Mortgage

Altisource Residential announces new management agreement with AAMC

Will result in “substantial management fee savings”

Recently, the relationship between Altisource Residential Corporation (RESI) and Altisource Asset Management Corporation (AAMC) has come under scrutiny from investors and regulators. The scrutiny intensified when the two companies announced the delay of their earnings conference calls, saying that they were working to “modify” their asset management agreement.

On Tuesday afternoon, the companies released the details of their now-modified asset management agreement, which the companies say will result in “substantial management fee savings.”

According to the companies, AAMC will be RESI’s “exclusive asset manager” for an initial term of 15 years, subject to two additional five-year automatic renewal terms if RESI achieves an “average annual return on invested capital of at least 7%.”

The companies expect the new management agreement to be “immediately accretive” to RESI’s earnings.

The companies disclosed a new fee structure for AAMC that will replace the existing fee structure, which includes the following:

  • An annual base management fee equal to 1.5% of RESI’s invested capital, payable quarterly in arrears, potentially increasing to a base management fee of up to 2% of invested capital, based on the number of RESI’s rented homes
  • A quarterly incentive management fee equal to 20% of the amount by which RESI’s return on invested capital exceeds a hurdle return rate of between 7% and 8.25% (based on the 10-year treasury rate), potentially increasing to an incentive management fee of up to 25% of such amount, based on the number of RESI’s rented homes
  • A quarterly conversion fee equal to 1.5% of the market value of the single-family homes leased by RESI for the first time during the quarter

Additionally, the new agreement provides RESI the “flexibility” to pay up to 25% of the incentive management fee to AAMC in shares of common stock, which the two companies say will “further align both companies' interests.”

RESI will also no longer be required to reimburse AAMC for the compensation-related expenses of AAMC's employees, including salaries, bonuses, benefits, wages and payroll taxes, as such amounts will be covered with the base management fee, the companies said.

One of the investors that called for an “Altisource family divorce” was Capstone Equities Capital Management.

Capstone said that AAMC, which, according to the company's website, exists solely to provide “portfolio management and corporate governance services” to RESI, has the duty to prevent harm coming to RESI and has failed in that capacity.

Capstone said that harm came to to RESI because of the company’s relationship with Ocwen, which is the “main servicer of RESI’s portfolio” of loans, and demanded that RESI and AAMC terminate the servicing agreement with Ocwen Financial (OCN).

“Ocwen has admitted to engaging in ‘numerous and significant’ violations of law and imprudent servicing practices to the detriment of investors in the loans it services,” Capstone said in its letter.

RESI took a step in distancing itself from Ocwen, when it announced recently that agreed to transfer more than $1 billion worth of mortgage servicing from Ocwen to Fay Servicing and BSI Financial Services.

One issue Capstone had with RESI and AAMC is the two companies' complicated relationship, which is now further strengthened with this new agreement.

Until AAMC recently named a new CEO in the form of George Ellison, the two companies' executive teams were identical.

Ashish Pandey had served as chief executive officer of both RESI and AAMC since the companies were founded in 2012. The companies still share a chief financial officer, chief accounting officer and general counsel and secretary.

According to the new announcement from RESI and AAMC, Ellison will now serve as president of RESI in addition to his role as CEO of AAMC. Pandey will continue to serve as RESI’s CEO.

Prior to joining AAMC, Ellison was with Bank of America (BAC) for 19 years. While at Bank of America, Ellison was a named defendant in a lawsuit brought by the Federal Housing Finance Agency against Bank of America over claims that the bank sold toxic mortgages to Fannie Mae and Freddie Mac from 2005 to 2007.

That lawsuit was settled in March 2014 for $9.33 billion.

"We are pleased to have negotiated a new asset management agreement that will provide the company with substantial financial and structural benefits,” David Reiner, chairman of RESI’s board, said.

“We are also excited that George has become a part of our management team,” Reiner said. “George brings over 30 years of high-level banking and mortgage experience to our company. We believe that his leadership qualities and the relationships he has developed over a successful career will have a very positive impact on the company."

Ellison said that the new agreement will help both companies grow.

“Following an extensive negotiation process, we believe that we have modified the asset management agreement in a way that benefits both AAMC and RESI and their respective shareholders while solidifying a long term relationship between the companies,” Ellison said. “We believe the new agreement will promote the growth of Residential and thereby contribute to the long term prospects for AAMC.”

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