Business Context and Reporting Period
Company: Cherry Hill Mortgage Investment Corp
Filing Type: Form 8-K (Current Report)
Date of Report: November 15, 2016
Event: Entry into a Material Definitive Agreement to sell Excess Mortgage Servicing Rights (MSRs) back to Freedom Mortgage Corporation.
Key Financial Metrics and Transaction Terms
- Transaction Structure: Two-step sale of Excess MSRs previously acquired from Freedom Mortgage.
- Closing Dates: Step 1 on November 15, 2016; Step 2 on or about December 15, 2016.
- Purchase Price Formula: 60 basis points (60 bps) multiplied by the aggregate Unpaid Principal Balance (UPB) of applicable mortgage loans as of the last business day of the prior month.
- Payment Terms: Cash payments, with the potential for the second closing payment to include Ginnie Mae MSRs subject to approval.
- Additional Compensation: Freedom Mortgage to make quarterly yield maintenance payments in 2017 aggregating $3.0 million.
- Debt Impact: Proceeds will be used to repay a portion of the Company's outstanding Term Loan.
- Financial Impact: The Company expects to recognize a gain on the sale.
Material Changes and Strategic Rationale
The primary material change is the termination of the Company's Acknowledgment Agreement with Ginnie Mae and Freedom Mortgage. This agreement previously exposed the Company to potential liability if Freedom Mortgage defaulted on its Ginnie Mae servicing obligations. Management determined that counterparty risk had increased disproportionately due to the growth of Freedom Mortgage's Ginnie Mae servicing portfolio (which more than doubled since the agreement was entered). The transaction eliminates this potential liability.
Outlook, Management Commentary, and Risks
- Capital Deployment: Proceeds remaining after Term Loan repayment are expected to be invested in Residential Mortgage-Backed Securities (RMBS) pending redeployment into new MSR acquisitions.
- Corporate Governance: At the request of Ginnie Mae, Mr. Middleman (owner of the Manager and Freedom Mortgage) has agreed not to stand for re-election to the Company's board of directors in 2017.
- Risks and Contingencies: Completion of the transaction is subject to obtaining Ginnie Mae issuer approval. The filing contains forward-looking statements regarding the ability to complete the transaction on the described terms.
Investor Verification Checklist
- Verify the aggregate UPB of the mortgage loans to calculate the exact purchase price.
- Confirm the specific amount of the Term Loan to be repaid versus the amount available for RMBS investment.
- Monitor the status of Ginnie Mae issuer approval required for the transaction and potential MSR payment form.
- Review the 2017 quarterly yield maintenance payments of $3.0 million for actual receipt and timing.
- Assess the impact of Mr. Middleman's departure from the board on future management alignment.