FMF Capital Group Ltd. Provides Market Update
Tuesday December 13, 9:27 am ET
Defers Interest Payments for November
TORONTO, Dec. 13 /CNW/ - FMF Capital Group Ltd., (TSX:FMF.UN - News), today provided the following market update and announced that it is deferring interest payments on its subordinated notes for the month of November.
Market Update
The market for non-prime mortgage loans remains uncertain and continues to negatively affect the financial condition of the Company as a result of the following:
- Rising interest rates continue to have a negative impact on mortgage premiums that can be realized on the sale of mortgage loans. The Company is unable to reliably predict the level of near-term and future premiums;
- Recent pricing volatility in the securitization market may also negatively affect premiums and make our loan purchasers reluctant to enter into forward commitments;
- Excess supply of mortgage loans in the market continue to put downward pressure on premiums; and
- Expected decline in the U.S. housing market, along with higher mortgage interest rates, may signal a potential slowing of the U.S. mortgage loan origination market in 2006.
These market factors, along with a decline in mortgage originations as a result of the increases in the Company's mortgage interest rates and the continued pressure to repurchase mortgage loans continue to have an adverse impact on the Company's cash available for distribution.
Plan to Address Market Conditions
In response to these difficult market conditions, the Company has taken a number of steps that management believes will permit the Company to mitigate current industry uncertainties and position itself to capitalize on improved market conditions in the future.
First, the Company has changed its product mix by increasing interest rates on its mortgage loans and focusing on originating higher margin products. Management believes that these changes will increase the premiums realized on the sale of the Company's mortgage loans, reduce its monthly mortgage loan origination levels to a range of $200 to $250 million per month, and ultimately minimize operating losses and preserve operating capital and working capital liquidity. Specifically, the Company has implemented the following product changes:
Product Changes
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- Increased the weighted average coupon for mortgage loans in the
"pipeline" by over 100 basis points, which is competitive with larger
industry participants, and which would normally be expected to
increase premiums realized on future mortgage loan sales;
- Reduced the volume of "interest only" mortgage loan originations from
approximately 40% to 20% of all mortgage loans originated;
- Reduced the volume of fixed interest rate mortgage loans from
approximately 25% to 15% of all mortgage loans originated;
- Modified its underwriting guidelines to create demand for products
with its largest institutional investors; and
- Introduced a 40 year mortgage loan product to offer an alternative to
"interest only" mortgage loans which now represents approximately 5%
of the current mortgage loan origination pipeline.
Second, the Company has and will continue to identify areas in which it can reduce expenses and drive operational efficiencies including aligning our operational overhead with the current premium environment and anticipated mortgage origination volume. Specifically, the Company has implemented the following operational improvements:
Operational Improvements
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- Significantly reduced general and administrative expenses;
- Reduced the yield spread premium paid to independent mortgage brokers
by approximately 30 basis points on average for mortgage loan
originations which remains in line with the Company's competitors;
- Taken steps to decrease the Company's warehouse credit facility
capacity to be in line with expected near term monthly mortgage
origination volumes; and
- Deferred the opening of the Company's Florida office until market
conditions improve.
Third, the Company is proactively taking measures to reduce the aggregate amount of pending repurchase requests as well as mitigate the losses on mortgage loans repurchased. With this concentrated effort, management believes that it will successfully negotiate a significant portion of the outstanding repurchase requests. Specifically, the Company has taken the following steps:
- Negotiating with several institutional mortgage loan purchasers to
settle pending mortgage loan repurchase requests;
- Modifying underwriting guidelines in response to indentifiable
criteria that potentially contribute to mortgage repurchase activity;
and
- Aggressively selling the mortgage loans that have been repurchased.
Finally, the Board of Directors of the Company has retained an independent financial advisor to address potential capitalization issues and alternatives and any other matters that the Board determines appropriate.
The Company continues to monitor the impact of the above measures and may modify any such measures based upon its ongoing assessment of their impact of such changes and the evolving market conditions for mortgage loans. While management believes these will be the most effective measures to maximize profitability of the Company in this current environment, there can be no assurance that such measures will result in the resumption of interest payments and dividends in the foreseeable future. The Company expects that it will not begin to realize any significant benefit from such measures until the second calendar quarter of 2006.
Based on financial results for the month of November, the Board of Directors of the Company has determined that the Company's interest ratio coverage ratio has fallen below the applicable threshold and therefore, has decided to exercise the Company's contractual right to defer the payment of interest on the subordinated note component of its income participating securities (IPSs) for the month of November, which would otherwise be payable on December 15. The Board of Directors expects to defer interest for the month of December and will make this determination in January, 2006 after reviewing the Company's financial results including December.
FMF Capital Group Ltd., headquartered in Southfield, Michigan, has branch offices in Scottsdale, Arizona, Nashville, Tennessee, Virginia Beach, Virginia, and Overland Park, Kansas. FMF Capital is a residential mortgage lending company that originates and funds primarily nonconforming or "nonprime", mortgage loans in the United States and sells those mortgage loans to institutional loan purchasers within an average of 35 days of funding. FMF Capital originates its mortgage loans through a network of more than 5,000 independent mortgage brokers. FMF Capital is traded on the Toronto Stock Exchange (TSX) under the symbol FMF.UN. More information on the Company can be found at www.fmfcapital.com. |
