HBT, this transaction was accounted
for as the reverse acquisition of HBT by HMCLP and HFC.
Concurrent with the Exchange Transaction, HBT acquired a 50%
interest in TMC in exchange for 0.8 million Preferred Units of
HBT (a 2.9% interest) (the "TMC Transaction"). This interest,
combined with the 50% interest previously contributed to HMCLP by
Harbourton in June of 1994, resulted in HBT's 100% ownership of
TMC.
Accounting for a reverse acquisition requires that the historical
results of operations (prior to the Exchange Transaction) reflect
the operations of HMCLP as the continuing accounting entity.
Further, under the accounting for a reverse acquisition, HBT is
reported as if it were "purchased" as of the date of the Exchange
Transaction. Therefore, the historical results of operations
exclude the operating results of HBT prior to the date of the
Exchange Transaction. These results are reflected in the
purchase adjustments associated with the recognition of this
transaction.
The operating results of TMC are reflected as equity in earnings
in affiliates in the operating results of HMCLP for the period
from June 30, 1994 to the date of the Exchange Transaction.
Thereafter, the results of operations of TMC are reflected as a
100% owned subsidiary of the Partnership and reported in the
consolidated statements of operations.
Western Transaction
On July 31, 1995, HBT acquired Western in exchange for 8.6
million Series B Preferred Units (the "Western Transaction")
which were converted to Preferred Units during the quarter ended
December 31, 1995. This was a transaction between entities under
common control, therefore, the transaction was accounted for
using the pooling-of-interests method of accounting. Under the
pooling method of accounting, the results of operations of
Western are included in the accompanying consolidated financial
statements of the Partnership as if the transaction occurred at
the inception date of each respective entity.
In summary prior to January 1, 1996, the consolidated
results of operations presented herein primarily represent the
following: i) HMCLP and Western for the periods prior to June 30,
1994, b) HMCLP and Western plus a 50% equity interest in TMC for
the period from July 1, 1994 through March 31, 1995, and
c) HMCLP, Western, HBT and TMC, from April 1, 1995 through
December 31, 1995.
Revenues and Expenses 1996 Compared to 1995
Net income (before equity in earnings of affiliates and gain on
bulk sale of servicing) for the year ended December 31, 1996
totaled approximately $2.2 million or $.05 per unit compared to
net income of approximately $2.7 million or $.07 per unit earned
during the year ended December 31, 1995, a decrease of
approximately $0.5 million or $.02 per unit. The following table
summarizes the Partnership's operating results for the year ended
December 31, 1996 and 1995 (in thousands):
<TABLE>
1996 1995
<S> <C> <C>
Net income from servicing operations $11,644 $10,735
Net income (loss) from production 530 (555)
operations
Other investment and interest income 5,401 4,749
General and administrative expenses (7,147) (6,200)
Other expenses (8,214) (5,999)
Net income before equity in
earnings of affiliates and gain on
sale of bulk servicing 2,214 2,730
Gain on bulk sales of servicing 2,942 9,148
Equity in earnings (losses) of 305 (254)
affiliates
Net income $5,461 $11,624
</TABLE>
Net Income from Servicing Operations
The increase in net income from servicing operations of
approximately $0.9 million is due primarily to an increase in
investment income, net of interest expense of
approximately $4.1 million offset by an increase in servicing
costs of approximately $2.0 million and an increase in provision
for foreclosure losses of approximately $1.0 million.
Investment income, net of interest expense, consists
primarily of the gain on sale of reinstated loans, the interest
earned on the Partnership's investment in loans
repurchased from GNMA pools (offset by the interest expense
on borrowings to fund this investment, and the benefit derived
from the servicing portfolio's custodial account balances.
During the year ended December 31, 1996, the Partnership
recognized gains on the sale of reinstated loans totaling
approximately $2.8 million. This program of repurchasing
loans from GNMA pools and selling them to
affiliates began in 1994. Late in 1995, the Partnership began
buying reinstated loans back from affiliates and selling the
loans to institutional investors. The interest earned on loans
repurchased from GNMA pools (see Note 7 to the consolidated
financial statements for a further discussion
for the year ended December 31, 1996 totaled approximately
$2.1 million and was offset by the interest expense of
approximately $1.7 million on borrowings to fund this investment.
HBT began repurchasing loans from GNMA pools and holding the
loans as an investment during the year ended December 31, 1996.
The remaining increase in investment income, net of interest
expense , was due primarily to the
increase of approximately $0.6 million in the benefit derived
from the servicing portfolio's custodial account balances which
averaged $112.7 million for the year ended December 31, 1996
compared to $71.9 million for the year ended December 31, 1995.
The increase in servicing costs from 1995 to 1996 of
approximately $2.0 million is due in part to an increase in the
average servicing portfolio balance from $5.0 billion to $6.0
billion for the years ended December 31, 1995 and 1996,
respectively. In addition, the composition of the servicing
portfolio was more weighted towards high coupon GNMA servicing
during the year ended December 31, 1996 which resulted in higher
servicing costs as compared to other servicing due to higher
delinquencies and foreclosure costs which resulted in the
addition of employees and a higher servicing cost per loan.
During the fourth quarter, the Partnership sold the servicing
rights to high coupon GNMA loans with unpaid principal balances
totaling approximately $2.8 billion and thus, 1996
operations are not fully impacted.
The net increase in the provision for foreclosure losses of
approximately $1.0 million from the year ended December 31, 1995
compared to the year ended December 31, 1996 resulted from the
increase in the average servicing portfolio balance and the
composition of the servicing portfolio becoming more weighted
towards high coupon GNMA servicing as noted above. See Note 14
for a rollforward of the foreclosure, repurchase and
indemnification reserves.
Net Income from Production Operations
The increase in net income from production operations of
approximately $1.1 million is due to an increase in total
production revenues of approximately $25.7 million offset by an
increase in loan production and secondary marketing costs of
approximately $24.6 million. The increase in both production
revenues and loan production and secondary marketing costs is due
primarily to the increase in production volumes and sales
volumes. The following table summarizes production volumes and
sales volumes for the years ended December 31, 1996 and 1995
(principal balance in thousands):
<TABLE>
1996 1995
# of Principal # of Principal
Lns Balance Lns Balance
<S> <C> <C> <C> <C>
Sales Volume 29,635 $3,232,099 11,604 $1,335,706
Production Volume 29,531 $3,218,571 12,724 $1,464,663
</TABLE>
Loan production revenues as a percent of principal increased
during the year ended December 31, 1996 to approximately 128
basis points compared to the year ended December 31, 1995 of
approximately 117 basis points, a net increase of approximately
$3.6 million. This increase was due primarily to an increase in
the Partnership's warehouse margin (i.e., loan production
interest income net of related interest expense).
The increase in the warehouse margin resulted
from an increase in the average number of days loans were held by
the Partnership before being sold to an investor. This increase
in the average number of days resulted from the Partnership
selling more loans under its early funding programs with third
parties prior to selling the loans to the final investors.
Loan production and secondary marketing costs are comprised of
employee costs, occupancy costs, data processing costs, and
general and administrative costs (e.g., postage and delivery
charges, supplies, and provision for repurchase and
indemnification reserves). The increase in loan production and
secondary marketing costs from 1995 to 1996 of approximately
$24.6 million is due primarily to the increase in production
volumes. The average cost to produce a loan in 1996 approximated
$1,381 per loan compared to the average cost to produce a loan in
1995 of approximately $1,269 per loan, a difference of
approximately $112 per loan or $3.3 million. This increase is
due primarily to the provision for repurchase and indemnification
losses recorded during the year ended December 31, 1996 of
approximately $2.1 million (approximately $71 per loan). As
noted previously, as part of the production operations, the
Partnership is subject to certain repurchase and indemnification
provisions under its agreements with the investors to which it
sells mortgage loans. The increase in this liability is due both
to the increase in production volumes and to the Partnership's
announcement of its plan to liquidate which accelerated the
notification of potential repurchase and indemnification claims
made by investors.
Other Investment and Interest Income
Other investment and interest income consists primarily of income
from CMO bonds, residual interests, and SMATs. During the first
quarter of 1997, the Partnership sold its CMO bond and residual
interest portfolio totaling approximately $1.2 million to
unrelated third parties for approximately $3.1 million. The gain
of approximately $1.9 million was reflected as an unrealized gain
in the December 31, 1996 consolidated financial statements.
Additionally, during the year ended December 31, 1996, the
Partnership sold a residual interest and realized and recorded
a gain of approximately $2.5 million.
During 1995 the Partnership recognized an unrealized gain of $2.4
million associated with its investments in SMATs and realized
that gain during the first quarter of 1996. Additionally, during
the year ended December 31, 1995, the Partnership recognized
unrealized gains in its CMO bond and residual interest portfolio
of approximately $0.3 million.
General and Administrative Expenses
General and administrative expenses increased to approximately
$7.1 million from $6.2 million for the year ended December 31,
1996 as compared to the same period of 1995. The increase in
general and administrative expenses can be attributed to an
increase in professional fees associated with the
enhancement and customization made to the accounting
systems and software as well as the enhancement to the
Partnership's computer network system. In addition, this increase
is attributable to an increase in legal fees during 1996 compared
to 1995.
Other Expense Items
The increase in net other expense items is attributed to an
increase in servicing facility interest of approximately $0.8
million related to higher average balances outstanding to support
a larger servicing portfolio. The remaining net increase in other
expense items is primarily attributable to the increase in other
interest expense of approximately $0.9 million for interest on
the Partnership's working line of credit to fund taxes and
insurance advances, principal and interest advances, and the
origination and acquisition of residential loans held for
investment.
Equity in Earnings of Affiliates
Equity in earnings of affiliates for the period from June 30,
1994 to December 31, 1994, and from January 1, 1995 to March 31,
1995, represents the Partnership's 50% interest in TMC. As
previously discussed, prior to March 31, 1995, the Partnership
reported its interest in TMC on the equity method of accounting.
Subsequent to March 31, 1995 TMC's operations are consolidated
and included in the consolidated operating results of the
Partnership.
Equity in earnings of affiliates for the year ended December 31,
1996, represents the Partnership's 50% interest in HTP. As noted
previously, the purpose of HTP is to buy nonconforming credit
mortgage loans (e.g., B Paper loans) originated by HMCLP,
securitize the loans, and sell them in the secondary market.
During the fourth quarter of 1996, HTP sold approximately $13.2
million in loans and recognized a gain of approximately $0.6
million.
Bulk Sales of Servicing
As noted previously, on October 4, 1996, the Partnership executed
a Purchase and Sale Agreement with Source One Mortgage Services
Corporation for the sale of the Partnership's servicing rights
related to high coupon GNMA loans with unpaid principal balances
totaling approximately $2.8 billion. The sale of the servicing
rights was recognized by the Partnership during the three months
ended December 31, 1996. The Partnership recognized a net gain
on the transaction of approximately $2.7 million. Additionally,
during the year ended December 31, 1996, the Partnership entered
into a bulk servicing sale agreement, with an unrelated third
party, to sell the servicing rights related to a portion of its
conventional servicing portfolio with unpaid principal balances
totaling approximately $244.9 million. The Partnership recognized
a gain on sale of approximately $0.2 million.
During the first quarter of 1995, the Partnership entered into a
Purchase and Sale Agreement with an unrelated third party to sell
originated mortgage servicing rights ("OMSRs"), originated prior
to the adoption of SFAS No. 122, related to GNMA loans with
unpaid principal balances totaling approximately $493 million.
The Partnership realized a gain on sale of approximately $9.1
million, net of related transaction fees.
Revenues and Expenses 1995 Compared to 1994
Net income for the year ended December 31, 1995 totaled
approximately $11.6 million or $.31 per unit compared to,
approximately $4.8 million or $.16 per unit earned during the
year ended December 31, 1994, an increase of approximately $6.8
million or $.15 per unit. As previously discussed, the
Partnership's 1995 results were accounted for under the new
accounting pronouncement, SFAS No. 122. This pronouncement
prohibits retroactive application to prior years. Accordingly,
the Partnership's 1994 historical results were accounted for
under SFAS No. 65. If the Partnership had not applied this new
accounting pronouncement in 1995, the Partnership would have
reported net income of approximately $2.1 million or $.06 per
unit.
The following table summarizes the Partnership's operating
results for the years ended December 31 (in thousands)*:
<TABLE>
1995 1994
<S> <C> <C>
Net income from servicing $10,735 $8,263
operations
Net income (loss) from (555) 4,506*
production operations
Other investment and interest 4,749 483
income
General and administrative (6,200) (4,405)
expenses
Other expense (5,999) (2,096)
Net income before equity in
earnings of affiliates and 2,730 6,751
gain on bulk sale of servicing
Gain on bulk sale of servicing 9,148 2,957
Equity in earnings of (254) (374)
affiliates
Net Income as adjusted* $11,624 $9,334
</TABLE>
* In order to compare the results of 1995 and 1994 production
operations, the net income (loss) from production operations
for the year ended 1994 has been adjusted (by approximately
$4.5 million) to recognize the value associated with
originations sold on a servicing retained basis as if SFAS No.
122 had been applied in 1994. This adjustment is not intended
to represent a full adoption of SFAS No. 122 in 1994 as the
results of operations for servicing have not been adjusted for
the change in methodology associated with evaluating and
measuring impairment of mortgage servicing rights.
The decline in results of operations (after adjusting 1994 to
reflect the effect on production net income of recording SFAS No.
122 and before gain on bulk sale of servicing and equity in
earnings of affiliates) of approximately $4.0 million for 1995 as
compared to 1994 is primarily attributable to a decrease in net
income from production operations of approximately $5.0 million
as a result of (a) a $3.0 million decrease in profits arising
from a decline in refinance volume derived from the Partnership's
servicing portfolio; (b) start-up costs incurred associated with
expanding the production operation, and (c) duplicate expenses
incurred during the reorganization and consolidation of all
production support functions. These decreases were partially
offset by an increase in production volume, however, 1995's
gross profit margins declined as a result of increased price
competition beginning in the second half of 1994. In addition,
the decline in results of operations for 1995 as compared to 1994
is attributable to an increase in general and administrative
expenses of approximately $1.8 million due to one-time
nonrecurring reorganization costs and expenses required to
support a larger more diverse publicly traded master limited
partnership, and an increase in other expenses of approximately
$3.9 million due to an increase in interest expense and
additional amortization and depreciation expense associated with
the transactions discussed above. These amounts were partially
offset by: (i) an increase in net income from servicing
operations of approximately $2.5 million due to bulk servicing
acquisitions and the retention of originated loans sold on a
servicing retained basis, and (ii) an increase in other
investment and interest income of approximately $4.3 million due
to the unrealized gains of the SMATs investments and CMO bonds
and residual interest portfolio.
Servicing
Net income from servicing increased approximately $2.5 million or
30% for the year ended December 31, 1995 compared to the year
ended December 31, 1994. The increase in the contribution from
servicing primarily resulted from the growth in the servicing
portfolio. The average principal balance of loans serviced for
the year ended December 31, 1995 (based on beginning of the month
totals) increased to approximately $5.3 billion from
approximately $3.3 billion for the same period 1994.
The growth in the servicing portfolio is principally due to the
acquisition of a $1.5 billion bulk servicing portfolio with an
effective acquisition date of August 31, 1995, the acquisition of
the HBT portfolio of approximately $1.1 billion effective April
1, 1995 resulting from the Exchange Transaction, the retention of
approximately $665 million in originated loans sold on a
servicing retained basis, net of the sale of an approximate $493
million bulk servicing portfolio effective January 31, 1995. The
$1.5 billion bulk servicing acquisition was acquired with an
effective acquisition date of August 31, 1995 and a transfer date
of November 1, 1995. As a result, the effects of the acquisition
are reflected for four months during the year ended December 31,
1995. In addition, pursuant to the terms of the acquisition and
interim servicing agreements, the seller was responsible for
servicing the portfolio for the period prior to the transfer
date. The Partnership was obligated to compensate the seller for
performing the servicing obligations during the interim servicing
period. As a result the Partnership did not achieve the
economies of scale normally obtained by acquiring servicing
portfolios until the fourth quarter of 1995.
The increases in gross servicing revenues for the year ended
December 31, 1995, as compared to the same period for 1994 was
principally due to the growth in the servicing portfolio.
Total servicing costs, including prepayment costs and provision
for foreclosure losses, grew to approximately $12.7 million for
the year ended December 31, 1995 from $8.7 million for 1994
primarily as a result of the increase in the Partnership's
servicing portfolio.
Amortization of mortgage servicing rights increased to
approximately $8.5 million for the year ended December 31, 1995
from approximately $6.2 million for the same period in 1994, a
net change of $2.3 million. The net change primarily relates to
additional amortization associated with the acquisitions
discussed above, and the increased amortization associated with
the implementation of SFAS No. 122. In addition, in 1995 the
Partnership recorded a valuation allowance of approximately $1.1
million against its mortgage servicing assets. As noted
previously, the Partnership recorded a valuation allowance
against various portfolio risk stratum as a result of a decrease
in interest rates during the fourth quarter causing a decrease in
value of those servicing rights below carrying value. In
accordance with SFAS No. 122, the Partnership may recover all or
a portion of this valuation reserve if the servicing value
increases in subsequent periods.
Production
The principal balance of loans produced for the year ended
December 31, 1995 increased to approximately $1.5 billion from
approximately $1.1 billion for the same period of 1994, an
increase of approximately $0.4 billion or 40%. The year ended
December 31, 1994 excluded the production volume of TMC. TMC was
recorded and reported on the equity method of accounting prior to
the consummation of the TMC transaction in March 1995. Included
in the consolidated 1995 production volumes are $0.3 billion in
production for TMC for the period from April 1, 1995 to December
31, 1995. Excluding the impact of TMC, the Partnership's volume
increased $0.1 billion or 11%.
Net income from production operations decreased by approximately
$5 million (after adjusting 1994 to reflect the effect on
production net income of recording SFAS No. 122) for 1995 as
compared to 1994, primarily due to:
(i) A $3 million decrease in profits arising from a decline in
refinance volume in 1995 as compared to 1994 derived from the
Partnership's servicing portfolio. This type of refinance volume
is highly profitable and results in the recognition of higher
gross profit margins than margins realized on other types of
origination volume.
(ii) The increase from
December 31, 1994 to December 31, 1995 of approximately $187
million in mortgage loans held for sale, which had a negative
impact of reducing earnings for the costs associated with
originating/acquiring the loans without the recognition of
the gain realized from the sale of the loan.
(iii) The reorganizing
and consolidating of all production support functions (e.g.,
accounting, treasury, secondary marketing, shipping, and
quality control). The reorganization began August 31, 1995
and continued through the end of 1995.
(iv) The expansion of
its wholesale and retail operations in order to enhance its
production operations geographically. During the latter part
of 1995, the Partnership incurred costs associated with these
expansion efforts without realizing the increased revenue
associated with the increased origination volume thereby
having a negative impact in the net income generated by the
production operation.
(v)Fierce price competition for wholesale mortgage bankers, as a
result of a sharp rise in mortgage interest rates during the
last quarter of 1994, resulting in overall lower gross profit
margins recognized on loans originated.
Other Investment and Interest Income
In conjunction with the Exchange Transaction the Partnership
acquired other mortgage related trusts (SMATs) collateralized by
FNMA mortgage-backed securities with coupon rates ranging from
9.0% to 9.50%. As of the date of the Exchange Transaction the
fair market value of these SMATs was estimated to total
approximately $700 thousand. As of December 31, 1995 the fair
market value of the SMATs was approximately $3.1 million with
underlying collateral balances totaling in excess of
approximately $51.0 million. During 1995 the Partnership
recognized an unrealized gain of $2.4 million associated with its
investments in SMATs.
Additionally, during the year ended December 31, 1995, the
Partnership recognized unrealized gains in its CMO bond and
residual interest portfolio of approximately $0.3 million.
General and Administrative Expenses
General and administrative expenses increased to approximately
$6.2 million from $4.4 million for the year ended December 31,
1995 as compared to the same period of 1994. The increase in
general and administrative expenses can be attributed to a number
of factors including the recognition of transactional costs
associated with the completion of the transactions previously
discussed above and one time non-recurring expenses associated
with the reorganization and consolidation of the Partnership's
mortgage banking operations into one entity. In addition, the
Partnership's general and administrative expenses have increased
due to the functions required to maintain and support a larger
more diverse publicly traded master limited partnership.
Other Expense Items
The increase in net other expense items is attributed to an
increase in term interest and other interest expense associated
with the completion of the Partnership's term facility in August
1995 and additional amortization and depreciation expense. The
remaining net increase in other expense items is primarily
attributable to the increase in amortization of excess cost over
identifiable tangible and intangible assets acquired, as well as
other interest expense for interest on borrowings during the year
from Harbourton.
Equity in Earnings of Affiliates
Equity in earnings of affiliates for the period from June 30,
1994 to December 31, 1994, and from January 1, 1995 to March 31,
1995, represents the Partnership's 50% interest in TMC. As
previously discussed, prior to March 31, 1995, the Partnership
reported its interest in TMC on the equity method of accounting.
Subsequent to March 31, 1995 TMC's operations are consolidated
and included in the consolidated operating results of the
Partnership.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by
reference from Part IV, Item 14(a) (1) and (2).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable.
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons of the Registrant
The directors and executive officers of the General Partner are
as follows:
Name Position
David W. Mills Director and Chairman of the Board
Jack W. Schakett Director and Chief Executive Officer
Rick W. Skogg Director, President and Chief Operating
Officer
Paul A. Szymanski Executive Vice President, Chief
Financial Officer and Secretary
Brent F. Dupes Executive Vice President
Leo C. Trautman, Jr. Executive Vice President, Loan
Administration
Kevin Ryan Senior Executive Vice President of
HMCLP, President - East Region Production
of HMCLP
Cynthia B. Sample Senior Executive Vice President of
HMCLP, President - West Region Production
of HMCLP
Robert Hermance* Director
Ronald Blaylock* Director
Andrew S. Winokur Director
* Denotes Independent Directors
The ages and principal occupations for at least the last five
years of the persons named in the foregoing table is as follows:
David W. Mills--Director and Chairman of the Board since August
1994. Mr. Mills, 49, has been the Chief Executive Officer and
sole shareholder of HGC since 1990. From 1986 to the present,
Mr. Mills has been involved in the business of reviewing,
structuring and at times arranging for the financing of the
acquisitions and dispositions of businesses. From 1988 to the
present, he has been the Chairman of the Board and Chief
Executive Officer of Mills & Lynn Enterprises.
Jack W. Schakett, CPA--Director and Chief Executive Officer
(employed by Harbourton) since August 1994. Mr. Schakett, 44,
joined Harbourton in April 1993 as Chief Operating Officer and
presently serves as its Chief Executive Officer. Prior to
joining Harbourton, Mr. Schakett spent 18 years at Ernst & Young,
where he was National Director in charge of Ernst & Young's
mortgage banking practice and local office director of real
estate. Mr. Schakett is also an executive officer of Harbourton
Reassurance Inc., a reinsurance company controlled by Mr. Mills.
Rick W. Skogg--Director, President and Chief Operating Officer
since August 1994. Mr. Skogg, 35, has been the President and
Chief Executive Officer of HMCLP since January 1994 and was the
Executive Vice President and Chief Operating Officer of HMCLP
from November 1991 to January 1994. From 1986 to 1991, he served
in various capacities (including Executive Vice President) of
Platte Valley Mortgage Corporation.
Kevin Ryan--Senior Executive Vice President of HMCLP and
President - East Region Production of HMCLP. Mr. Ryan, 43, had
been the President of TMC's general partner from December 1986
through July 31, 1995 at which time TMC was merged into HMCLP.
Cynthia B. Sample--Senior Executive Vice President of HMCLP and
President - Western Region Production of HMCLP, Director of
General Partner from August 1994 through March 1996. Ms. Sample,
46, had been President and Chief Executive Officer of Western
from December 1987 through July 31, 1995, at which time Western
was merged into HMCLP.
Paul A. Szymanski, CPA--Executive Vice President, Chief Financial
Officer and Secretary since August 1994. Mr. Szymanski, 35, has
been the Executive Vice President and Chief Financial Officer of
HMCLP since March 1994. Since January 1, 1996, Mr. Szymanski has
also served as an executive officer of Harbourton. From June
1991 through March 1994, he was Senior Vice President of Finance
of HMCLP. Prior to joining HMCLP, he spent four years
(1987-1991) in the national mortgage banking practice at Ernst &
Young.
Brent F. Dupes, CPA--Executive Vice President
since January 1996. Prior to joining HMCLP,
Mr. Dupes, 41, was Vice President of Finance with Bramalea Inc.,
a $3.5 billion real estate holding company, from 1984 to 1995.
Leo C. Trautman, Jr., CPA--Executive Vice President, Loan
Administration, since August 1994. Mr. Trautman, 42, has been
the Executive Vice President, Loan Administration, for HMCLP
since February 1994. Prior to joining HMCLP, he spent five years
(1989-1994) as President and Chief Executive Officer of Colorado
Springs Savings and Loan Association.
Robert Hermance--Independent Director since August 1994.
Mr. Hermance, 64, is a retired partner of Ernst & Young. He
joined Ernst & Young in 1957, was admitted as a partner in 1968,
and served as the Managing Partner of the firm's Houston office
from 1980 to 1993. From 1971 to 1977, he served in the firm's
national office as Director of Services to the Real Estate
Industry. He has served on the American Institute of CPA's Real
Estate and Real Estate Investment Trusts Committees and on its
Mortgage Banking Task Force.
Ronald Blaylock--Independent Director. Mr. Blaylock, 36, has
been the President and Chief Executive Officer of Blaylock &
Partners, L.P., an investment banking firm in New York, New York,
since October 1993. From April 1992 to October 1993, he was an
Executive Vice President at Utendahl Capital Partners, a
broker-dealer located in New York, New York. From 1986 to 1992,
he was employed by Paine Webber as a First Vice President. Mr.
Blaylock is a member of the board of trustees of Georgetown
University.
Andrew S. Winokur--Director since March 1996. Mr. Winokur, 38,
has been a Managing Director of Harbourton Enterprises since
November 1994. From April 1989 to November 1994, Mr. Winokur was
President of AVM of California, a consultant/advisor to Wall
Street firms and fixed-income money managers. Mr. Winokur is
also Chief Executive Officer of Harbourton Reassurance, Inc., a
reinsurance company controlled by Mr. Mills.
The Independent Directors
The By-Laws of the General Partner calls for the General Partner
to have at least three members of the Board that are neither an
officer, director or employee of any affiliate of the General
Partner, nor an officer or employee of the General Partner, nor
any relative of the foregoing (the "independent directors").
There currently is a vacancy in the Board for one of the
independent directors, and until the vacancy is filled, any
approval of the independent directors shall require a unanimous
vote. Although the independent directors are non-affiliated,
they are not necessarily completely independent of the General
Partner or its affiliates. Each of the independent directors is
elected to a term of one year. Any approval of the independent
directors is to be given by a majority vote, and any such
approval is referred to in this Form 10-K as a "consent of the
independent directors."
The General Partner generally intends to rely upon the
independent directors for advice from time to time regarding
potential conflicts of interest and broad Partnership business
policies. Except as specifically provided in the HBT Agreement,
however, the General Partner is not obligated to solicit the
advice of the independent directors with respect to any
Partnership matter, nor is it obligated to follow any
recommendation of the independent directors. The HBT Agreement
provides that action in accordance with a recommendation of the
independent directors will be a complete defense to any claim
against the person asserting the invalidity or negligence of the
action or asserting that the action constituted a breach of
fiduciary duty.
As the sole current shareholder of the General Partner,
Harbourton may remove any of the independent directors for cause
(as set forth in the By-Laws of the General Partner) if it
believes that removal is in the best interests of the
Partnership. The remaining independent directors will fill any
vacancy caused by the removal or withdrawal of any independent
director.
The Partnership is authorized to reimburse the independent
directors for any expenses incurred in connection with their
activities and to pay the independent directors such compensation
as the General Partner deems appropriate. In connection
therewith, the Partnership has procured liability insurance for
the members of the Board of Directors of the General Partner.
All of the directors of the General Partner serve for a term of
one year or until their respective successors are elected at the
annual meeting of shareholders of the General Partner following
the expiration of such terms, and the executive officers serve at
the discretion of the Board.
Directors and executive officers of the General Partner are
required to devote only so much of their time to the
Partnership's affairs as is necessary or required for the
effective conduct and operation of the Partnership's business.
However, Messrs. Skogg, Sample, Ryan, and
Trautman as employees of the Partnership's subsidiaries shall
devote substantially all of their business efforts to the
Partnership's affairs.
Directors' Compensation
Currently, each independent director receives an annual fee of
$12,000 and $1,000 per regular meeting attended, plus travel
costs.
Item 11. Executive Compensation
The following table summarizes salaries, bonuses paid, and other
compensation for the years ended December 31, 1996 and 1995,
respectively, for services rendered by the named executive
officers employed by the Partnership in all capacities to the
Partnership and its subsidiaries during 1996. Jack W. Schakett,
Chief Executive Officer of the Registrant, is an employee of
Harbourton and, therefore, is not included in the following table
of executive compensation. A portion of Mr. Schakett's
compensation is allocated to the Partnership through a management
fee based upon the amount of time he spends on matters pertaining
to the Partnership.
<TABLE>
SUMMARY COMPENSATION TABLE(1)
Long-Term
Annual Compensation Compensation
Securit
Other ies All
Salary Bonus Annual Underly Other
Name Year ($) ($) Compen ing Compens
sation Options ation
($)(2) (#) ($)(3)
<S> <C> <C> <C> <S> <C> <C>
Rick 1996 200,000 50,000 -- -- 5,382
Skogg 1995 200,000 125,000 -- 126,000 9,857
Cindy 1996 205,000 100,000 -- -- 6,342
Sample 1995 200,000 150,000 -- -- 3,294
Kevin 1996 204,176 110,000 11,500 -- 5,772
Ryan 1995 202,606 -- -- -- 12,905
George 1996 200,000 -- -- -- 8,851
Resta 1995 -- -- -- -- --
Alan 1996 200,000 -- -- -- 8,531
Bernstein 1995 -- -- -- -- --
</TABLE>
(1) Summary compensation for all executive officers as a group
(10 persons) for 1996 was salary $1,521,337; bonus $332,500;
other annual compensation $136,550; and all other
compensation $57,348.
(2) Other annual compensation for Mr. Ryan consists of an
automobile allowance.
(3) All other compensation consists of the Partnership's
matching contributions to the 401K retirement plan and life
insurance premiums paid by the Partnership on behalf of the
named executive.
The Partnership adopted a Preferred Unit Option Plan (the "Plan")
effective September 28, 1995 (amended October 15, 1995) under
which options to acquire Preferred Units and Distribution
Equivalent Rights may be granted to key management personnel of
the Partnership and its Affiliates. The Board of Directors of
the General Partner (the "Board") is authorized to grant Options
not to exceed 1,000,000 Preferred Units in the aggregate and
Distribution Equivalent Rights not to exceed 3,000,000 Preferred
Units in the aggregate.
The Board or a delegated committee of two or more members of the
Board is responsible for administering the Plan subject to the
Plan provisions. The Board has complete authority and discretion
to interpret all provisions of the Plan; to prescribe the form of
option grants; to adopt, amend, and rescind rules and regulations
pertaining to the administration of the Plan.
No options were granted and no options were exercised in 1996.
The following table presents, for each of the named executive
officers employed by the Partnership, the number of
exercisable/unexercisable options at December 31, 1996.
<TABLE>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Options at December 31, 1996
December 31, 1996
Name Exercisable/Unexer Exercisable/Unexer
cisable cisable
<S> <C> <C>
Rick Skogg 21,000/42,000 $0/$0
Leo Trautman 9,166/18,334 0/0
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security ownership of certain beneficial owners.
The following table sets forth information regarding the security
ownership of each person (or "group" within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended) who is known to the Partnership to have beneficially
owned on March 28, 1997 more than five percent of the outstanding
equity securities in the Partnership and the security ownership
of the members of the Board and the executive officers of the
General Partner, individually and as a group.
<TABLE>
Name of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
<S> <C> <C> <C>
Preferred David W. Mills 4,470,250 10.6%(1)
Units
Rick W. Skogg 31,000 -- (2)
Kevin Ryan 820,828 2.0%(3)
Lee Trautman, Jr 6,900 -- (2)
All directors and
executive
officers as a group 5,328,978
(17 persons)
</TABLE>
(1) Mr. Mills is the sole director and shareholder of HGC, which
owns 85,743 Preferred Units of the Partnership and is the
managing general partner of PVSC, the record owner of the
24,947,132 Preferred Units. HGC is also the managing
general partner of Harbourton, the sole limited partner of
PVSC and the owner of 9,972,984 Preferred Units. On the
basis of his ownership of HGC and his direct and indirect
interest in Harbourton and PVSC, Mr. Mills has an indirect
pecuniary interest in approximately 4,470,250 Preferred
Units of the Registrant. Mr. Mills' address is 1205 Pacific
Avenue, Suite 203, 2nd Floor, Santa Cruz, California 95060.
(2) Less than 1%.
(3) Kevin Ryan is a Senior Executive Vice President of HMCLP and
President-East Region Production of HMCLP. Mr. Ryan's
address is 7926 Jones Branch Drive, Suite 700, McLean,
Virginia 22102. The number of units above include 812,537
Preferred Units owned by TMC Mortgage Corporation with
respect to which Mr. Ryan exercises voting and investment
control.
Item 13. Certain Relationships and Related Transactions
The General Partner
Pursuant to the HBT Agreementthe General Partner manages the business
and affairs of the Partnership and has exclusive authority to act
on behalf of the Partnership (subject to certain limitations set
forth in the HBT Agreement). The General Partner has a broad
range of powers comparable to those held by the directors and
officers of a corporation, including the power to determine the
amount of Partnership distributions, to hire employees, and to
determine executive compensation. Harbourton, as the sole
shareholder of the General Partner, has the sole right to elect
the directors of the General Partner.
Pursuant to the HBT Agreement, the General Partner may be removed
for "cause" as the general partner of the Partnership by a
majority vote of the Preferred Units. Pursuant to the HBT
Agreement, "cause" generally means willful and continued neglect
of or failure to substantially perform the duties and obligations
of the General Partner or the engaging in conduct which
constitutes gross negligence, willful or wanton misconduct or
illegal activity. Cause does not include bad judgment or
negligence. In addition, pursuant to the HBT Agreement, the
General Partner may only be removed without cause by a vote
representing 80% or more of the outstanding Preferred Units of
the Partnership. Because PVSC, Harbourton and HGC are the
owners of approximately 85% of the issued and outstanding
Preferred Units, the ability to remove the General Partner,
either with or without cause, is effectively eliminated.
Compensation of General Partner
The General Partner receives an annual management fee equal to
1/2 of 1% of the initial investment of the Preferred Unitholders
(the "Base Management Amount"). Such fee increases
proportionately to reflect the raising of additional capital
through the subsequent issuance of Units or other interests in
the Partnership. These fees are not subject to reduction in the
event that the Partnership sustains losses.
Western was a party to a management services agreement with
Harbourton and paid Harbourton approximately $300 thousand in
management fees under the management services agreement during
the year ended December 31, 1994. HMCLP was also a party to a
management agreement with Harbourton and paid management fees of
approximately $100 thousand during the year ended December 31,
1994.
The General Partner has contracted with Harbourton whereby
Harbourton performs all of the management functions.
Accordingly, the General Partner recognized management fees (see
discussion below) due to Harbourton totaling approximately $609
thousand for the year ended December 31, 1996.
Partnership Expenses
The Partnership bears all of its operating, marketing and
business development fees and expenses, all transaction fees and
expenses in connection with the acquisition and sale of mortgage
assets, mortgage-related securities and residual cash flows, all
Partnership investor servicing, all direct fees and expenses
incurred in connection with the issuance of mortgage-related
securities, all computer system expenses to develop and operate
tracking and inventory control and the Partnership bases, and all
legal, accounting and liability insurance costs and fees. The
Partnership may also bear any other expenses as may be approved
by the Board of Directors of the General Partner from time to
time. The General Partner and its affiliates shall be reimbursed
for any of the foregoing expenses that it incurs on behalf of the
Partnership.
The General Partner is reimbursed for the portion of its expenses
allocable to its activities in connection with the Partnership's
business. The General Partner is required to determine the
amount of such expenses that are allocable to the Partnership in
a reasonable manner. Allocable expenses include: (i) allocable
share of office rent and related facilities; (ii) allocable share
of cost of equipment necessary to the conduct of the
Partnership's business; (iii) allocable share of the salaries and
other compensation expenses of employees primarily engaged in the
conduct of the Partnership's business; and (iv) allocable share
of other administrative expenses, including travel, accounting
and similar costs.
The maximum aggregate amount of allocable expenses for which the
Partnership is obligated to reimburse the General Partner in a
fiscal year is an amount equal to 0.9% of the initial investment
of the Preferred Unitholders. The amount of such reimbursement
will increase proportionately to reflect the raising of
additional capital through the subsequent issuance of Units or
other interests in the Partnership. Since initial investment is
not a reflection of the Partnership's present net asset or book
value, the cap on expenses for which the General Partner may be
reimbursed will not reflect changes in the Partnership's net
asset or book values (other than commensurate changes to reflect
the issuance of additional Units).
The Partnership recognized approximately $965 thousand and $395
thousand for direct and allocable expenses incurred for the years
ended December 31, 1996 and 1995, respectively.
Other Related Party Transactions
During the year ended December 31, 1996, the Partnership borrowed
from an affiliate to fund its investment in loans repurchased
from GNMA pools. These borrowings are secured by the investments
and will be repaid upon disposition of the asset. These
borrowings generally bear interest at LIBOR plus 1% to LIBOR plus
2.25%. Interest incurred during the year approximated $1.7
million. At December 31, 1996, the Partnership had approximately
$36.6 million outstanding which is classified as notes payable to
affiliates in the accompanying consolidated financial statements.
The affiliate participates in the profits of these loans which
reinstate.
The Partnership has a working capital subordinated debt line with
Harbourton that was subordinate to all other loans with banks.
These borrowings generally bear interest at prime to prime plus
2% and LIBOR plus 1%. Interest incurred during the years ended
December 31, 1996, 1995, and 1994 approximated $0.6 million, $0.4
million and $0.1 million, respectively. At December 31, 1996 and
1995, the Partnership had outstanding borrowings of approximately
$1.2 million and $0 million, respectively which are classified as
notes payable to affiliates in the accompanying consolidated
financial statements.
The Partnership has notes with its affiliates PVSCLP
and PVMC. These borrowings bear interest at prime plus 2%.
Interest incurred during the year approximated $34 thousand. At
December 31, 1996 and 1995, the Partnership had approximately
$0.3 million outstanding which is classified as notes payable to
affiliates in the accompanying consolidated financial statements.
The Partnership has a notes payable to an affiliated party which
bears interest at prime plus 2%. Interest incurred during the
year approximated $24 thousand. At December 31, 1996 and 1995,
the Partnership had approximately $0.3 million outstanding which
is classified as notes payable to affiliates in the accompanying
consolidated financial statements.
The Partnership has entered into transactions pursuant to which
it repurchases delinquent loans from GNMA pools which it services
and resells such loans on a servicing retained basis to Santa
Cruz Partners, Skillman Partners, and Harbourton Reassurance,
Inc., affiliates of the Partnership and Harbourton. As of
December 31, 1996 and December 31, 1995, the ending balance of
loans purchased out of securitized pools and sold to these
affiliates totaled approximately $48.2 million and $158.5
million, respectively. These loans are being serviced by the
Partnership on behalf of the affiliated companies. The
associated mortgage servicing is reflected in the Serviced for
Affiliates portion of the Partnership's servicing portfolio as
presented in the notes to the consolidated financial statements.
Such transactions are expected to benefit the Partnership by
reducing the Partnership's related foreclosure loss through the
reduction of the pass-through rate due to the investor (owner of
the loan). The reduction in foreclosure loss reserve requirement
is reflected as a gain on sale of defaulted loans to affiliates
in the accompanying consolidated financial statements. In
addition, the Partnership's advance requirement for its GNMA
servicing will be reduced as the servicing contract with the
affiliates is actual/actual as opposed to GNMA's
scheduled/scheduled requirement.
During the third quarter of 1995, Harbourton and its affiliates
converted $9.0 million of notes receivable from the Partnership
into equity in the Partnership. In connection with the debt to
equity conversion, Harbourton and its affiliates received
approximately 4.9 million of Series B Preferred Units having
generally the same rights as the outstanding Preferred Units.
During the quarter ended December 31, 1995, the Preferred
Unitholders voted to convert the Series B Units to Preferred
Units at a conversion ratio of one Preferred Unit for each Series
B Unit.
During August 1993, Western received a promissory note for
approximately $500 thousand from Harbourton as consideration for
Harbourton receiving a 50% participation interest in an interest-
only security. The note accrued interest at a rate of 5.5%, and
was due on December 31, 1995. Harbourton was entitled to
receive, as payment from Western, 50% of monthly cash flows that
were distributed to Western related to ownership of the interest-
only security (net of any interest due Western, as holder of the
promissory note given by Harbourton as consideration for its
participation interest). Harbourton was also entitled to
receive, as payment from Western, 50% of sale or distribution
proceeds net of 50% of any costs incurred by Western to sell or
otherwise dispose of the security and net of any interest and/or
principal that remained payable to Western under the terms of the
promissory note given by Harbourton as consideration for its
participation in the security. Further, on September 30, 1995,
Harbourton exchanged its 50% interest in its interest-only
security with the Partnership in partial settlement of the note
payable to the Partnership.
Through the ordinary course of business, the Partnership acquires
mandatory forward commitments to sell whole loans and mortgage
backed securities through a dealer, whose owners also own less
than an aggregate 5% limited partnership interest in Harbourton.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements and Supplementary Data
Report of Independent Public Accountants 49
Consolidated Balance Sheets as of December 31, 1996 and 1995 50
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 51
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 52
Consolidated Statements of Partners' Capital for the
years ended December 31, 1996, 1995 and 1994 55
Notes to Consolidated Financial Statements 56
No supplemental financial data schedules specified by Item
302 of Regulation S-K and Article 12 of Regulation S-X are
presented as the requirements are either not applicable or
the data required to be set forth therein are included
elsewhere in the accompanying consolidated
statements.
(2) Exhibits:
Not applicable
(b) Form 8-K was filed by the Partnership on October 21,1996
announcing that on October 4, 1996, the Partnership
executed a Purchase and Sale
Agreement with Source One Mortgage Services Corporation
for the sale of the Partnership's servicing rights
related to high coupon GNMA loans.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Harbourton Financial Services L.P.:
We have audited the accompanying consolidated balance sheets of
Harbourton Financial Services L.P. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of operations, cash flows and partners' capital for
each of the three years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of
the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 21 to the consolidated financial statements,
on January 31, 1997 the Board of Directors of the Partnership's
General Partner adopted a plan to liquidate the Partnership and
the Partnership commenced liquidation shortly thereafter. As a
result, the Partnership will change its basis of accounting for
periods subsequent to January 31, 1997, from the going concern
basis to the liquidation basis. Under the liquidation basis of
accounting, carrying values of assets are presented at estimated
net realizable values and liabilities are presented at estimated
settlement amounts.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Harbourton Financial Services L.P. and subsidiaries as of
December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles.
As explained in Notes 2 and 4 to the consolidated financial
statements, effective January 1, 1995, the Partnership changed
its method of accounting for mortgage servicing rights.
Denver, Colorado Arthur Andersen LLP
March 28, 1997.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,951 $ 2,273
Mortgage loans held for sale, net 214,609 232,073
Mortgage loans held for investment, net
of reserves of $307 and $123, 3,178 1,507
respectively
CMO bonds, residual interests,
investment securities and SMATs, net of
accumulated amortization of $577 and 3,583 6,306
$439, respectively
Notes receivable - affiliates 587 587
Investment in loans repurchased from
GNMA pools, net of reserves of $1,120 40,127 --
Advances receivable, net of reserves of
$3,984 and $2,264, respectively 5,709 21,016
Mortgage servicing rights, net of
accumulated amortization of $9,268 and
$21,979, respectively and valuation 41,773 75,846
allowances of $0 and $1,132,
respectively
Deferred acquisition, transaction and
borrowing costs, net of
accumulated amortization of $1,075 and 2,825 2,676
$1,271, respectively
Property, equipment and leasehold
improvements, net of accumulated
amortization of $4,567 and $3,283, 5,773 4,176
respectively
Investment in affiliates 405 --
Due from affiliates -- 3,632
Excess cost over identifiable tangible
and intangible assets acquired, net of
accumulated amortization of $577 and 2,633 2,726
$464, respectively
Bulk and flow sales of servicing 52,658 --
receivables
Other assets 8,309 3,277
Total Assets $384,120 $356,095
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Installment purchase and sale $ 1,303 $ 9,740
obligations - servicing
Foreclosure, repurchase and 6,403 8,142
indemnification reserves
Lines of credit & short-term 212,388 232,144
borrowings
Servicing facility 54,400 37,215
Notes payable - affiliates 38,412 581
Due to affiliates 1,678 --
Accounts payable and other liabilities 10,604 13,766
Total Liabilities 325,188 301,588
Partners' Capital 58,932 54,507
Commitments and Contingencies (Notes 14 and 15)
Total Liabilities and Partners' Capital $384,120 $356,095
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Loan servicing fees $ 20,512 $ 19,479 $ 14,525
Loan servicing and subservicing fees 1,146 1,678 433
received from affiliates
Ancillary income 6,500 6,404 4,405
Gain on sale of defaulted loans to 678 744 146
affiliates
Investment income net of interest
expense of $1,628, $0 and
$0, respectively 8,909 4,774 3,725
Total servicing revenue 37,745 33,079 23,234
Gain on sale of mortgage loans and
related mortgage servicing rights 21,587 9,093 8,348
Interest income, net of related
warehouse interest expense of $20,612, 4,271 1,059 844
$6,383, and $3,718, respectively
Other production income 15,476 5,434 3,642
Total production income 41,334 15,586 12,834
Other investment and interest income 5,401 4,749 483
Total Revenues 84,480 53,414 36,551
EXPENSES
Servicing costs 9,011 6,991 5,681
Prepayment costs and interest 2,204 1,702 695
curtailments
Provision for foreclosure losses 5,040 4,029 2,364
Amortization of mortgage servicing
rights, net of impairment
recovery of $1,132 and impairment of 9,846 9,622 6,231
$1,132 and $0, respectively
Total servicing expenses 26,101 22,344 14,971
Loan production and secondary 40,804 16,141 12,828
marketing costs
General and administrative costs,
including management fees and
reimbursed costs to affiliates of 7,147 6,200 4,405
$1,574, $795, and $400, respectively
Interest expense - servicing 3,471 2,632 1,167
facility
Other interest expense 1,548 656 55
Other interest expense-affiliates, net
of interest income-affiliates of $21, 1,051 776 226
$45, and $98, respectively
Other amortization and depreciation 2,144 1,935 648
Total Expenses 82,266 50,684 34,300
Net Income Before Equity in Earnings of
Affiliates and Gain on Bulk Sale of 2,214 2,730 2,251
Servicing
Equity in earnings (loss) of 305 (254) (374)
affiliates
Gain on bulk sale of servicing 2,942 9,148 2,957
Net Income $ 5,461 $ 11,624 $ 4,834
Net Income per Preferred Unit, based
on 41,414,002; 37,309,780; and
30,087,826 weighted average number of $ .13 $ .31 $ .16
Preferred Units outstanding,
respectively
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Net Cash Flows From Operating Activities:
Net Income $ 5,461 $11,624 $4,834
Adjustments to reconcile net income to net
cash flows from operating activities:
Gain on bulk sales of servicing (2,942) (9,148) (2,957)
Gain on sale of CMO bonds and, residual (2,486) -- --
interests
Gain on sale of defaulted loans to (678) (744) (146)
affiliates
Net unrealized gain on CMO bonds, (1,897) (2,669) --
residual interests and SMATs
Mortgage servicing rights valuation (1,132) 1,132 --
(recovery) allowance
Amortization and depreciation 13,122 10,425 7,246
Equity in earnings of affiliates (305) 254 374
Provision for foreclosure losses,
repurchase and indemnification 7,012 4,029 2,364
and mortgage loans held for
investment reserves
Changes in operating assets and
liabilities:
Mortgage loans held for sale and 17,337 (176,264) 112,682
investment, net
Advances receivable 8,391 2,455 (3,015)
Flow sale receivable (11,743) -- --
Other assets (4,987) 7,772 (502)
Due to/from affiliates 5,310 (3,634) (2,056)
Accounts payable and other (3,162) 5,708 (2,328)
liabilities
Net Cash Flows From Operating Activities 27,301 (149,060) 116,496
Net Cash Flows From Investing Activities:
Proceeds from bulk sales of servicing 13,038 9,148 4,058
Allocated costs associated with
originated retained servicing (26,827) (10,924) --
Purchase of loans from GNMA pools, net (41,247) -- --
Net acquisition of mortgage servicing -- (4,112) (4,274)
rights
Proceeds from sale of CMO bonds, residual 5,550 -- --
interests, and SMATs
Change in notes receivable - affiliates -- 466 (3,356)
Funding of deferred acquisition and (225) (840) (309)
transaction costs
Amortization of CMO bonds, residual 1,556 914 --
interests, and investment securities
Funding of acquisition advances -- (676) (3,641)
Distribution from affiliates -- -- 20
Investment in subsidiary (100) -- --
Purchases of property and equipment (3,167) (1,759) (1,149)
Cash acquired in Exchange Transaction -- 2,715 --
Net Cash Flows From Investing Activities (51,422) (5,068) (8,651)
</TABLE>
Continued on next page.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
Net Cash Flows From Financing Activities: 1996 1995 1994
<S> <C> <C> <C>
Principal payments on servicing facility (87,063) (33,670) (4,571)
Funding of deferred borrowing costs (387) (983) (173)
Advances on servicing facility 104,248 41,350 20,308
Net (repayment) borrowings on lines of (19,756) 156,607 (104,513)
credit & short- term borrowings
Repayments on installment purchase (9,974) (5,982) (10,158)
obligations
Redemption of Partnership Units (1,100) -- --
Payment on partners' notes receivable -- 300 267
Partners' distributions -- -- (8,982)
Net (repayments) borrowings from notes 37,831 (2,891) (8,074)
payable - affiliates
Net Cash Flows From Financing Activities 23,799 154,731 (115,896)
Increase (decrease) in cash and cash (322) 603 (8,051)
equivalents
Cash and cash equivalents at beginning of
period 2,273 1,670 9,721
Cash and cash equivalents at end of period $1,951 $2,273 $1,670
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
<S> <C> <C> <C>
Non-cash Investing and Financing Activities:
Acquisition and consolidation of HBT, TMC,
HFC, and TMC Mortgage Corp., net of cash
acquired:
Mortgage loans held for sale, net -- $12,922 --
Mortgage loans held for investment, net -- 222 --
CMO bonds and residual interests -- 3,864 --
Notes receivable - affiliates -- 314 --
Advances receivable, net -- 5,875 --
Mortgage servicing rights, net -- 18,631 --
Deferred acquisition and borrowing costs, -- 86 --
net
Property and equipment, net -- 468 --
Investment in affiliates -- (1,652) --
Excess cost over identifiable tangible and -- 2,236 --
intangible assets acquired, net
Other assets -- 7,212 --
Total Assets -- 50,178 --
Foreclosure reserves -- 3,334 --
Lines of credit & short-term borrowings -- 21,472 --
Servicing facility -- 7,202 --
Notes payable - affiliates -- 5,588 --
Due to affiliates -- (44) --
Accounts payable and other liabilities
-- 1,724 --
Total Liabilities -- 39,276 --
</TABLE>
Continued on next page.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
1996 1995 1994
<S> <C> <C> <C>
Contribution of investment in affiliate -- -- 2,221
Installment purchase and sale obligations - 3,453 14,636 10,338
servicing
Reduction of foreclosure reserve in connection
with bulk and flow sales of servicing (452) -- --
Reduction in basis of mortgage servicing
rights due to reduction in installment (1,316) -- --
purchase obligation
Net change in cost of mortgage loans
allocated between loans and mortgage (1,728) -- --
servicing rights
Receivable for bulk sales of servicing 40,915 -- --
Distribution to affiliates prior to the -- (6,284) --
Exchange Transaction
Conversion of debt in exchange for preferred -- 9,000 --
units
Unrealized gain (loss) on available for sale -- (146) 65
investment securities
Reduction of investment in
settlement of note receivable from -- 249 --
affiliate
Contribution of property and equipment, net -- -- 189
Contribution of miscellaneous receivables -- -- (298)
and payables
Net distribution of notes receivable/payable
from/to affiliates and due from/to -- -- (3,768)
affiliates
Push down of purchase price in connection
with Harbourton's Acquisition of management
interest in Western:
Mortgage servicing rights, net -- 389 --
Excess cost over identifiable tangible and
intangible assets acquired, net -- 238 --
-- 627 --
Cash paid for interest 18,781 7,419 5,451
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31
(AFTER CORPORATE REORGANIZATION -- NOTE 1)
(in thousands)
General
Partner Limited Partners
Subor-
Prefer dinat
red ed Total
Amount Units Amount Units Amount Other Amount
<S> <C> <C> <C> <C> <C> <S> <C>
Balance at December $216 30,088 $31,025 - - - $31,241
31, 1993
Contribution of
investment in - - 2,221 - - - 2,221
affiliates
Net distribution of
assets and - - (3,877) - - - (3,877)
liabilities to
affiliates
Distribution of (97) - (8,885) - - - (8,982)
earnings
Payment on
partners' notes - - 267 - - - 267
receivable
Unrealized gain on
available-for - - - - - 65 65
sale investment
securities
Net income for the
year ended 1994 50 - 4,784 - - - 4,834
Balance at December 169 30,088 25,535 - - 65 25,769
31, 1994
Payment on
partners' notes - - 300 - - - 300
receivable
Unrealized loss on
available- for - - - - - (146) (146)
sale investment
securities
Push down of
purchase price in
connection with
Harbourton's
acquisition of - - 627 - - - 627
management interest
in Western prior to
Western Transaction
Acquisition of HBT,
TMC, and HFC (169) 6,897 13,786 800 - - 13,617
Conversion of debt
in exchange for - 4,918 9,000 - - - 9,000
Preferred Units
Net income for the 45 - 11,579 - - - 11,624
year ended 1995
Distribution to
affiliates prior - - (6,284) - - - (6,284)
to Exchange
Transaction
Balance at 45 41,903 54,543 800 - (81) 54,507
December 31, 1995
Net income for the 55 - 5,406 - - - 5,461
year ended 1996
Repurchase and
redemption of - (733) (1,100) - - - (1,100)
Preferred Units
Other - - 64 - - - 64
Balance at December $100 41,170 $58,913 800 - (81)$58,932
31, 1996
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
HARBOURTON FINANCIAL SERVICES L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(After Corporate Reorganization -- Note 1)
December 31, 1996, 1995 and 1994
Note 1. Description of Business and Organization
Harbourton Financial Services L.P. ("HBT") was created pursuant
to a Certificate of Limited Partnership filed with the Secretary
of the State of Delaware on August 12, 1987 and a limited
partnership agreement (the "HBT Agreement") (as amended and
restated) dated as of August 12, 1987. Harbourton Mortgage
Corporation (the "General Partner") was incorporated in the State
of Delaware on August 12, 1987. The General Partner manages the
business and affairs of HBT and has exclusive authority to act on
behalf of HBT. HBT's termination date is December 31, 2050
unless sooner dissolved or terminated pursuant to the HBT
Agreement. See Note 21, Liquidation of Partnership.
Harbourton Assignor Corporation ("Assignor Limited Partner") is
the sole limited partner of HBT. Pursuant to the HBT Agreement,
the Assignor Limited Partner holds for the benefit of the holders
of the Preferred Units all of the limited partnership interests
underlying such Preferred Units. Each Preferred Unit is
evidenced by a beneficial assignment certificate, which is issued
by the Assignor Limited Partner and HBT in fully registered form.
Each holder of a Preferred Unit is entitled to all of the
economic rights and interests in the underlying limited
partnership interest held by the Assignor Limited Partner, and
each holder of a Preferred Unit has the right to direct the
Assignor Limited Partner on voting and certain other matters with
respect to such underlying limited partnership interests.
On August 5, 1994, Harbourton Holdings, L.P. ("Harbourton"), a
Delaware limited partnership, acquired from JHM Capital
Corporation ("JCC") (i) all of the issued and outstanding capital
stock of the General Partner of HBT and (ii) all of the issued
and outstanding Subordinated Units of HBT, pursuant to the terms
of a definitive acquisition agreement (the "Transfer Agreement")
for a sum of $100.
Pursuant to the Transfer Agreement and New York Stock Exchange
rules, on March 14, 1995, HBT obtained the approval from existing
Unitholders to issue to Platte Valley Servicing Co., L.P.
("PVSC"), a 99% owned subsidiary of Harbourton, approximately
21.5 million Preferred Units of HBT in exchange for PVSC's
ownership interest of (i) all of the issued and outstanding
limited partnership interests of Harbourton Mortgage Co., L.P.
(formerly Platte Valley Funding, L.P.) ("HMCLP") and (ii) all of
the issued and outstanding capital stock of Harbourton Funding
Corporation (formerly Platte Valley Funding Corporation) ("HFC"),
the general partner of HMCLP (the "Harbourton Transaction").
Pursuant to an agreement dated October 1, 1994 (the "TMC Mortgage
Agreement"), which was joined in by HBT with the unanimous
consent of the independent directors of the General Partner, TMC
Mortgage Corp. and two of its shareholders (the "TMC Parties")
agreed to contribute to HBT their direct and indirect 50%
interest in TMC Mortgage Co., L.P. ("TMC"), a partnership engaged
in the origination and sale of mortgage loans in the eastern
United States, in exchange for approximately .8 million Preferred
Units (the "TMC Transaction"). On the same date, HMCLP agreed to
include its 50% direct and indirect equity interest in TMC as
part of the assets owned by it at the time of the consummation of
the Harbourton Transaction (collectively, the "Exchange
Transaction").
Upon the consummation of the Exchange Transaction, HMCLP became a
wholly-owned subsidiary of HBT and TMC became an indirect wholly-
owned subsidiary of HBT, with an aggregate 50% equity interest
owned by HBT and an aggregate 50% equity interest owned by HMCLP.
The effect of the Exchange Transaction was that PVSC acquired
approximately 75.7% of the issued and outstanding Preferred Units
of HBT, and the TMC Parties acquired approximately 2.9% of the
issued and outstanding Preferred Units. HBT has continued to
exist in accordance with the provisions of the HBT Agreement,
which was unchanged by the Exchange Transaction.
On July 31, 1995 HBT acquired Western Sunrise Holdings, L.P. (the
"Western Transaction") and its subsidiaries, Western Sunrise
Mortgage Co., L.P. and its general partner Western Sunrise
Mortgage Corporation (collectively "Western"). Western had been
an affiliated mortgage originator and servicer headquartered in
Sacramento, California and was a 99% owned subsidiary of
Harbourton. At the transaction date (July 31, 1995), the net
book value of Western was approximately $5.7 million and the fair
value of Western on that same date was approximately
$15.7 million. In exchange for Western, Harbourton and its
general partner Harbourton General Corporation ("HGC") received
approximately 8.6 million Series B Preferred Units having
generally the same rights as the outstanding Preferred Units.
During the quarter ended December 31, 1995, the Preferred
Unitholders voted to convert the Series B Units to Preferred
Units at a conversion ratio of one Preferred Unit for each Series
B Unit. Furthermore, as additional consideration for their
respective contributions to the Partnership of Western,
Harbourton and HGC were to be issued additional Preferred Units
if certain economic earnings hurdles were met. Additional
Preferred Units will be issued based upon 70% and 40% of the
"Excess Earnings" for the 12 month periods commencing on April 1,
1995 and 1996, respectively. Excess Earnings were to be
calculated as the economic earnings of the Western production
operation in excess of $2.5 million and $2.6 million for the 12
month periods commencing on April 1, 1995 and 1996, respectively.
The unit price for the Preferred Units would be based upon the
average closing price for the 20 business days ending on July 31,
1997. Western's production operations during the 12 month
periods commencing April 1, 1995 and 1996 did not meet the Excess
Earnings criteria and accordingly, no additional Preferred Units
were issued. The Western Transaction was accounted for as a
reorganization of entities under common control similar to a
pooling-of-interests.
Simultaneously with the Western Transaction, HBT contributed its
50% interest in TMC and transferred all of its remaining mortgage
banking-related assets to HMCLP.
During the third quarter of 1995, HMCLP formed a partnership,
HTP Financial, L.P. ("HTP"), with Paine Webber Real Estate
Securities, Inc. The purpose of the partnership was to buy
nonconforming credit mortgage loans (e.g., B Paper loans)
originated by HMCLP, securitize the loans, and sell them in the
secondary market. Since its inception through December 31, 1996,
the Partnership purchased approximately $14.8 million of mortgage
loans of which it sold approximately $13.2 million to an
unrelated third party investor. In February 1997, the
decision was made to terminated the partnership and sell the
remaining mortgage loans.
HBT, HMCLP, HFC, and the Partnership's 50% equity investment in
HTP are hereinafter collectively referred to as the "Partnership"
unless otherwise noted. The Partnership's primary business
activity is mortgage banking, which is conducted through its
wholly-owned subsidiary HMCLP. Mortgage banking consists of (i)
mortgage loan servicing activities, including the acquisition and
sale of mortgage servicing rights, (ii) the origination and
purchase of mortgage loans, including the securitization and sale
of mortgage loans with the related servicing rights retained or
released, and (iii) investments in other mortgage-related
securities. HMCLP is an approved Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association
("FNMA"), and Federal Home Loan Mortgage Corporation ("Freddie
Mac") licensee.
In general, each quarter the Partnership allocates 99% and 1% of
profits and losses to the Preferred Unitholders and General
Partner, respectively, up to a maximum amount as defined in the
HBT Agreement ("Participating Amount"). This Participating
Amount generally does not exceed the product of the cash or fair
value of property contributed to the Partnership in consideration
for the issuance of Preferred Units, including units issued in
connection with the Exchange and Western Transactions, the debt
to equity conversion and the Preferred Unit redemption ("Initial
Investment") and the appropriate weighted average Treasury Index.
Profits that exceed this Participating Amount, up to an
additional amount as defined, are allocated 75%, 12.5% and 12.5%
to the Preferred Unitholders ("Preferred Amount"), General
Partner and Subordinated Unitholder, respectively. Preference
amounts ("Second Preference") beyond these levels, up to an
additional amount as defined, are then allocated 62.5%, 18.75%
and 18.75% to the Preferred Unitholders, General Partner and
Subordinated Unitholder, respectively. Preference amounts in
excess of the Second Preference are then allocated 55%, 22.5%,
and 22.5% to the Preferred Unitholders, General Partner, and
Subordinated Unitholder, respectively. Cash distributions are
allocated approximately in the same manner as allocated taxable
profits. Losses are allocated up to the amount of the sum of the
undistributed Preferred Amount allocations, Second Preference
allocations and Participating Amount allocations to the Preferred
Unitholders, Subordinated Unitholders, and General Partner in
proportion to their respective interest in the sum of such
undistributed allocations. See Note 17 regarding the allocation
of liquidating distributions.
Prior to the Exchange Transaction, HMCLP's and Western's profits
and losses were allocated in accordance with their respective
partnership agreements.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements
primarily include the accounts of HBT, HMCLP, HFC, and a 50%
equity interest in HTP. The historical consolidated financial
statements and notes reflect the Western Transaction for all
periods presented as a reorganization of entities under common
control in accordance with the pooling-of-interests method of
accounting. All intercompany accounts and transactions have been
eliminated in consolidation.
As previously discussed, on March 14, 1995, the existing
Unitholders of HBT approved the issuance of approximately 21.5
million Preferred Units of HBT (a 75.7% controlling interest in
HBT) in exchange for 100% ownership interest in HMCLP and HFC.
Because of the change in control of HBT, this transaction was
accounted for as a reverse acquisition of HBT by HMCLP.
Concurrent with the Exchange Transaction, HBT acquired a 50%
interest in TMC in exchange for approximately .8 million
Preferred Units of HBT (a 2.9% interest) (the "TMC Transaction").
This interest, combined with the 50% interest previously
contributed to HMCLP by Harbourton, in June of 1994, resulted in
HBT's direct and indirect 100% ownership of TMC. Accounting for
a reverse acquisition requires that the historical results of
operations (prior to the Exchange Transaction) reflect the
operations of HMCLP as the continuing accounting entity.
Further, under the accounting for a reverse acquisition, HBT is
reported as if it were purchased as of the date of the Exchange
Transaction. Therefore, the historical results of operations
exclude the operating results of HBT prior to the date of the
Exchange Transaction. The operating results of TMC are reflected
as equity in earnings of affiliates in the operating results of
HMCLP for the period from June 30, 1994 to the date of the
Exchange Transaction. Thereafter, the results of operations of
TMC are reflected as a 100% owned subsidiary of the Partnership
and reported in the consolidated statements of operations. On
July 31, 1995, HBT acquired Western in exchange for approximately
8.6 million Series B Preferred Units (the "Western Transaction")
which were converted to Preferred Units during the quarter ended
December 31, 1995. This was a transaction between entities under
common control, therefore, the transaction was accounted for
using the pooling-of-interests method of accounting. Under the
pooling method of accounting, the results of operations of
Western are presented as if the transaction occurred at the
inception date of HMCLP and Western.
In summary prior to January 1, 1996, the consolidated
results of operations presented herein primarily represent the
following: a) HMCLP and Western consolidated for the periods
prior to June 30, 1994, b) HMCLP and Western consolidated plus a
50% equity interest in TMC for the period from July 1, 1994
through March 31, 1995, and c) HMCLP, Western, HBT and TMC
consolidated, from April 1, 1995 to December 31, 1995.
Cash and Cash Equivalents - Cash and cash equivalents consist of
cash on hand and in banks and short-term instruments with
original maturities of three months or less.
Mortgage Loans Held for Sale - Mortgage loans held for sale are
stated at the lower of aggregate cost, net of deferred loan
production fees and costs, or market value.
Mortgage Loans Held for Investment - Mortgage loans held for
investment are stated at the amount of unpaid principal, reduced
by an allowance for loan losses, based upon management's
evaluation of the economic conditions of borrowers, loan loss
experience, collateral value and other relevant factors, which
approximates the lower of cost or market. See Note 8.
Investment in Loans Repurchased from GNMA Pools - The Partnership
has repurchased loans from GNMA pools which it services. See
Notes 7 and 14.
Advances Receivable - Funds advanced for mortgagor escrow
deficits, foreclosures and other investor requirements are
recorded as advances receivable in the consolidated statements of
financial condition. Such receivables are generally recoverable
from the insurers or guarantors, which are generally government
agencies, or the mortgagors through increased monthly payments,
as applicable. A reserve for uncollectible items has been
established for those receivables which management estimates are
not recoverable. See Note 14.
Mortgage Servicing Rights - The Partnership capitalizes the cost
of mortgage servicing rights and amortizes such costs in
proportion to, and over the period of, estimated future
undiscounted net servicing income. See Note 4.
Collateralized Mortgage Obligation ("CMO") Bonds, Residual
Interests, Investment Securities, and Securitized Mortgage
Acceptance Trusts ("SMATs") - The Partnership classifies its
CMO bonds, residual interests, and SMATs portfolio as trading
securities since the securities are being held with the intent of
selling them in the near term. Accordingly, such assets are
stated at fair value and unrealized gains and losses are
recognized in earnings. The Partnership classifies its
investment securities as available for sale. Accordingly, such
assets are stated at fair value and unrealized gains and losses
are recognized as a component of partners' capital.
Deferred Acquisition, Transaction and Borrowing Costs -
Deferred borrowing costs are amortized over the life of the
servicing facility agreement using the straight-line method which
approximates the effective interest method. Deferred acquisition
and transaction costs are amortized over a period of five to
fifteen years using the straight-line method.
Property, Equipment and Leasehold Improvements - Property,
equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is computed using the
straight-line method over the assets' useful lives, which are
estimated to be 30 years for depreciable real property and 2 to
15 years for furniture, fixtures and equipment. Leasehold
improvements are amortized using the straight-line method over
the lease life.
Investment in Affiliates - HMCLP recorded its 50% investment in
HTP based on the equity method of accounting for the year ended
December 31, 1996. HMCLP recorded its investment in affiliates
(TMC) based on the equity method of accounting for the period
from June 30, 1994 through March 31, 1995. HMCLP's initial
investment in TMC exceeded its underlying
equity in net assets by approximately $1.1 million for which
amortization of $18 thousand and $35 thousand has been recognized
in the accompanying statement of operations for the three months
ended March 31, 1995 and six months ended December 31, 1994,
respectively. Excess cost was amortized on a straight-line
basis over a period of 15 years.
Excess Cost Over Identifiable Tangible and Intangible Assets
Acquired - Excess cost over identifiable tangible and intangible
assets acquired is amortized using the straight-line method over
15 years.
Loan Servicing Fees and Servicing Costs - Loan servicing fees are
based on a contractual percentage of the unpaid principal balance
of the related loans and are recognized in income as earned.
Servicing costs are charged to operations as incurred.
Investment Income Net of Interest Expense -
Investment income net of interest expense on escrows includes
primarily the gain on sale of reinstated loans, interest income
on investment in loans repurchased from GNMA pools, net of
interest expense on related borrowings to fund such investments
and the earnings derived from the servicing portfolio custodial
balances. See Notes 3, 4, 7 and 10.
Loan Production Fees and Costs - Certain direct loan production
fees and costs associated with mortgage loans held for sale are
deferred until the related loans are sold.
Foreclosure, Repurchase, and Indemnification Reserves -
Foreclosure reserves are maintained to provide for an estimate of
the losses associated with delinquent loans and loans in
foreclosure or bankruptcy ("Defaulted Loans"). The reserves are
established based on management's expectations and historical
loss experience and are adjusted periodically through charges to
current operations to reflect changes in the Defaulted Loans, net
of actual charge-offs. In addition, the Partnership establishes
foreclosure reserves related to Defaulted Loans for each
purchased servicing asset at the time of acquisition in
accordance with its existing reserve policy. See Note 14.
As part of its production operations, the Partnership is subject
to certain repurchase and indemnification provisions through its
contractual agreements with the investors to which it sells
mortgage loans. These provisions generally provide that the
Partnership repurchase from the investor, mortgage loans in which
an origination (i.e., underwriting) defect is
discovered. The investor, however, may require the Partnership
to indemnify them against losses that result from an
origination defect rather than repurchase the loan. The reserve
is based on management's expectations and historical loss
experience. The provisions for this reserve are charged against
loan production and secondary marketing costs. See Note 8.
Income Taxes - The Partnership is a limited partnership and is
not liable for federal income taxes, however, individual
unitholders have liability for income taxes. As a result of the
provisions currently in the tax law, the Partnership could be
taxed as a corporation for federal income tax purposes for its
tax year beginning on January 1, 1998. See Notes 16 and 21.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications - Certain amounts presented for prior periods
have been reclassified to conform to the current year's
presentation.
SFAS No. 107 - During the year ended December 31, 1995, the
Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments ("SFAS No. 107"), which requires that
companies disclose the fair value of financial instruments, where
practicable, and the method(s) and significant assumptions used
to estimate those fair values. The adoption of SFAS No. 107
resulted only in additional disclosure requirements and had no
effect on the Partnership's consolidated financial position or
results of operations.
SFAS No. 121 - In March 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of ("SFAS No. 121"), which
is effective for the Partnership in fiscal 1996. SFAS No. 121
requires that long-lived assets and certain identifiable
intangibles to be held and used by the Partnership be reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Partnership has adopted the principles of this
statement within the accompanying consolidated financial
statements; however, there was no impact on the Partnership's
consolidated financial condition or results of operations as a
result of adopting SFAS No. 121.
SFAS No. 122 - During the quarter ended September 30, 1995, the
Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights--An amendment of FASB Statement No. 65 ("SFAS No. 122")
retroactive to January 1, 1995, which modifies the accounting for
originated mortgage servicing rights ("OMSRs") by mortgage
banking enterprises. See Note 4 for further discussion regarding
the adoption of SFAS No. 122.
SFAS No. 123 - During the year ended December 31, 1996 the
Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), which provides an alternative to
APB Opinion No. 25, Accounting for Stock Issued to Employees, in
accounting for stock-based compensation issued to employees. The
adoption of SFAS No. 123 resulted only in additional disclosure
requirements and had no effect on the Partnership's consolidated
financial position or results of operations as the Partnership
continues to adhere to the accounting principles provided for in
APB No. 25 in its financial statements.
SFAS No. 125 - In August 1996, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities ("SFAS No.
125"). SFAS No. 125 provides new accounting and financial
reporting requirements for sales, securitizations, and servicing
of receivables and other financial assets, for secured borrowing
and collateral transactions, and for extinguishments of
liabilities. SFAS No. 125 is applicable to transactions occurring
after December 31, 1996. However, the FASB has issued an
amendment, Statement of Financial Accounting Standards No. 127,
Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 that would delay until 1998 the effective date
of certain of SFAS No. 125's provisions that deal with
transactions such as securities lending, repurchase and dollar
repurchase agreements. The other provisions of SFAS No. 125 will
continue to be effective January 1, 1997.
SFAS No. 125 significantly changes the criteria for determining
whether a transfer of financial assets represents a sale of the
assets or a collateralized borrowing arrangement. As a result,
some forms of transactions that presently are recognized as sales
of assets and, therefore, are off-balance sheet, will be treated
as financing transactions under SFAS No. 125 unless the
transaction structures are revised. The Partnership will adopt
this statement effective January 1, 1997; however, it is not
anticipated that under the current provisions, it will have a
material effect on the Partnership's financial condition and
results of operations. SFAS No. 125 will not change balance
sheet classification of sales transactions consummated prior to
December 31, 1996.
Note 3. Mortgage Servicing Portfolio
The Partnership's mortgage servicing and subservicing portfolio
included loans in all 50 states and the District of Columbia.
The following table shows the geographic concentration of the
mortgage servicing portfolio:
<TABLE>
December 31, December 31,
1996 1995
<S> <C> <C>
California 48.1% 26.6%
Florida 5.3% 8.0%
Texas 5.6% 7.8%
Maryland 5.1% 3.5%
Arizona 5.3% 4.4%
Other* 30.6% 49.7%
Total 100.0% 100.0%
</TABLE>
* Loans from no other state exceed 5% of the principal balance
of loans in the portfolio in either year.
The Partnership's servicing and subservicing portfolio (unpaid
principal balances and number of loans) was comprised of the
following (in thousands except number of loans):
<TABLE>
December 31, 1996 December 31, 1995
Principal Number of Principal Number
Balance Loans Balance of
<S> <C> <C> <C> <C>
Loans
Servicing:
GNMA Loans $1,199,205 16,131 $4,262,160 79,994
Other, primarily 2,106,391 24,744 1,768,924 20,218
Agency loans
Serviced for 50,296 811 161,395 2,663
affiliates
Total Servicing 3,355,892 41,686 6,192,479 102,875
Subservicing 325,464 3,455 148,923 1,542
Total Portfolio $3,681,356 45,141 $6,341,402 104,417
</TABLE>
As of December 31, 1996 and 1995, the total GNMA loans serviced
include loans insured by the Federal Housing Administration
("FHA") of 9,942 and 58,539, respectively, and loans guaranteed
by the Veterans Administration ("VA") of 6,189 and 21,455,
respectively. In addition, at December 31, 1996, the Partnership
services 4,960 FHA and VA loans for certain other investors not
included in GNMA Loans which are potentially subject to the same
losses experienced on GNMA loans that complete the foreclosure
process.
Other, primarily agency loans serviced by the Partnership are
generally securitized through FNMA or Freddie Mac programs on a
non-recourse basis, whereby foreclosure losses are generally the
responsibility of the respective agency or investor and not of
the Partnership. GNMA loans serviced by the Partnership are
securitized through GNMA programs, whereby the Partnership is
insured against certain losses by the FHA or partially guaranteed
against loss by the VA, however, the Partnership is subject to
foreclosure risk. The Partnership is not responsible for
foreclosure losses associated with loans subserviced for others
unless the Partnership defaults in its servicing obligations.
In connection with mortgage servicing and subservicing
activities, the Partnership segregates tax and insurance ("T&I")
escrow and principal and interest ("P&I") custodial funds in
separate trust accounts maintained at federally insured financial
institutions and excludes these balances from its consolidated
balance sheet. For the years ended December 31, 1996 and
December 31, 1995, these T&I and P&I balances averaged
approximately $112.7 million and $71.9 million, respectively.
At December 31, 1996, errors and omissions and fidelity bond
insurance coverage was $10.0 million and $10.0 million,
respectively.
In conjunction with the performance of mortgage banking
activities, the Partnership's subsidiary, HMCLP, is subject to
minimum net worth requirements established by GNMA, FNMA, Freddie
Mac and the Department of Housing and Urban Development ("HUD").
At December 31, 1996 and 1995, HMCLP's eligible net worth
exceeded these requirements.
Note 4. Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board issued SFAS
No. 122, which was effective for fiscal years beginning after
December 15, 1995, with earlier application encouraged. SFAS No.
122, however, prohibited retroactive application to prior years.
SFAS No. 122, among other things, modified accounting for
originated mortgage servicing rights by mortgage banking
enterprises. The change eliminated the separate treatment of
servicing rights acquired through loan origination and those
acquired through purchase transactions, as previously required
under SFAS No. 65, Accounting for Certain Mortgage Banking
Activities. Accordingly, the Partnership's consolidated
financial statements through December 31, 1994 were accounted for
under SFAS No. 65. The Partnership adopted SFAS No. 122 in the
quarter ended September 30, 1995 retroactive to January 1, 1995
and its consolidated financial statements for the first and
second quarters of 1995 were restated to reflect the impact of
adopting SFAS No. 122.
SFAS No. 122 required that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing right based
on its fair value relative to the loan as a whole. The fair
value of the Partnership's government product mortgage servicing
rights ("MSRs") created during the year ended December 31, 1996
and 1995 was determined by an independent third party valuation
based on market characteristics during the quarter in which the
mortgage servicing rights were created. The fair value of the
Partnership's conventional product mortgage servicing rights
created during the year ended December 31, 1996 and 1995 was
based on third party quoted market prices for similar products.
SFAS No. 122 also required that all capitalized MSRs be evaluated
for impairment based on the excess of the carrying amount of the
MSRs over their fair value. In determining servicing value
impairment at the end of each quarter, the mortgage servicing
portfolio was disaggregated into its predominant risk
characteristics. As noted previously, the Partnership adopted
SFAS No. 122 during the quarter ended September 30, 1995
retroactive to January 1, 1995. The Partnership reallocated its
total book basis in its mortgage servicing rights (which had
previously been recorded on an acquisition-by-acquisition basis)
as of January 1, 1995 to its new risk stratum based on a relative
fair value basis. The Partnership has determined those risk
characteristics to be loan type and interest rate. These
segments of the portfolio were then valued by an independent
third party to determine the fair value of the MSRs. The fair
value, as determined by independent appraisal, was then compared
with the book value, net of the foreclosure reserve, of each
segment to determine if a reserve for impairment was required.
As of December 31, 1995 a valuation allowance of approximately
$1.1 million was recorded against various portfolio risk stratum.
During the year ended December 31, 1996, the Partnership
reversed the valuation allowance recorded as of December 31, 1995.
Prior to the adoption of SFAS No. 122, the Partnership accounted
for mortgage servicing rights under SFAS No. 65. Accordingly,
the Partnership evaluated the realizability of each purchased
servicing rights portfolio based upon the future undiscounted net
servicing income related to each portfolio on a disaggregated
basis. The level of disaggregation resulted in the grouping of
loans with similar characteristics (e.g., purchase by purchase,
coupon interest rates, loan type, and maturity). If the future
undiscounted net servicing income related to each portfolio
exceeded the asset's carrying amount, a write-down was recorded
for that amount.
The following table presents a summary rollforward of the
Partnership's mortgage servicing rights, net of accumulated
amortization (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1993 $ 22,194
Acquisitions 18,803
Sales (867)
Scheduled Amortization* (5,692)
Amortization due to acquisitions (1,453)
Reduction in scheduled amortization due to
changes in anticipated prepayements 914
Balance at December 31, 1994 $33,899
Acquisitions 38,656
Capitalized OMSRs in connection with SFAS 12,913
No. 122
Scheduled amortization* (5,058)
Amortization due to acquisitions (3,314)
Unscheduled amortization (118)
Valuation allowance (1,132)
Balance at December 31, 1995 $75,846
Capitalized OMSRs in connection with SFAS 25,099
No. 122
Scheduled amortization* (12,786)
Bulk sales of servicing (49,062)
Reduction in scheduled amortization due to 1,807
loan sales
Valuation allowance recovery 1,132
Other (263)
Balance at December 31, 1996 $41,773
</TABLE>
* Scheduled amortization is based on estimates made at the
beginning of each fiscal year.
As previously discussed, SFAS No. 122 prohibited retroactive
application for OMSRs created prior to the fiscal year in which
the Partnership adopted the new accounting pronouncement. As a
result the Partnership, at December 31, 1996, owns servicing
rights related to approximately $657 million in mortgage loans
that are not capitalized in its consolidated financial
statements. Further, SFAS No. 122 prohibited the recognition of
fair value in excess of the book basis of the MSRs. As a result,
the Partnership has off-balance sheet value associated with its
non-capitalized MSRs, as well as the excess in fair value of the
MSRs capitalized in the consolidated financial statements.
On October 4, 1996, the Partnership executed a Purchase and Sale
Agreement with Source One Mortgage Services Corporation, an
unrelated third party, for the sale of the Partnership's
servicing rights related to high coupon GNMA loans with unpaid
principal balances totaling approximately $2.8 billion. The
Partnership took advantage of favorable market conditions in
deciding to sell its GNMA portfolio. The transfer of the
servicing responsibilities occurred on November 1, 1996. The
sale of the servicing rights was recognized by the Partnership
during the three months ended December 31, 1996. The Partnership
recognized a net gain on the transaction of approximately $2.7
million. The expected proceeds from the sale were $50.4
million of which $40.2 million was outstanding at December 31,
1996. The receivable is included in the borrowing base supporting
HMCLP's servicing facility (see Note 10). During the first quarter
of 1997 approximately $21.4 million was received and used to reduce
the Partnership's servicing facility. The remaining net proceeds
are expected to be received pursuant to the terms of the Purchase
and Sale Agreement of which a substantial portion of the receivable
will be received upon completion of various tasks associated with
the GNMA pool recertification process.
During the year ended December 31, 1996, the Partnership entered
into a bulk servicing sale agreement, with an unrelated third
party, to sell the servicing rights related to a portion of its
conventional servicing portfolio with unpaid principal balances
totaling approximately $244.9 million. The Partnership recognized
a gain on sale of approximately $0.2 million. In addition, the
Partnership entered into a flow servicing contract, with the same
party, to sell the servicing rights related to a certain portion
of the conventional loans it originated. The Partnership sold
the servicing rights to mortgage loans with unpaid principal
balances totaling approximately $540.4 million resulting in a
$6.0 million receivable under this flow servicing contract as of
December 31, 1996, of which $5.2 million has been collected
subsequent to year end.
During the year ended December 31, 1996, the Partnership entered
into a transaction to sell its investment in certain loans
repurchased from GNMA pools to an unrelated third party. At
December 31, 1996, the Partnership had receivables from such
sales totaling approximately $5.7 million. These loans were sold
with recourse on a servicing retained basis.
During the quarter ended September 30, 1995, the Partnership
acquired approximately $1.4 billion of GNMA mortgage servicing
rights from an unaffiliated third party. The Partnership
negotiated with the third party to subservice the mortgage loans
until the fourth quarter of 1995, at which time the loans were
transferred to the Partnership. During that time period, the
Partnership received servicing fees and ancillary income and paid
a subservicing fee. In addition, the seller financed a portion
of the purchase price which is reflected in installment purchase
obligations in the accompanying consolidated financial
statements.
Effective January 31, 1995, the Partnership entered into a
Purchase and Sale Agreement with an unrelated third party to sell
OMSRs, originated prior to the adoption of SFAS No. 122, related
to GNMA loans with unpaid principal balances totaling
approximately $493 million. The Purchase and Sale Agreement was
dated January 31, 1995 with a May 2, 1995 servicing transfer
date. In conjunction with the Purchase and Sale Agreement, the
Partnership entered into an Interim Servicing Agreement with the
purchaser to perform the servicing functions until the May 2,
1995 servicing transfer date. The Partnership realized a gain on
sale of approximately $9.1 million, net of related transaction
fees.
The Partnership retained the servicing rights to approximately
$1.3 billion of loans originated and sold during 1996 of which
approximately $26.8 million was capitalized to the consolidated
balance sheets. In addition, the Partnership capitalized OMSRs
on mortgage loans held for sale, of approximately $0.2 million,
with underlying principal balances totaling approximately $21.5
million at December 31, 1996.
Note 5. Mortgage Loan Production
The Partnership originates and purchases mortgage loans insured
by the FHA, mortgage loans partially guaranteed by the VA,
conventional conforming and nonconforming mortgage loans, home
equity loans and nonconforming credit loans (e.g., B Paper
loans). During the years ended December 31, 1996, 1995, and
1994 HMCLP originated approximately $3.2 billion, $1.5 billion
and $1.1 billion of mortgage loans, respectively.
Note 6. CMO Bonds, Residual Interests, Investment Securities
and SMATs
In conjunction with the Exchange Transaction, the Partnership
acquired investments in CMO bonds and residual interest
portfolios. As of December 31, 1996, the Partnership's CMO bonds
and residual interests portfolio consisted primarily of FNMA
issues with various durations ranging from five to eleven years.
These securities are classified as trading securities since the
Partnership is actively seeking to sell the portfolio. The
securities are carried at fair value and unrealized gains and
losses are reported in earnings. Because no quoted market prices
are available for CMO bonds and residual interests, fair market
value generally represents the estimated amount at which such CMO
bonds and residual interests could be exchanged in a transaction
between willing parties. Fair value is based on anticipated
future cash flows utilizing projections of future prepayment
rates based on current market participants' prepayment rate
assumptions and future long-term estimates of short-term interest
rates. Projected cash flows are discounted using estimates of
discount rates established in market transactions for financial
instruments with similar underlying characteristics and risks.
For the years ended December 31, 1996 and 1995, the CMO bonds and
residual interests were held as trading securities and net
unrealized gains of approximately $1.9 million and $0.6 million,
respectively, are reflected in the consolidated statement of
operations. Additionally, during the year ended December 31,
1996, the Partnership sold a residual interest and recorded and
realized a gain of approximately $2.5 million.
At December 31, 1996 and December 31, 1995, the balance of
investment securities consisted of a 100% interest in an interest-
only strip derivative (see Note 9) of a pool of FNMA mortgage-
backed securities ("MBS"). The securities had an original
principal balance of $12 million on April 1, 1988. The interest-
only security had an outstanding principal balance of
approximately $1.7 million as of December 31, 1996, a maturity
date of April 1, 2018, and a coupon rate of 8.5%. At December
31, 1996 and 1995, the investment securities were held as
available for sale net of an allowance for unrealized losses of
approximately $81 thousand. Changes in this allowance are
reflected as a separate component of partners' capital.
In conjunction with the Exchange Transaction, the Partnership
acquired investments in SMATs which are investments that
indirectly entitle the Partnership to the residual cash flows
generated by mortgage-related assets underlying an issuance of a
mortgage-related securities transaction. In a mortgage-related
securities transaction, the residual cash flows generated
represent the excess cash flows after all required payments
including administrative expenses have been disbursed pursuant to
the terms of the mortgage related securities transaction. As the
indirect owner of these residual cash flows the Partnership
retains the option to call or redeem the underlying collateral
once the balance falls below a minimum required amount. These
investments are classified as trading securities since the
Partnership is actively seeking to sell these investments. Fair
market value of these investments generally represents the
estimated amount which such investments could be exchanged in a
transaction between willing parties. Fair value is based on
estimated future cash flows utilizing estimates of the value of
the underlying collateral, future prepayment rates, timing of the
anticipated call date, and other factors impacting the value of
the underlying collateral. Projected cash flows are discounted
using estimates of discount rates established in market
transactions for instruments with similar underlying
characteristics and risks.
The SMATs are collateralized by FNMA mortgage backed securities
with coupon rates ranging from 9% to 9.50%. As of the date of the
Exchange Transaction the fair market value of these investments
was estimated to total approximately $700 thousand. As of
December 31, 1995 the fair market value of the SMATs was
approximately $3.1 million. During 1995,
the Partnership recognized an unrealized gain of $2.4 million
associated with its investments in SMATs. During the first
quarter of 1996, the Partnership realized the $2.4 million gain
through the sale of a portion of its SMATs portfolio. The unsold
SMAT had a fair value of $0 at December 31,1996.
Note 7. Investment in Loans Repurchased from GNMA Pools
As noted previously, a substantial portion of the Partnership's
servicing rights relate to GNMA servicing contracts. Under GNMA
servicing contracts, the servicer is required to advance
principal and interest payments to investors on a scheduled basis
and to make advances for taxes, insurance and foreclosure related
expenses in the event that a borrower is delinquent on their
monthly payments. Among other things, the ultimate foreclosure
loss on GNMA servicing is a factor of the interest spread between
the interest remitted by the servicer to the investors and the
interest reimbursed to the servicer by HUD (FHA loans) or the VA
upon completion of a foreclosure.
In order to reduce the interest remitted to investors and thus
partially reduce the resulting foreclosure losses on defaulted
loans, the Partnership has implemented a buyout program. GNMA
guidelines allow for a servicer to purchase a loan out of a GNMA
pool once the loan becomes 90 days past due. Upon the buyout of
a loan, the servicer's responsibility to advance principal and
interest payments to investors is terminated.
A significant portion of the buyout loans have been resold to
affiliated entities on a servicing retained basis. Under the
affiliated servicing contracts the Partnership has reduced its
interest pass through requirements by approximately 100 basis
points which has resulted in a direct reduction in the
foreclosure loss reserve requirement on these loans. The
reduction in foreclosure loss reserve requirement is reflected as
a gain on sale of defaulted loans to affiliates of $678 thousand
and $744 thousand for the years ended December 31, 1996 and 1995,
respectively. In addition, the affiliated servicing contracts
call for the affiliated entities to make all servicing advances
and require payment of principal and interest and unreimbursed
advances upon completion of a foreclosure or upon receipt of a
borrower payment, thus, significantly reducing the Partnership's
advance requirements and improving the liquidity of the
Partnership. See Note 11.
Beginning in 1996, the Partnership retained a portion of the
buyout loans for its own investment portfolio. At December 31,
1996, the balance of the retained buyout loans, net of reserves
totaling approximately $1.1 million, was approximately $40.1
million, consisting of principal, interest and advances. The
Partnership has entered into a borrowing arrangement with an
affiliated entity to provide financing for the retained buyout
loans. At December 31, 1996, the outstanding balance of such
borrowing was approximately $36.6 million. This borrowing
generally bears interest at LIBOR plus 1% to LIBOR plus 2.25%.
The Partnership recognized interest income and interest expense
of approximately $2.1 million and $1.7 million, respectively on
its portfolio of buyout loans for the year ended December 31,
1996.
As part of the buyout program, the Partnership has implemented a
program of resecuritizing loans which have come current
subsequent to being repurchased from GNMA pools ("reinstated
loans"). The reinstated loans are resecuritized and sold to
institutional investors. For the year ended December 31, 1996,
the Partnership recognized $2.8 million in gains on sales of
reinstated loans.
Note 8. Mortgage Loans Held for Investment
Mortgage loans held for investment consists of loans that have
been originated by the Partnership and repurchased from investors
to whom the Partnership had sold the loan. As part of the
origination process, the Partnership is subject to certain
repurchase and indemnification provisions though its contractual
agreements with the investors to whom it sells mortgage loans.
These provisions provide that the Partnership repurchase from the
investor, mortgage loans in which a servicing or origination
(i.e., underwriting) defect is discovered.
At December 31, 1996, the Partnership had repurchased
approximately $3.5 million of mortgage loans it had originated or
serviced. These loans had reserves recorded against them of
approximately $0.3 million reflected in the accompanying December
31, 1996 consolidated financial statements of which approximately
$0.2 million was provided for during the year ended December 31,
1996 and was reflected as a charge to loan production and
secondary marketing costs. See Note 14.
The investor, however, may require the Partnership to indemnify
them against losses that result from an origination
defect rather than repurchase the loan. At December 31, 1996,
the Partnership had been notified of certain other loans in which
a possible origination defect might exist.
Accordingly, the Partnership has established a reserve for such
loans it anticipates will have to be repurchased or indemnified.
This reserve totaled approximately $1.8 million at December 31,
1996 and is reflected in foreclosure, repurchase and
indemnification reserves in the accompanying consolidated
financial statements. Further, this provision was reflected as a
charge to loan production and secondary marketing costs. The
increase in this liability is required as a result of (i) the
increase in origination volume in 1996 and (ii) the acceleration
of assertions of claims in the beginning of 1997 after the
Partnership's February announcement of its plan to liquidate
during 1997. The reserve was based on management's evaluation of
information currently available to it.
Note 9. Other Mortgage-Related Assets
The Partnership owns a prepayment cap to reduce the prepayment
risks associated with the mortgage servicing portfolio. The
Partnership is entitled to a monthly payment when the reference
portfolio runoff rate exceeds the strike PSA of 485%. The
reference portfolio is a FNMA 10% MBS issued in 1986. The
prepayment cap did not meet the requirements for hedge accounting
and therefore, was accounted for as a trading instrument. The
prepayment cap, which was acquired as a result of the Exchange
Transaction at no cost, had a market value of $0 at December 31,
1996 and 1995. The termination date of the cap was January 31,
1997.
In addition, the Partnership owns a LIBOR interest rate floor
instrument to help manage a portion of the interest rate risk
associated with its MSRs. The LIBOR floor did not meet the
requirements for hedge accounting and therefore, was accounted
for as a trading instrument. The Partnership is entitled to a
monthly payment when the LIBOR rate falls below the strike rate
of 4.00%. The floor, which was acquired as a result of the
Exchange Transaction at no cost, had a market value of $0 at
December 31, 1996 and 1995. The termination
date of the floor is September 30, 1997.
Note 10. Bank Debt
On July 30, 1996, the Partnership refinanced its credit
facilities which resulted in a $75 million revolving
servicing facility which converts to a five-year term facility
after one year; a $375 million revolving warehouse credit
facility consisting of two tranches: (i) a $300 million
revolving committed warehouse facility and (ii) a $75 million
discretionary facility for early funding programs; and a
revolving working capital facility of approximately $45 million
to provide financing for servicing advances and repurchased loans
held for sale. This refinancing allowed the Partnership to
manage its liquidity for its servicing and production operations
and to repay its borrowings to affiliates.
The servicing facility consisted of the following (in
thousands):
<TABLE>
December 31, December 31,
1996 1995
<S> <C> <S>
Servicing facility due in
quarterly principal
installments following the
month in which the Servicing
Conversion Date occurs. The
Servicing Conversion Date is
defined as the earlier of
July 28, 1997 or the date the
Partnership utilizes the
maximum loan amount of $75
million. Interest is paid
monthly. The servicing
facility matures on the
earlier of (a) the last day
of the 60th month following
the month in which the
Servicing Conversion Date
occurs or (b) July 17, 2002.
The servicing facility is
secured by substantially all
of the assets of the
Partnership, other than
mortgage loans held for sale
and assets securing other
debt. The interest rate is
subject to reduction by
certain compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. $54,400 --
Servicing facility due in
quarterly principal
installments totaling
approximately $2.1 million
each quarter. Interest was
paid monthly. The servicing
facility was repaid July 30,
1996 and was secured by
substantially all of the
assets of the Partnership,
other than mortgage loans
held for sale and assets
securing other debt. The
interest rate was subject to
reduction by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. -- 37,215
Total $54,400 $37,215
Lines of credit and short-term borrowings consisted of the
following (in thousands):
December 31, December 31,
1996 1995
A warehouse line of credit to
fund the purchase or
origination of residential
mortgage loans with a maximum
availability of $300.0 million
at December 31, 1996. This
line of credit matures July
28, 1997 and advances under
this line are secured by the
individual mortgage loans and
related assets. The interest
rate is subject to reduction
by certain compensating
balance arrangements with
respect to escrow and agency
premium deposit balances. 188,254 --
A warehouse line of credit to
fund the purchase or
origination of residential
mortgage loans with a maximum
availability of $200.0 million
at December 31, 1995. This
line of credit matured July
30, 1996 and advances under
this line were secured by the
individual mortgage loans and
related assets. The interest
rate was subject to reduction
by certain compensating
balance arrangements with
respect to escrow and agency
premium deposit balances. -- 200,000
December 31, December 31,
1996 1995
A working capital line of
credit to fund: (i) taxes and
insurance advances made on
behalf of borrowers of
residential mortgage loans
with a maximum availability of
$25.0 million at December 31,
1996; (ii) principal and
interest advances made on
behalf of borrowers of
residential mortgage loans
with a maximum availability of
$15.0 million at December 31,
1996; and (iii) the
origination or acquisition of
residential loans held for
investment purposes with a
maximum availability of $5.0
million at December 31, 1996.
This line of credit matures
July 28, 1997 and advances
under this line are secured by
the related advances,
individual mortgage loans and
related assets. The interest
rate is subject to reduction
by certain compensating
balance arrangements with
respect to escrow and agency
premium deposit balances. 11,960 --
A letter agreement dated
December 29, 1995 to fund the
purchase and origination of
residential mortgage loans
with a maximum availability of
$25 million at December 31,
1995. This agreement expired
January 31, 1996 and advances
under this agreement were
secured by the individual
mortgage loans and related
assets. Advances under this
agreement reduce the
availability of unused
portions of other lines of
credit available to the
Partnership. The interest
rate was subject to reductions
by certain compensating
balance arrangements with
respect to escrow and agency
premium deposit balances. -- 8,091
December 31, December 31,
1996 1995
A line of credit to fund taxes
and insurance advances made on
behalf of borrowers of
residential mortgage loans
with a maximum availability of
$5.0 million at December 31,
1995. This line of credit
matured July 31, 1996 and
advances under this line were
secured by the related
advances. The interest rate
was subject to reduction by
certain compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. -- 5,000
A line of credit to fund
principal and interest
advances made on behalf of
borrowers of residential
mortgage loans with a maximum
availability of $15.0 million
at December 31, 1995. This
line of credit matured July
31, 1996 and advances under
this line were secured by the
related advances. The
interest rate was subject to
reduction by certain
compensating balance
arrangements with respect to
escrow and agency premium
deposit balances. -- 2,300
Repurchase agreements with a
securities dealer (Bear
Stearns) secured by the
Partnership's CMO bond and
residual interest portfolio.
The repurchase liability
amounts mature monthly and
bear interest at LIBOR plus
1.50%. 1,679 1,733
Short-term funding obligations 10,495 15,020
Total $212,388 $232,144
</TABLE>
Short-term funding obligations represent obligations to fund
originations. These funding obligations were met through
subsequent bank borrowings and/or the Partnership's available
liquidity.
In conjunction with the servicing facility discussed above, the
Partnership has a maximum availability of $75 million to finance
or refinance the origination or acquisition of mortgage servicing
rights up to 65% of the market value of the servicing portfolio
as determined by an independent third party appraiser. The
servicing facility is subject to quarterly mandatory prepayments
in an amount equal to the amount by which the aggregate monthly
amortization payment then due exceeds 65% of the appraised value
of the qualified servicing portfolio as determined by an
independent third party appraisal. No such mandatory prepayments
occurred during 1996. The line availability must be utilized by
July 28, 1997.
In addition, the Partnership has a $100 million line of credit to
finance the acquisitions of high-grade, short-term investments as
defined pursuant to the Investment Line Agreement. Advances on
the line of credit are secured by the acquired investments. The
Partnership utilized the entire line of credit during the last
quarter of 1996 and realized net earnings of approximately $0.7
million. No amounts were outstanding on this line at December
31, 1996.
The weighted average interest rate and the maximum and average
amounts outstanding for such obligations for the years ending
December 31, 1996 and 1995 (in thousands) are as follows:
<TABLE>
1996 1995
Weighted Maximum Average Weighted Maximum Average
Average Outstan Outstan Average Outstand Outstan
Rate ding ding Rate ing ding
<S> <C> <C> <C> <C> <C> <C>
Lines of 5.16% 301,720 192,506 5.28% 215,391 95,547
Credit
Servicing
Facility 6.58% 60,500 44,736 4.34% 41,350 29,475
Total 5.43% 362,220 237,242 5.06% 256,741 125,022
</TABLE>
If the compensating balance arrangements were not in effect, the
total weighted average effective interest rate under such credit
agreements would have been 6.77% and 7.54% for the years ended
December 31, 1996 and 1995, respectively, and the Partnership
would have been charged an additional $3.4 million and $3.1
million in interest for the years ended December 31, 1996 and
1995, respectively.
The Partnership must meet certain debt covenant requirements in
accordance with its bank debt agreements. At December 31, 1996
and 1995, the Partnership met all of its debt covenant
requirements.
Note 11. Transactions with Affiliates
The General Partner receives an annual management fee equal to
1/2 of 1% of the initial investment of the Preferred Unitholders
(the "Base Management Amount"). Such fee increases
proportionately to reflect the raising of additional capital
through the subsequent issuance of Units or other interests in
the Partnership. These fees are not subject to reduction in the
event that the Partnership sustains losses. The General Partner
has contracted with Harbourton whereby Harbourton performs all of
the management functions. Accordingly, the General Partner
recognized management fees (see discussion below) due to
Harbourton totaling approximately $609 thousand for the year
ended December 31, 1996.
Western was a party to a management services agreement with
Harbourton and paid Harbourton approximately $300 thousand in
management fees under the management services agreement during
the year ended December 31, 1994. HMCLP was also a party to a
management agreement with Harbourton and paid management fees of
approximately $100 thousand during the year ended December 31,
1994.
The General Partner is reimbursed for the portion of its expenses
allocable to its activities in connection with the Partnership's
business. The maximum aggregate amount of allocable expenses for
which the Partnership is obligated to reimburse the General
Partner in a fiscal year is an amount equal to 0.9% of the
initial investment of the Preferred Unitholders. The Partnership
recognized approximately $965 thousand and $395 thousand for
direct and allocable expenses incurred for the years ended
December 31, 1996 and 1995, respectively.
During the year ended December 31, 1996, the Partnership borrowed
from an affiliate to fund its investment in loans repurchased
from GNMA pools. These borrowings are secured by the investments
and will be repaid upon disposition of the asset. These
borrowings generally bear interest at LIBOR plus 1% to LIBOR plus
2.25%. Interest incurred during the year approximated $1.7
million. At December 31, 1996, the Partnership had approximately
$36.6 million outstanding which is classified as notes payable to
affiliates in the accompanying consolidated financial statements.
The affiliate participates in the profits of these loans which
reinstate.
The Partnership has a working capital subordinated debt line with
Harbourton that was subordinate to all other loans with banks.
These borrowings generally bear interest at prime to prime plus
2% and LIBOR plus 1%. Interest incurred during the years ended
December 31, 1996, 1995, and 1994 approximated $0.6 million, $0.4
million and $0.1 million, respectively. At December 31, 1996 and
1995, the Partnership had outstanding borrowings of approximately
$1.2 million and $0 million, respectively which are classified as
notes payable to affiliates in the accompanying consolidated
financial statements.
The Partnership has notes with its affiliates PVSCLP
and PVMC. These borrowings bear interest at prime plus 2%.
Interest incurred during the year approximated $34 thousand. At
December 31, 1996 and 1995, the Partnership had approximately
$0.3 million outstanding which is classified as notes payable to
affiliates in the accompanying consolidated financial statements.
The Partnership has a notes payable to an affiliated party which
bears interest at prime plus 2%. Interest incurred during the
year approximated $24 thousand. At December 31, 1996 and 1995,
the Partnership had approximately $0.3 million outstanding which
is classified as notes payable to affiliates in the accompanying
consolidated financial statements.
The Partnership has entered into transactions pursuant to which
it repurchases delinquent loans from GNMA pools which it services
and resells such loans on a servicing retained basis to Santa
Cruz Partners, Skillman Partners, and Harbourton Reassurance,
Inc., affiliates of the Partnership and Harbourton. As of
December 31, 1996 and December 31, 1995, the ending balance of
loans purchased out of securitized pools and sold to these
affiliates totaled approximately $48.2 million and $157.9
million, respectively. These loans are being serviced by the
Partnership on behalf of the affiliated companies. The
associated mortgage servicing is reflected in the Serviced for
Affiliates portion of the Partnership's servicing portfolio as
presented in the notes to the consolidated financial statements.
Such transactions are expected to benefit the Partnership by
reducing the Partnership's related foreclosure loss through the
reduction of the pass-through rate due to the investor (owner of
the loan). The reduction in foreclosure loss reserve requirement
is reflected as a gain on sale of defaulted loans to affiliates
in the accompanying consolidated financial statements. In
addition, the Partnership's advance requirement for its GNMA
servicing will be reduced as the servicing contract with the
affiliates is actual/actual as opposed to GNMA's
scheduled/scheduled requirement.
During the third quarter of 1995, Harbourton and its affiliates
converted $9.0 million of notes receivable from the Partnership
into equity in the Partnership. In connection with the debt to
equity conversion, Harbourton and its affiliates received
approximately 4.9 million of Series B Preferred Units having
generally the same rights as the outstanding Preferred Units.
During the quarter ended December 31, 1995, the Preferred
Unitholders voted to convert the Series B Units to Preferred
Units at a conversion ratio of one Preferred Unit for each Series
B Unit.
During August 1993, Western received a promissory note for
approximately $500 thousand from Harbourton as consideration for
Harbourton receiving a 50% participation interest in an interest-
only security. The note accrued interest at a rate of 5.5%, and
was due on December 31, 1995. Harbourton was entitled to
receive, as payment from Western, 50% of monthly cash flows that
were distributed to Western related to ownership of the interest-
only security (net of any interest due Western, as holder of the
promissory note given by Harbourton as consideration for its
participation interest). Harbourton was also entitled to
receive, as payment from Western, 50% of sale or distribution
proceeds net of 50% of any costs incurred by Western to sell or
otherwise dispose of the security and net of any interest and/or
principal that remained payable to Western under the terms of the
promissory note given by Harbourton as consideration for its
participation in the security. Further, on September 30, 1995,
Harbourton exchanged its 50% interest in its interest-only
security with the Partnership in partial settlement of the note
payable to the Partnership.
On August 21, 1992, Western issued to certain of its officers
notes related to limited partnership interests. The notes
accrued interest at prime plus 1% and had a scheduled maturity
date of August 21, 1999. The notes required mandatory
prepayments for bonuses and distributions paid in future periods
in accordance with the terms of the individual notes and
respective employment agreements. Effective January 1, 1995,
management exchanged their interests in Western for limited
partnership interests in Harbourton. This transaction was
accounted for as a purchase of Western's limited partnership
interest by Harbourton at fair value. The fair value of the
interests in Harbourton exceeded management's basis by
approximately $627 thousand. In accordance with Harbourton's
established accounting policy, the excess fair value was "pushed-
down" to Western. Accordingly, the transaction resulted in a
write-up of purchased servicing rights and excess costs over
identifiable tangible and intangible assets of $389 thousand and
$238 thousand, respectively.
Through the ordinary course of business, the Partnership acquires
mandatory forward commitments to sell whole loans and mortgage
backed securities through a dealer, whose owners also own less
than an aggregate 5% limited partnership interest in Harbourton.
Note 12. Western Transaction
As noted previously, on July 31, 1995 the Partnership completed
its acquisition of Western. The Western Transaction was
accounted for as a reorganization of entities under common
control similar to a pooling-of-interests. Accordingly, the
consolidated results of operations for the years ended December
31, 1995 and 1994 include the operations of both Western and
HMCLP as though the combination occurred at the inception date of
HMCLP and Western. The following table summarizes the results of
operations for the individual partnerships prior to the
combination (in thousands):
<TABLE>
Year Ended
December 31, 1994
Western HMCLP
<S> <C> <C>
Revenues* $13,644 $25,490
Expenses (12,668) (21,632)
Net Income $ 976 $ 3,858
</TABLE>
* Includes gain on bulk sale of originated servicing of $2,957
and $0, respectively, and equity in earnings of affiliates
of $0 and ($374), respectively.
Note 13. Proforma Earnings
As noted previously, on March 14, 1995, the Exchange Transaction
was consummated. Accordingly, HMCLP became a subsidiary of HBT
and TMC became an indirectly wholly-owned subsidiary of HBT, with
an aggregate 50% equity interest owned by HBT and an aggregate
50% equity interest owned by HMCLP. Had the transactions
occurred at the beginning of the periods presented in the
accompanying consolidated statements of operations, proforma
results of operations would have been as follows for the years
ended December 31 (in thousands):
<TABLE>
1995 1994
<S> <C> <C>
Total revenues* $ 67,532 $ 48,598
Total expenses (52,820) (42,784)
Net income $ 14,712 $ 5,814
</TABLE>
* Includes gain on bulk sale of servicing of approximately
$9,148 and $2,957, respectively.
Note 14. Foreclosure, Repurchase and Indemnification Reserves
The Partnership is subject to inherent losses in its loan
servicing portfolio due to loan foreclosures. Certain agencies
have the authority to limit their repayment guarantees on
foreclosed loans resulting in increased foreclosure costs being
borne by servicers. The Partnership has evaluated its exposure
to such losses based on loan delinquency status, foreclosure
expectancy rates and historical foreclosure loss experience. The
Partnership has established a reserve for its investment in loans
repurchased from GNMA pools, advances receivable and for losses
it will experience in future periods as loans complete the
foreclosure process totaling approximately $9.1 million and $10.4
million as of December 31, 1996 and 1995, respectively. Required
adjustments, if any, to the established reserve will be reflected
in earnings in the periods in which they become known.
In addition, as part of the production operations, the
Partnership is subject to certain repurchase and indemnification
provisions through its contractual agreements with the investors
to which it sells mortgage loans. These provisions provide
that the Partnership repurchase from the investor, mortgage loans
in which an origination (i.e., underwriting) defect is
discovered. The investor, however, may require the Partnership
to indemnify them against losses that result from an origination
defect rather than repurchase the loan. The reserve is based on
management's expectations and historical loss experience and
totaled approximately $1.8 million and $0 million at December 31,
1996 and 1995, respectively.
Further, as noted previously, the Partnership executed a Purchase
and Sale Agreement, with an unrelated third party, for the sale
of the Partnership's servicing rights related to high coupon
GNMA. As part of this agreement, the Partnership was required to
indemnify the buyer against certain foreclosure losses related to
VA loans (i.e., VA no-bids and VA buydowns). A liability for
approximately $0.6 million was established at the time of the
sale which reduced the gain on bulk sales of servicing in the
accompanying consolidated financial statements.
The following is a summary of foreclosure, repurchase and
indemnification reserves at December 31, 1996 and 1995 (in
thousands):
<TABLE>
1996 1995
<S> <C> <C>
Reserves for foreclosures $ 4,013 $ 8,142
Reserves for advances 3,984 2,264
Reserves for investments in loans
repurchased from GNMA pools 1,120 --
Total foreclosure reserves 9,117 10,406
Reserves for production repurchase and 1,790 --
indemnifications
Reserves for servicing sale 600 --
indemnifications
Total repurchase and indemnification 2,390 --
reserves
Total Reserves $11,507 $10,406
The following is a roll-forward of the total reserves for the
years ended December 31 (in thousands):
1996 1995
Beginning Balance $10,406 $7,190
Provision for foreclosure losses 5,040 4,029
Provision for repurchase and 1,790 --
indemnification losses
Establishment of reserves in
connection with -- 4,210
acquisitions of servicing rights
Establishment of reserves in
connection with 600 --
sales of servicing rights
Net foreclosure charge-offs (6,329) (5,023)
Ending Balance $11,507 $10,406
</TABLE>
Note 15. Commitments and Contingencies
The Partnership is a party to transactions with off-balance sheet
risk in the normal course of business through the origination and
sale of mortgage loans. These transactions include commitments
to extend credit to mortgagors (i.e., mortgage loan pipeline) and
mandatory forward commitments to sell whole loans or mortgage-
backed securities. Those transactions involve, to varying
degrees, elements of credit and interest rate risk in excess of
the amount recognized in the consolidated balance
sheets.
The mortgage loan pipeline of the Partnership represents
agreements to lend to a mortgagor as long as there is no
violation of any condition established in the application or
contract. Such commitments generally have fixed expiration dates
or other termination clauses. The Partnership evaluates each
mortgagor's credit worthiness on a case-by-case basis.
Collateral is limited to residential properties. As of December
31, 1996, the Partnership's mortgage loan pipeline and warehouse
of approximately $451.8 million and $214.6 million, respectively,
consisted of approximately $385.7 million in locked interest rate
commitments with interest rate risk.
In order to offset the risk that a change in interest rates will
result in a decrease in the value of the Partnership's current
mortgage loan inventory or its commitments to purchase or
originate mortgage loans ("Locked Pipeline"), the Partnership
enters into hedging transactions. The Partnership's hedging
policies generally require that substantially all of its
inventory of conforming and government loans and the maximum
portion of its Locked Pipeline that it believes may close be
hedged with forward contracts or options. The inventory is then
used to fill the forward delivery contracts and options. The
Partnership is exposed to interest rate risk to the extent that
the portion of loans from the Locked Pipeline that actually close
at the committed price is different than the portion expected to
close in the event of a change in rates and such change in
closings is not covered by forward contracts and options needed
to replace the loans in process that do not close at their
committed price. The Partnership determines the portion of its
Locked Pipeline that it will hedge based on numerous factors,
including the composition of the Partnership's Locked Pipeline,
the portion of such Locked Pipeline likely to close, the timing
of such closings and changes in the expected number of closings
affected by changes in interest rates.
The Partnership had both mandatory and optional forward
commitments outstanding matched against mortgage loans held for
sale and its Locked Pipeline at December 31, 1996 of
approximately $318.4 million and to the extent mortgage loans are
not available to fill these commitments, the Partnership has
interest rate risk.
Note 16. Income Taxes
The Partnership may be treated as a corporation for federal
income tax purposes beginning on January 1, 1998, unless 90% of
the Partnership's gross income is "qualifying income", as defined
in the tax law. "Qualifying income" includes certain interest,
dividends, certain real property rents, and gains from the sale
or disposition of capital assets or property described in Section
1231(b) of the Code which is held for the production of
"qualifying income." Based on the Partnership's existing
composition of gross revenue, the Partnership would be treated as
a corporation for federal income tax purposes in 1998.
Therefore, the Partnership is required to provide deferred taxes
on any existing temporary differences between the basis of its
assets and liabilities for financial reporting and income tax
purposes that are anticipated to exist on January 1, 1998. As of
December 31, 1996, no deferred taxes have been recorded as
management anticipates that the net
taxable temporary differences existing at December 31, 1996 will
reverse prior to January 1, 1998. The following analysis sets
forth the estimated tax effects (using a corporate federal and
state effective tax rate) of the significant cumulative temporary
differences between the book and tax bases of the Partnership's
assets and liabilities at December 31, 1996. This analysis does
not consider permanent book and tax baseis differences (in
thousands):
<TABLE>
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Installment receivable related to servicing $(5,508) $ --
sold
Mortgage servicing rights (12,212) (4,912)
Property, plant and equipment (58) (234)
Mortgage loans held for sale (717) --
Deferred acquisition and borrowing (478) --
costs
Excess cost over identifiable tangible and
intangible assets acquired (982) --
Deferred tax liabilities (19,955) (5,146)
Deferred tax assets:
CMO bonds, residual interests, investment
securities and SMATs 961 966
Foreclosure and advances reserves 1,957 1,588
Other -- 321
Deferred tax assets 2,918 2,875
Net deferred tax liability $(17,037) $(2,271)
</TABLE>
The following is a reconciliation of net income in the
accompanying consolidated financial statements to the taxable
income (loss) reported for federal income tax purposes for the
year ended December 31 (in thousands):
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Net income per consolidated financial $5,461 $11,624 $ 4,834
statements
Increases (decreases) resulting from:
Amortization (7,518) (10,239) (1,115)
Impairment on mortgage servicing (1,132) 1,132 --
rights
Mark-to-market adjustments related to
investments and mortgage loans held (944) (1,537) (1,430)
for sale
Foreclosure and advances reserves 1,002 1,842 1,266
Equity in earnings of affiliates (12) 254 374
Gain (loss) on sale of securities 338 -- (987)
Recognition of SFAS No. 122 mortgage (26,828) (10,924) --
servicing rights
Miscellaneous 856 (639) 480
Cumulative effect of the Exchange and -- (16,030) --
Western Transactions
Gain recognized on sale 11,355 -- --
of servicing rights
Gain deferred on (14,768) -- --
installment sales of servicing
Taxable (loss) income per federal $(32,190) $(24,517) $3,422
income tax return
</TABLE>
Note 17. Partners' Capital
On October 27, 1988, HBT completed its Initial Public Offering of
approximately 4.6 million Preferred Units. Simultaneously with
the closing of that offering, HBT issued an additional .4 million
Preferred Units to JCC and certain of its subsidiaries in
exchange for their interests in certain residual cash flows. On
November 4, 1991, approximately .7 million Preferred Units were
issued in connection with the settlement of a note issued in
connection with the purchase of a servicing portfolio. On
December 31, 1993, HBT issued approximately .3 million Preferred
Units to JCC to discharge amounts owed to JCC and certain of its
subsidiaries for expenses incurred on its behalf or fees for
services rendered to HBT. On March 14, 1995, in conjunction with
the Exchange Transaction, HBT issued to PVSC and the TMC Parties
approximately 21.5 million and .8 million Preferred Units,
respectively. On July 31, 1995, in conjunction with the
acquisition of Western, the Partnership issued to Harbourton and
its affiliates approximately 8.6 million Series B Preferred Units
having generally the same rights as the outstanding Preferred
Units. Further, on July 31, 1995, the Partnership issued to
Harbourton and its affiliates approximately 4.9 million of Series
B Preferred Units having generally the same rights as the
outstanding Preferred Units in settlement of $9.0 million in
notes owed to Harbourton and its affiliates. During the quarter
ended December 31, 1995, the Preferred Unitholders voted to
convert the Series B Units to Preferred Units at a conversion
ratio of one Preferred Unit for each Series B Unit. Further,
during the second quarter of 1996, the Partnership purchased and
redeemed from an unaffiliated party approximately 0.7 million
publicly traded Preferred Units for approximately $1.1 million.
Accordingly, partners' capital decreased by approximately $1.1
million during the year ended December 31, 1996 due to the
transaction.
At December 31, 1996, the number of outstanding units totaled
approximately 41.2 million. Approximately 35.8 million units are
held by Harbourton and its affiliates and certain TMC parties.
The Partnership's other 5.3 million publicly traded units were
held by non-affiliates.
After the payment of all debts, liabilities and obligations,
allocation of income (loss), liquidating distributions are
allocated to the General Partner and Preferred and Subordinated
Unitholders in accordance with and in proportion to their
respective capital account balances as determined in accordance with
the HBT Agreement. At December 31, 1996, the Subordinated Unitholders
capital account balances totaled $0 and management is unable to
determine at this time what, if any, liquidating distributions will
be distributed to Subordinated Unitholders.
Note 18. Preferred Unit Option Plan
The Partnership adopted a Preferred Unit Option Plan (the "Plan")
effective September 28, 1995 (amended October 15, 1995) under
which options to acquire Preferred Units and Distribution
Equivalent Rights may be granted to key management personnel of
the Partnership and its Affiliates. The Board of Directors of
the General Partner (the "Board") is authorized to grant Options
not to exceed 1.0 million Preferred Units in the aggregate and
Distribution Equivalent Rights not to exceed 3.0 million
Preferred Units in the aggregate. Options are generally granted
at the average market price of a Preferred Unit on the date of
grant and are exercisable beginning one year from the date of
grant and expire ten years from date of grant.
On September 28, 1995, 326.5 thousand options were granted under
the Plan at fair market value. At December 31, 1996, all 326.5
thousand options were outstanding. No options were granted in
1996. Approximately 72.2 thousand options were exercisable at
December 31, 1996. The current exercise price, which increases
at a rate of 7% annually, as of December 31, 1996 is
approximately $2.00.
Note 19. HBT Condensed Financial Data
The following condensed statement of financial condition
represents HBT on a parent-only basis at December 31, 1996 (in
thousands):
<TABLE>
<S> <C> <C>
Assets: 1996 1995
Cash $ 121 $ 47
CMO bonds, residual interests, investment
securities and SMATs 3,094 2,613
Notes receivable - affiliates 5,000 5,000
Distribution receivable - subsidiaries 20,000 --
Investment in loans repurchased from GNMA 41,247 --
pools
Investment in subsidiaries 30,904 50,091
Other 6,238 81
Total Assets $106,604 $57,832
Liabilities:
Lines of credit and short-term borrowings 1,679 1,733
Notes payable - affiliates 38,013 1,031
Due to affiliates 7,903 --
Accounts payable and other liabilities 77 561
Total Liabilities 47,672 3,325
Partners' Capital 58,932 54,507
Total Liabilities and Partners' Capital $106,604 $57,832
</TABLE>
The following condensed statement of operations represents HBT on
a parent-only basis for the years ended December 31, 1996 and
1995:
<TABLE>
1996 1995
<S> <C> <C>
Revenues:
Loan servicing fees $ -- $ 1,066
Ancillary income -- 377
Gain on sale of defaulted loans -- 104
to affiliates
Investment income 2,026 159
Total servicing revenues 2,026 1,706
Other investment and interest income 4,395 798
Total revenues 6,421 2,504
Expenses:
Servicing costs -- 89
Provision for foreclosure losses -- (134)
Amortization of mortgage servicing -- 756
rights
Total servicing expenses -- 711
General and administrative costs 1,528 644
Other interest expense 961 187
Other interest expense - affiliates 126 142
Total expenses 1,750 1,684
Net income before equity in earnings of 4,671 820
affiliates
Equity in earnings of affiliates 790 10,804
Net Income $ 5,461 $11,624
</TABLE>
Note 20. Fair Value of Financial Instruments
SFAS No. 107 requires disclosure of fair value information about
financial instruments, whether or not recognized in the
consolidated balance sheets.
Fair values are based on estimates using present value or other
valuation techniques in cases where quoted market prices are not
available. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, might not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments
from its disclosure requirements.
Financial instruments are defined as cash, evidence of an
ownership interest in an entity, or a contractual obligation or
right which results in a transfer of cash or an ownership
interest in an entity. Pursuant to that definition, the
Partnership recognizes the following as financial instruments:
(1) cash and cash equivalents, (2) mortgage loans held for sale,
(3) mortgage loans held for investment and, investment in loans
repurchased from GNMA pools, (4) CMO bonds, residual interests,
investment securities, and SMATs, (5) advances receivable, (6)
other receivables (e.g., trade receivables), (7) installment
purchase and sale obligations - servicing, (8) lines
of credit (floating rate), (9) servicing facility, and (10) other
payables (e.g., trade payables).
For cash and cash equivalents, installment purchase and sale
obligations - servicing, lines of credit, and servicing facility,
the carrying value approximates fair value at December 31, 1996
and 1995. The carrying value of mortgage loans held for
investment, advances receivable, other receivables and other
payables net of any applicable allowances, also approximates fair
value at December 31, 1996 and 1995. CMO bonds, residual
interests, investment securities and SMATs are carried at fair
value at December 31, 1996 and 1995. Mortgage loans held for
sale are carried at the lower of cost or market.
Note 21. Liquidation of Partnership and Subsequent Events
On January 31, 1997, pursuant to the HBT Agreement (as amended and
restated) the Board of Directors of the General Partner had determined
that there is a substantial risk that an Adverse Tax Consequence (as
defined below) will occur within one year and that it is in the best
interests of the Partnership and the holders of beneficial interests
in the Partnership (collectively, "Unitholders") to sell or otherwise
dispose of all of the assets of the Partnership and to liquidate the
Partnership as soon as reasonably practicable. Pursuant to Section
8.10 of the HBT Agreement, in the event that the General Partner
reasonably believes that within one year there is a substantial risk
of the Partnership being treated for federal income tax purposes as a
corporation (an "Adverse Tax Consequence") as a result of, among other
things, a reclassification of the Partnership as a corporation under
the Revenue Act of 1987 (the " 1987 Act") for its first taxable year
beginning after December 31, 1997, the General Partner may take
certain actions, including the liquidation of the Partnership, upon
not less than 30 days prior written notice to the Partners and the
Unitholders unless, prior to the taking of such action, the
Unitholders shall have voted against such action by a vote of at least
two-thirds of all Limited Partnership Interests in the Partnership.
PVSC, Harbourton and HGC are the owners of approximately 85% of the
issued and outstanding Preferred Units, and thus, there is no
expectation that a vote will be taken.
Under existing tax law, the Partnership is treated as a partnership
and is not separately taxed on its earnings. Rather, income (or loss)
of the Partnership is allocated to the Unitholders pursuant to the
terms of the HBT Agreement and is included by them in determining
their individual taxable incomes, subject to certain special rules
applicable to publicly traded partnerships. By contrast, a
corporation is subject to tax on its net income and any dividends or
liquidating distributions paid to stockholders are then subject to a
second tax at the stockholder level. Accordingly, under current tax
law, the Partnership enjoys a tax advantage over a similarly situated
entity which is taxed as a corporation.
The 1987 Act generally requires publicly traded partnerships to be
taxed as corporations. However, under the 1987 Act existing
partnerships, such as the Partnership, were allowed to continue to be
treated as partnerships for federal income tax purposes for all
taxable years commencing on or prior to December 31, 1997.
Thereafter, the Partnership will be treated as a corporation for
federal income tax purposes unless contrary legislation is enacted
prior to December 31, 1997.
From time to time, legislation has been introduced in Congress that
would have the effect of extending the December 31, 1997 grandfather
date or eliminating altogether the relevant provisions of the 1987
Act. However, to date no such legislation has passed both houses of
Congress and, in the best judgment of the General Partner, it is
doubtful that any such legislation will be enacted prior to December
31, 1997. Accordingly, the General Partner believes that there is a
substantial risk that an Adverse Tax Consequence will occur for the
Partnership's first taxable year beginning after December 31, 1997.
Pursuant to Section 8.10 of the HBT Agreement, the General Partner has
the right to take one of several actions in the event that it believes
there is a substantial risk that an Adverse Tax Consequence will occur
within one year. For instance, the General Partner has the power to
(a) modify, restructure or reorganize the Partnership as a
corporation, a trust or other type of legal entity, (b) liquidate the
Partnership, (c) halt or limit trading in the Units or cause the Units
to be delisted from the NYSE, or (d) impose restrictions on the
transfer of Units. In addition, the General Partner can continue the
Partnership and allow it to be treated as a corporation for federal
income tax purposes.
The General Partner believes that the consolidation taking place in
the mortgage banking industry makes it difficult for the Partnership
to compete effectively with market participants that are larger and
more readily able to recognize substantial economies of scale in their
operations than the Partnership. The General Partner believes that
the loss of partnership tax treatment will eliminate an offsetting
competitive advantage which the Partnership has. These factors weigh
in favor of liquidating the Partnership rather than attempting to
continue the Partnership's business in its present or some other form.
Although no assurances can be given, the General Partner believes that
substantially all of the Partnership's assets can be disposed of in an
orderly fashion by the end of 1997. The Partnership has developed
the following liquidation plan:
Liquidation of Assets
The disposition of the Partnership's significant assets can be
summarized into the following categories: i) wholesale production
operations, ii) retail production operations, iii) remaining servicing
assets, iv) servicing operation, and v) other assets. Subsequent to
December 31, 1996, the Partnership began the process of liquidating
its assets as follows:
Wholesale Production Operations
On February 28, 1997, the Partnership's subsidiary, HMCLP, executed a
Purchase and Sale Agreement to sell its wholesale loan production
branch operations to CrossLand Mortgage Corp. ("CrossLand"), a
subsidiary of First Security Corporation, for approximately $4 million
in cash. In addition, HMCLP will receive an earnout payment based on
the aggregate principal amount of loans generated, between $1.5
billion and $4.0 billion, from the transferred facilities during the
thirteen months following the anticipated closing date of March 31,
1997. If the aggregate principal amount of loans generated is less
than $1.5 billion, the Partnership will not receive an earnout
payment. If CrossLand maintains the same volume of wholesale loan
originations as HMCLP experienced in 1996 (approximately $2.8
billion), this earnout payment would total approximately $3.3 million
resulting in total proceeds received from CrossLand of approximately
$7.3 million. If the Partnership receives total proceeds from
CrossLand of approximately $7.3 million, this would approximate the
Partnership's cost basis assigned to the fixed assets associated with
its wholesale production operation, and the excess cost of identifiable
tangible and intangible assets acquired, and deferred acquisition,
transaction and borrowing costs. The purchase will not include the
wholesale mortgage loan pipeline being processed by HMCLP at the time
of the sale. Pursuant to the Purchase and Sale Agreement, these
excluded loans will be processed and closed for HMCLP's account by
CrossLand pursuant to an administrative services agreement between the
parties.
Retail Production Operations
On March 18, 1997, HMCLP executed a Purchase and Sale Agreement under
which it sold a majority of its retail loan production branch
operations to an unaffiliated third party for an amount approximately
equal to the net book value of the fixed assets owned by the retail
branches. The purchase did not include the retail mortgage loan
pipeline being processed by HMCLP at the time of the sale. Pursuant
to the Purchase and Sale Agreement, these excluded loans will be
processed and closed for HMCLP's account by the unaffiliated third
party pursuant to an administrative services agreement between the
parties. The Partnership is continuing to explore the disposition and
sale of its remaining retail branches.
Remaining Servicing Assets
As of December 31, 1996, the Partnership's servicing portfolio
totaled approximately $3.4 billion. On March 20, 1997, the
Partnership executed a letter of intent, with an unrelated third
party, for the sale of the Partnership's servicing rights related to
non-recourse FNMA and Freddie Mac loans and GNMA loans with unpaid principal
balances totaling approximately $1.5 billion. The transfer of the
servicing responsibilities is expected to occur in June 1997. Net
proceeds from the sale are expected to be approximately $26.4 million
and will be used to reduce the Partnership's servicing facility. See
Note 10.
The Partnership, with the assistance of Bayview Trading Group, Inc.,
is continuing to market the remaining servicing portfolio. Based on
preliminary discussions with potential buyers for such servicing, the
Partnership estimates to receive net proceeds of approximately $20.2
million. The net proceeds received for the sale of the remaining
servicing portfolio could be impacted by changes in market conditions
including, without limitation, changes in prevailing interest rates.
The net book basis associated with the servicing discussed above
totaled approximately $39.7 million net of related foreclosure
reserves of approximately $2.1 million at December 31, 1996.
Servicing Operation
The Partnership's National Servicing Center located in Scottsbluff,
Nebraska is currently in the process of being marketed for sale with
the assistance of Bayview Financial Trading Group, Inc. The
Partnership's Servicing Center, including the operations, facilities,
fixed assets and employees, is being marketed for sale along with the
Partnership's GNMA pool buyout and reinstatement unit, and its
streamline refinance capability. The book basis of the remaining
facilities and fixed assets was approximately $1.8 million at December
31, 1996.
Mortgage Loans Held for Investment
During the first quarter of 1997, the Partnership sold the majority of
its mortgage loans held for investment portfolio totaling
approximately $3.0 million to an unrelated third party for
approximately $2.8 million. An unrealized loss of approximately $0.2
million was provided for in the accompanying December 31, 1996
consolidated financial statements. It is anticipated that any
additional mortgage loans repurchased subsequent to 1996 and the
remaining portfolio will be marketed and sold in a similar fashion.
CMO Bonds, Residual Interests, Investment Securities and SMATs
During the first quarter of 1997, the Partnership sold its CMO bond
and residual interest portfolio, except for certain non-economic
residual interests, totaling approximately $1.2 million to unrelated
third parties for approximately $3.1 million. An unrealized gain of
approximately $1.9 million was provided for, in accordance with SFAS
No. 115, in the accompanying December 31, 1996 consolidated financial
statements. The Partnership is continuing to market for sale its
remaining portfolio. The book basis of the remaining portfolio was
approximately $0.5 million at December 31, 1996.
Investment in Loans Repurchased from GNMA Pools
The Partnership is currently in the process of negotiating a sales
transaction with an unrelated third party to acquire a substantial
portion of its investment in loans repurchased from GNMA pools. Based
on preliminary discussions with potential buyers for such assets, the
Partnership expects to sell these assets for an amount that
approximates its net book value at December 31, 1996.
Other
The Partnership is currently in the process of marketing its remaining
assets (not discussed above) for sale. The book basis of the remaining
fixed assets was approximately $2.0 million at December 31, 1996. The
remaining fixed assets will more than likely be sold at liquidation
value which could be significantly less than the current book
value. In addition, the Partnership will market and dispose of its
remaining operating receivables and operating payables. The book
basis of the operating receivables may differ from the amounts
realized from such a sale and the book basis of the operating payables
may differ from the actual settled amounts. Accordingly, the
realizability of various items upon liquidation could differ
materially from their current carrying values on a going concern basis.
Wind Down of Operations
Upon completion of the disposition of the Partnership's assets, the
Partnership will be required to wind down the operations of the
disposed units including, without limitation, the production,
servicing and related general administration functions including
financial reporting and accounting. Upon completion of the wind down
functions, the Partnership will be required to terminate employees not
hired in connection with the acquisition of the business units.
Towards this end, the Partnership has announced and provided notice of
termination (in accordance with the Worker's Adjustment and Retraining
Notification Act, WARN) to all employees located in its corporate
headquarters located in Aurora, Colorado (approximately 140 employees).
Additional announcements may be needed based on the outcome of the
disposition of the related business units. Accordingly, the Partnership
will provide for severance costs during 1997 which will include a
component to induce certain employees to remain until the liquidation is
complete in order to ensure the Partnership meets all its obligations to
its investors and creditors.
Liquidating Distribution
Once the assets of the Partnership have been sold and the
Partnership's creditors have been paid in full, or adequate provision
for such payment has been made, the General Partner will cause the
partnership to pay liquidating distributions to Unitholders upon the
surrender of their Units. While the exact timing and nature of any
liquidating distributions cannot be precisely determined at this time,
the Partnership will not make any distributions prior to the fourth
quarter of 1997. However, because of the nature of the Partnership's
business, it is possible that Unitholders may receive a portion of
their distributions in the form of an interest in another entity, such
as a liquidating trust. Any such interests will not, in all
likelihood, be transferable by a Unitholder.
During 1997 the Partnership will incur additional expense and
liabilities associated with its liquidation, including, without
limitation, expenses incurred in connection with the disposition of
its business operations and its winding down. In order for
distributions to be made to the Unitholders at the end of 1997, the
General Partner will have to make provision for the post-1997 liabilities
of the Partnership, by means of a liquidating trust, an arrangement with
another entity, or other procedure. The post-1997 liabilities
represent obligations of the Partnership which will survive beyond
December 31, 1997, such as indemnification or repurchase obligations
with respect to mortgage loans, servicing rights sold or to be sold
in prior periods or in 1997 or indemnification obligations with
respect to business operations sold or to be sold in 1997.
The amount of such additional expenses to be incurred by the
Partnership in 1997 is unknown at this time and is dependent in part
on factors beyond the Partnership's control, such as the timing and
difficulty of the disposition of the Partnership's assets and the
winding-down process. In addition, the net amount ultimately
available for distribution from the liquidated Partnership depends on
many unpredictable factors, such as the amounts realized on the sale
of the remaining assets, carrying costs of the assets prior to sale,
collection of receivables, settlement of claims and commitments, the
amount of revenue and expenses of the Partnership until completely
liquidated and other uncertainties.
Federal Income Tax Consequences of Liquidation
Any taxable gain or loss recognized by the Partnership on the sale of
its assets in connection with the liquidation will be allocated among
the Partners for income tax purposes in accordance with the HBT
Agreement. Assuming that a Partner's interest in the Partnership is
liquidated entirely for cash during 1997, then the Partner will
realize gain or loss to the extent that the cash received is greater
or less than the Partner's adjusted income tax basis in his or her
partnership interest, and the Partner will be permitted to claim any
losses from the Partnership which were previously suspended under the
rules regarding losses from passive activities. Special rules would
apply, however, if a Partner did not receive a full distribution in
cash of his or her interest in the Partnership during the year. After
the payment of all debts, liabilities and obligations, allocations of
income (loss), liquidating distributions are allocated to the General
Partner and Preferred and Subordinated Unitholders in accordance
with and in propotion to their respective capital accounts as determined
in accordance with the HBT Agreement. At December 31, 1996, the
Subordinated Unitholders capital account balances totaled $0 and
management is unable to determine at this time what, if any, liquidating
distributions will be distributed to Subordinated Unitholders.
Financial Statement Presentation
The accompanying consolidated financial statements are presented on a
going concern basis as the decision to liquidate the Partnership and
its assets was formally made and declared subsequent to December 31,
1996. Accordingly, the Partnership's assets, as presented in the
accompanying financial statements, do not include any adjustments that
might result from the outcome of this liquidation. In addition to the
items included in the liquidation of assets discussed above, the
amounts realizable from the disposition of certain other assets of the
Partnership or the settlement of various additional liabilities could
differ materially from those reported in the accompanying financial
statements.
As a result of the Partnership's determination to liquidate on January
31, 1997, the Partnership will change its basis of accounting for
periods subsequent to that date from a going concern basis to a
liquidation basis of accounting. Under the liquidation basis of
accounting, carrying values of assets are presented at estimated net
realizable values and liabilities are presented at estimated
settlement amounts.
Note 22. Subsequent Event
On March 18, 1997, HMCLP and certain other affiliates were sued in Federal
Court in the Eastern District of Virginia by a mortgage loan borrower
alleging, on behalf of the borrower and on behalf of an alleged class of
similarly situated borrowers from HMCLP since March 17, 1996, that certain
payments made by HMCLP to a mortgage broker in connection with the
plaintiff's loan, and loans to members of the purported class, violated
Section 8 of RESPA. Management has not had an opportunity to review
thoroughly the complaint or to formulate a response but management
expects to defend the suit vigorously.
<TABLE>
HARBOURTON FINANCIAL SERVICES, L.P.
UNAUDITED INTERIM FINANCIAL DATA
FOR THE THREE MONTHS ENDED
(in thousands)
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
<S> <C> <C> <C> <C>
Revenues $20,100 $24,300 $23,461 $21,548
Expenses 18,772 21,639 22,319 21,218
Net income $ 1,328 $ 2,661 $ 1,142 $ 330
Net Income $ 0.03 $ 0.06 $ 0.03 $ 0.01
Per Unit
Weighted Average 41,903 41,414 41,170 41,170
Units Outstanding
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
Revenues $17,940 $12,810 $14,117 $16,562
Expenses 9,256 13,568 13,673 14,187
Net Income (Loss) 8,684 (758) 444 2,375
as previously
reported
Adjustment for
adoption
of SFAS No. 122 334 545 - -
(1)
Net income (loss) $9,018 $ (213) $ 444 $ 2,375
Net Income $ 0.30 $ (0.01) $ 0.01 $ 0.06
Profit(Loss) Per
Unit
Weighted Average 30,088 36,985 40,264 41,903
Units Outstanding
</TABLE>
(1) The Partnership adopted SFAS No. 122 in the third quarter of
1995 and retroactively applied the provisions to the results of
operations for the first and second quarters of 1995. SFAS No.
122 does not allow restatement of prior years. Accordingly, the
results above have been restated for the first and second quarter
operations versus the amounts previously reported in the first
and second quarter 10-Qs.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HARBOURTON MORTGAGE CO., L.P.
By: Harbourton Mortgage Corporation, its
General Partner
Date: March 28, 1997 By: s/Jack W. Schakett
Jack W. Schakett
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Title Date
s/ David W. Mills Chairman of the Board of March 28, 1997
Directors of
David W. Mills the General Partner
s/ Jack W. Schakett Chief Executive Officer and March 28, 1997
Director of
Jack W. Schakett the General Partner
(Principal Executive
Officer)
s/ Rick W. Skogg President, Chief Operating March 28, 1997
Officer and
Rick W. Skogg Director of the General
Partner
s/ Paul A. Szymanski Chief Financial Officer and March 28, 1997
Secretary
Paul A. Szymanski
s/ Brent F. Dupes Executive Vice President March 28, 1997
Brent F. Dupes
s/ Bill L. Reid III Chief Accounting Officer March 28, 1997
Bill L. Reid III
s/ Ronald E. Director of the General March 28, 1997
Blaylock Partner
Ronald E. Blaylock
s/ Robert Hermance Director of the General March 28, 1997
Partner
Robert Hermance
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1951
<SECURITIES> 3583
<RECEIVABLES> 51527
<ALLOWANCES> 5104
<INVENTORY> 0
<CURRENT-ASSETS> 219738
<PP&E> 10340
<DEPRECIATION> 4567
<TOTAL-ASSETS> 384120
<CURRENT-LIABILITIES> 325188
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58932
<TOTAL-LIABILITY-AND-EQUITY> 384120
<SALES> 0
<TOTAL-REVENUES> 87727
<CGS> 0
<TOTAL-COSTS> 66905
<OTHER-EXPENSES> 9291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6070
<INCOME-PRETAX> 5461
<INCOME-TAX> 0
<INCOME-CONTINUING> 5461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5461
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
