Item 1. Business
General
Aames Financial Corporation (the "Company") is a consumer finance company primarily engaged, through its subsidiaries, in the business of originating, selling and servicing home equity mortgage loans collateralized by single family residences. Upon its formation in 1991, the Company acquired Aames Home Loan, a home equity lender making loans in California since it was founded in 1954. In 1995, the Company expanded its retail presence outside of California and began purchasing loans from correspondents. In August 1996, the Company acquired its broker production channel through the acquisition of One Stop Mortgage, Inc. In 1999, the Company consolidated its loan production channels into one company, and the retail and broker production channels (including the former One Stop) now operate under the name "Aames Home Loan."
The Company's principal market is borrowers whose financing needs are not being met by traditional mortgage lenders for a variety of reasons, including the need for specialized loan products or credit histories that may limit such borrowers' access to credit. The Company believes these borrowers continue to represent an underserved niche of the home equity loan market and present an opportunity to earn a superior return for the risk assumed. The residential mortgage loans originated by the Company, which include fixed and adjustable rate loans, are generally used by borrowers to consolidate indebtedness or to finance other consumer needs, and to a lesser extent, to purchase homes.
The Company originates loans nationally through its traditional retail and broker office networks and through the Internet and telemarketing. The Company no longer purchases loans through correspondents, which it ceased during the fiscal year ended June 30, 2000, and which it had materially decreased since fiscal 1998. During the years ended June 30, 2001, 2000 and 1999, the Company originated $2.4 billion, $2.1 billion and $2.2 billion, respectively, of mortgage loans. The Company underwrites and appraises every loan it originates.
As a fundamental part of its business and financing strategy, the Company sells its loans to third party investors in the secondary market as market conditions allow. The Company maximizes opportunities in its loan disposition transactions by disposing of its loan production through a combination of securitizations and whole loan sales, depending on market conditions, profitability and cash flows. During the years ended June 30, 2001, 2000 and 1999, the Company sold $2.3 billion, $2.2 billion and $1.9 billion, respectively, of loans. See "-Loan Disposition."
It is the Company's strategy to maximize opportunities in loan servicing. The Company retained the servicing on the loans it securitized through the fiscal year ended June 30, 2000, but sold the servicing rights in securitizations in the fiscal year ended June 30, 2001 for cash. At June 30, 2001, 2000 and 1999, the Company's servicing portfolio was $2.7 billion, $3.6 billion and $3.8 billion, respectively. Loans serviced in-house at June 30, 2001, 2000 and 1999 were $2.5 billion, $3.3 billion and $3.4 billion, respectively, or 93.2%, 92.6% and 89.2%, respectively.
The Company continues to focus on increasing its profitability through executing its core business strategy of: (i) increasing the amount and value of its core loan production; (ii) reducing its cost of production; (iii) maximizing its opportunities in loan servicing; and (iv) maintaining the ability to obtain sufficient lines of credit to provide financing for the assets created by the Company and become self financing.
Increasing the Amount and Value of Its Core Loan Production. The Company intends to increase the size of its overall originations while improving its value. The Company's traditional retail platform, its nationwide broker operations and its growing Internet and telemarketing channels are all targeted as
sources of growth. In its traditional retail platform, the Company intends to drive this growth by: improving market penetration in its existing markets, introducing new products and improving its customer service levels. The Company's nationwide broker operations plan to grow by: improving the service levels it offers to its current group of independent mortgage brokers, continuing to build new relationships with independent mortgage brokers throughout the country and introducing new products that meet the needs of brokers' customer bases. The Company's growing Internet and telemarketing channels are planning to increase their scale by: identifying additional non-traditional lead sources, increasing their product offerings and expanding their overall operations. Additionally, the Company plans to continue using its knowledge of current customer needs and the historical performance of its loans to improve the value of its offerings to its retail customers and independent mortgage brokers while maximizing the resale value of its production.
Reducing Its Cost of Production. The Company intends to reduce its cost of production by: leveraging its investment in origination technology platforms, increasing the amount of automation in the loan origination process and increasing the scale of the origination business driving fixed costs down as a percentage of overall production costs. The Company will also continue the on-going effort of identifying opportunities for cost reductions across all levels of the Company's operations.
Maximizing Its Opportunities in Loan Servicing. The Company's servicing operations generate servicing income and related fees while providing management information regarding the performance of mortgage loans. The Company is also able to sell its servicing rights to third parties in connection with whole loan sales and securitizations. The Company intends to maximize opportunities in loan servicing taking into consideration the overall Company's profitability and liquidity position. During the year ended June 30, 2001, the Company maximized profitability and cash flow by selling all of its loan production through whole loan sales and securitization transactions on a servicing released basis, which combined with existing loan servicing run-off, in the form of principal amortization, prepayments and liquidations, has resulted in a decline in the size of the servicing portfolio.
Maintaining the Ability to Obtain Sufficient Lines of Credit and Become Self Financing. The Company intends to increase and diversify its funding sources by adding additional warehouse or repurchase facilities by expanding its current funding relationships and identifying new funding sources. The Company will continue to fund its operations by disposing of a portion of its loan production for cash in the whole loan market, selling residual interests created in securitizations through the Residual Forward Sale Facility (the "Residual Facility") with Capital Z Investments, L.P., a Bermuda partnership ("CZI"), an affiliate of Specialty Finance Partners ("SFP"), the Company's largest stockholder which is controlled by Capital Z Financial Services Fund, II, L.P. (together with SFP, "Capital Z"), until the expiration of that facility, selling the mortgage servicing rights and the rights to prepayment fees on the mortgage loans in the securitizations and developing new sources for working capital.
The strategies discussed above contain forward-looking statements. Such statements are based on current expectations and are subject to risks, uncertainties and assumptions, including those discussed under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Thus, no assurance can be given that the Company will be able to accomplish the above strategies.
Recent Events
The Company reported a $30.5 million net loss for the year ended June 30, 2001. The $30.5 million net loss resulted from the Company's $33.6 million valuation adjustment to the estimated fair value of its residual interests partially offset by a $3.1 million net operating profit. The
$33.6 million valuation adjustment reflected the Company's assessment of credit loss and delinquency experience of certain mortgage loans in its securitized trusts originated during and prior to 1999.
All of the Company's revolving warehouse and repurchase facilities contain provisions requiring the Company to meet certain periodic financial covenants, including among other things, minimum liquidity, stockholders' equity, leverage, and net income levels. Due to the $33.2 million loss for the quarter ended March 31, 2001, the Company failed to meet certain financial covenants under its revolving warehouse and repurchase facilities at March 31, 2001, April 30, 2001 and May 31, 2001. However, the Company sought and successfully obtained amendments to these financial covenants from its warehouse and repurchase lenders to bring itself into compliance at March 31, 2001 and during the three months ended June 30, 2001. If the Company is unable to meet these financial covenants going forward, or is unable to obtain subsequent amendments, if required, or for any other reason is unable to maintain existing warehouse or repurchase lines or renew them when they expire, it would have to cease loan production operations which would negatively impact profitability and jeopardize the Company's ability to continue to operate as a going concern.
On September 25, 2001, the Company completed a securitization of $175.0 million of mortgage loans and sold its residual interest through the Residual Facility for cash. The Company also sold its servicing rights and the rights to the prepayment penalties under the securitization for cash to an unrelated mortgage banking company.
As previously reported, the Company received a notice from the New York Stock Exchange (the "NYSE") that the Company's common stock, par value $0.001 per share (the "Common Stock") did not meet the requirements for continued listing because the thirty day average trading price of the Common Stock was below $1.00 per share. After reviewing the Company's stock price performance, as well as other materials, the NYSE notified the Company that the Common Stock would remain listed until July 2, 2001, at which time the stock price performance would be measured for compliance with continued listing standards. The closing price and the thirty day average closing price of the Common Stock on July 2, 2001 was $1.35 and $1.42, respectively
On July 2, 2001, the NYSE acknowledged that the Company had met the stock price requirements of continued listing as of July 2, 2001. The NYSE also informed the Company that the Common Stock would continue to be listed on the NYSE; however, the Common Stock is subject to a follow-up period during which time the NYSE will continue to monitor the Company and, on November 2, 2001, the NYSE will again measure the stock price performance as of the thirty trading days ending November 2, 2001. In addition, if at any time before November 2, 2001, the NYSE determines that the Company has failed to meet any of the continuing listing standards, the NYSE will re-evaluate the continued listing of the Common Stock at that time and may take action including truncating the normal compliance procedures and beginning the initiation of suspension procedures. The closing price and the thirty day average closing price of the Common Stock as of September 26, 2001 was $0.90 and $1.11, respectively.
There can be no assurance that the thirty trading day average closing price of the Common Stock will remain above $1.00 per share or that the Common Stock will not be suspended by the NYSE. If the Common Stock were suspended by the NYSE, it would seriously impair the ability of the holders of the Common Stock to trade their shares.
Mortgage Loan Production
The Company's principal loan product is a non-conforming home equity loan with a fixed principal amount and term to maturity which is typically secured by a first or second mortgage on the borrower's residence with either a fixed or adjustable interest rate. Non-conforming home equity loans are loans made to homeowners whose borrowing needs may not be met by traditional financial institutions due to credit exceptions or other factors and generally cannot be directly marketed to agencies such as Fannie Mae and Freddie Mac. During the year ended June 30, 2001, the Company originated its residential
loans through its traditional retail and broker office networks and, to a lesser extent, through the Internet and telemarketing.
The following table presents certain information about the Company's loan production at or during the periods indicated:
(1)Calculated with respect to the interest rate at the time the mortgage loan was originated or purchased by the Company.
(2)Includes commercial loans. In late fiscal 1997, the Company began originating small commercial loans on a limited basis. In January 1999, the Company discontinued its commercial loan operation.
(3)Includes "flow" and bulk correspondent loans. Prior to fiscal 1999, the Company purchased a significant dollar amount of correspondent loans in bulk purchases, but eliminated bulk purchases and decreased its reliance on correspondent production in fiscal 1999. Total loan production during the year ended June 30, 2001 increased to $2.4 billion from the $2.1 billion reported during the year ended June 30, 2000 which, in turn, was a decrease from the $2.2 billion reported during the year ended June 30, 1999. The Company's total broker production declined $71.8 million to $1.2 billion during the year ended June 30, 2001 from $1.3 billion during the prior year, and increased $9.0 million from the $1.2 billion reported during the year ended June 30, 1999. Mortgage loan production from the traditional broker channel was $1.1 billion, $1.2 billion and $1.2 billion during the years ended June 30, 2001, 2000 and 1999, respectively, which reflects a decrease of $102.2 million during the year ended June 30, 2001 from the year ended June 30, 2000 and an increase of $55.9 million during June 30, 2000 from the prior year. Broker mortgage loan production through telemarketing and Internet sources, which commenced during fiscal 2000, increased $30.4 million to $55.3 million during the year ended June 30, 2001 from the $24.9 million of similar production reported during the year ended June 30, 2000. The Company's total retail mortgage loan production increased $396.9 million to $1.2 billion during the year ended June 30, 2001 from $783.7 million during the year ended June 30, 2000 and increased $13.7 million to $783.7 million during fiscal 2000 from the $770.0 million reported during the year ended June 30, 1999. Mortgage loan production volume reported by the Company's traditional retail channel was $1.1 billion, $777.8 million and $770.0 million during the years ended June 30, 2001, 2000 and 1999, respectively. Loan origination volume produced through the Company's retail Internet channel, through affiliations with certain Internet lending sites, was $75.9 million, an increase of $70.0 million from the $5.9 million reported during the year ended June 30, 2000 when the Company first commenced producing retail mortgage
loans through Internet sources. As previously reported, during the year ended June 30, 1998 the Company began materially decreasing its reliance on correspondent loan purchases and eliminated the program during the year ended June 30, 2001. During the years ended June 30, 2000 and 1999, mortgage loan production attributable to correspondent purchases was $32.7 million and $241.5 million, respectively.
Retail Loan Channel. The Company originates home equity mortgage loans through its network of retail loan offices and through the Internet through its National Loan Center. At June 30, 2001, the Company had 100 retail offices serving borrowers nationally. The Company continually monitors its retail operations and evaluates current and potential retail offices on the basis of selected demographic statistics, marketing analyses and other criteria developed by the Company.
The Company generates applications for loans through its retail loan office network principally through a direct response marketing program, which relies primarily on the use of direct mailings to homeowners, telemarketing and yellow-page listings. The Company generates customer leads for the retail network in two ways: produced by the Company based upon Company derived models and commercially developed customer lists (the "centralized marketing approach") and generated by the local branch by the loan officers who are familiar with the local area (the "decentralized marketing approach"). The Company's direct mail invites prospective borrowers to call the Company to apply for a loan. Direct mail is often followed up by telephone calls to potential customers. All contact with the customer is handled through the local branch. On the basis of an initial screening conducted at the time of the call, the Company's loan officer at the local retail loan office makes a preliminary determination of whether the customer and the property meet the Company's lending criteria. The loan officer may complete the application over the telephone, or schedule an appointment in the retail loan office most conveniently located to the customer or in the customer's home, depending on the customer's needs.
The Company's National Loan Center obtains leads through several commercially available Internet sites as well as through its own internet web site "Aames.net". On the basis of information provided by the customer through the Internet, a preliminary determination is made as to whether the customer and the property meet the Company's lending criteria. Once the Company receives the lead, a loan officer contacts the prospective customer by telephone and the customer completes the application by telephone or mail. During fiscal 2001, the Company increased its retail loan production through loan originations through the Internet to $75.9 million from $5.9 million of retail production during the years ended June 30, 2000. The Company expects retail Internet production to generate an increasing dollar amount and percentage of retail loan production in the coming quarters.
The loan officer assists the applicant in completing the loan application, arranges for an appraisal, orders a credit report from an independent, nationally recognized credit reporting agency and performs various other tasks in connection with the completion of the loan package. The loan package is then underwritten for loan approval. If the loan package is approved, the loan is funded by the Company. The Company's loan officers are trained to structure loans that meet the applicant's needs while satisfying the Company's lending guidelines.
The Company believes that its marketing efforts establish name recognition and serve to distinguish the Company from its competitors. The Company continually monitors the sources of its applications to determine the most effective methods and manner of marketing.
Independent Mortgage Broker Channel. At June 30, 2001, the Company operated five regional offices and during fiscal 2001, the Company originated loans through approximately 2,800 brokers, no one of which accounted for more than 3.1% of total broker originations. All broker loans originated by the Company are underwritten in accordance with the Company's underwriting guidelines. Once approved, the loan is funded by the Company directly.
The broker's role is to identify the applicant, assist in completing the loan application, gather necessary information and documents and serve as the Company's liaison with the borrower through the lending process. The Company reviews and underwrites the applications submitted by the broker, approves or denies the application, sets the interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions imposed by the Company, funds the loan. Because brokers conduct their own marketing and employ their own personnel to complete loan applications and maintain contact with borrowers, originating loans through the Company's broker network allows the Company to increase its loan volume without incurring the higher marketing and employee costs associated with increased retail originations.
Because mortgage brokers generally submit loan files to several prospective lenders simultaneously, consistent underwriting, quick response times and personal service are critical to successfully producing loans through independent mortgage brokers. To meet these requirements, the Company strives to provide quick response time to the loan application (generally within 24 hours). In addition, loan consultants and loan processors, including underwriters, are available in the Company's regional offices to answer questions, assist in the loan application process and facilitate ultimate funding of the loan.
In the fourth quarter of fiscal year 2000, the Company began using telemarketing and the Internet to increase its broker loan production and further penetrate the non-conforming home equity broker market through its "Broker Direct" program. Through Broker Direct, the Company makes out bound telemarketing calls to brokers who are not currently doing business with the Company or are outside the geographic areas served by the loan officers. The Company also obtains leads through a commercially available internet site as well as through its own internet web site "Aamesdirect.com". "Broker Direct" and broker Internet loan originations for the year ended June 30, 2001 increased to $55.3 million from $24.9 million during the year ended June 30, 2000. The Company expects "Broker Direct" and broker Internet to generate an increasing dollar amount and percentage of broker loan production in the coming quarters.
Correspondent Channel. Prior to fiscal 2001, the Company purchased a limited amount of closed loans from mortgage bankers and other financial institutions on a continuous or "flow" basis to supplement its core loan production on a cost effective basis.
Underwriting. The Company underwrites every residential loan it originates. The Company's underwriting guidelines are designed to assess the borrower's creditworthiness and the adequacy of the real property as collateral for the loan. The borrower's creditworthiness is assessed by examination of a number of factors, including calculation of debt-to-income ratios, which is the sum of the borrower's monthly debt payments divided by the borrower's monthly income before taxes and other payroll deductions, an examination of the borrower's credit history and credit score through standard credit reporting bureaus, and by evaluating the borrower's payment history with respect to existing mortgages, if any, on the property.
An assessment of the adequacy of the real property as collateral for the loan is primarily based upon an appraisal of the property and a calculation of the ratios of the loan applied for (the "LTV") and of all mortgages existing on the property, including the loan applied for, (the "combined loan-to-value ratio" or "CLTV") to the appraised value of the property at the time of origination. As a lender that specializes in loans made to credit impaired borrowers, the Company makes home equity mortgage loans to borrowers with credit histories or other factors that could typically disqualify them from consideration for a loan from traditional financial institutions. Consequently, the Company's underwriting guidelines for such credit-impaired borrowers generally require lower combined loan-to-value ratios than would typically be the case if the borrower could qualify for a loan from a traditional financial institution.
Appraisers determine a property's value by reference to the sales prices of comparable properties recently sold, adjusted to reflect the condition of the property as determined through inspection.
The underwriting of a mortgage loan to be originated by the Company includes a review of the completed loan package, which includes the loan application, a current appraisal, a preliminary title report and a credit report. All loan applications must be approved by the Company in accordance with its underwriting criteria. The Company regularly reviews its underwriting guidelines and makes changes when appropriate to respond to market conditions, the performance of loans representing a particular loan product or changes in laws or regulations.
The Company requires title insurance coverage issued on an American Land Title Association (or similar) form of title insurance on all residential properties securing mortgage loans it originates or purchases. The loan originator and its assignees are generally named as the insured. Title insurance policies indicate the lien position of the mortgage loan and protect the Company against loss if the title or lien position is not as indicated. The applicant is also required to maintain hazard and, in certain instances, flood insurance, in an amount sufficient to cover the new loan and any senior mortgage, subject to the maximum amount available under the National Flood Insurance Program.
Each of the Company's retail loan office network, Internet-based National Loan Center and broker channel has its own underwriting guidelines. While broadly similar, the underwriting guidelines do vary among the origination channels. The following generally summarizes the Company's underwriting guidelines:
•Each organization channel employs its own "traditional" underwriting program, under which the borrower's mortgage credit and consumer credit are each scored and weighted to determine the overall credit grade of the borrower with the borrower then being assigned an "A+/A" through "D" credit grade, and
•The broker channel also utilizes a credit score/LTV based underwriting program (referred to as the "SNAP program"), under which the borrower's credit score as reported by various reporting agencies and the LTV of the loan are used to determine whether the borrower qualifies for the loan requested and the appropriate pricing for that loan. Loans under this program are converted to "traditional" underwriting credit scores for reporting purposes.
"Traditional" Underwriting Program. The Company assigns a credit grade (A, A-, B, C, C- and D) to each loan it originates depending on the risk profile of the loan, with the higher credit grades exhibiting a lower risk profile and the lower credit grades exhibiting increasingly higher risk profiles. The retail loan office network also uses the letter grades of A+, B+ and C+ to further differentiate credit characteristics of the mortgage loan. Generally, the higher credit grade loans have higher loan-to-value ratios and carry a lower interest rate. The following chart generally outlines certain parameters of the credit grades of the Company's traditional underwriting program at September 15, 2001:
*A "rolling" 30-day late in which a borrower becomes 30 days delinquent and makes subsequent mortgage payments but remains consistently 30 days delinquent is considered one 30-day late for underwriting purposes. "SNAP" Underwriting Program. The SNAP program was developed by the Company to enhance its ability to risk-base price its loan products, to increase uniformity of creditworthiness within each credit "band" and to reduce subjectivity and simplify the underwriting process in order to improve efficiency and service levels to its customers.
The SNAP program uses the credit score (as defined below) of the primary borrower (i.e., the borrower with the majority of total income) to determine program eligibility and then to determine the maximum LTV and interest rate for which the borrower may qualify. The minimum acceptable credit score under the SNAP program is 500.
In most cases, the payment history of the borrower under the existing mortgage loan is also taken into consideration. Borrowers with lower credit scores generally qualify for lower maximum LTVs and are charged higher interest rates than borrowers with higher credit scores. "Credit Scores" are discussed below.
Under the SNAP program, a verification of the borrower's mortgage payment history under his existing mortgage loan over the most recent 12 months is required in all cases where the primary borrower's credit score is less than 600 (or less than 640 if the loan amount is less than $100,000). The maximum LTV allowed and the interest rate for the loan indicated by the SNAP program may be adjusted based on the borrower's past mortgage payment history. Under the SNAP program, a poor mortgage payment history will result in a lower maximum LTV and a higher interest rate (comparable to the maximum LTV and interest rate for a borrower with a lower credit score) in order to reflect the increased risk of default indicated by the mortgage payment history. The LTV and credit score adjustments are set forth in the chart below.
For example, under the SNAP program, in the case of a borrower with a credit score of 640 who has had not more than one 30-day late payment on his existing mortgage loan during the previous 12 months (i.e., 1x30) and who otherwise qualifies for a maximum LTV of 90%, the borrower's actual credit score of 640 would be used for purposes of qualifying for the loan and determining the applicable interest rate and the 90% maximum LTV allowed would not be adjusted downward. However, under the SNAP program, if the borrower with the 640 credit score had two 30-day late payments in the previous 12 months (i.e., 2x30), the credit score used for purposes of qualifying and determining pricing, would fall to 600-and the maximum LTV allowed would be 80%. In addition, the interest rate for that loan would be determined as if the borrower's credit score were 600 (instead of the actual credit score of 640). If that same borrower had a mortgage delinquency of 2x30 and 1x60 or 4x30 and 0x60 during the previous 12 months, then the maximum LTV allowed would be 80% and the loan would be priced as if the credit score was 560. If that borrower had a mortgage delinquency of 12x30 and 2x60 or 12x30 and 1x60 and 1x90 for the previous 12 months, then the maximum LTV falls to 75% and the loan would be priced as if the credit score was 550. If that borrower had a mortgage delinquency of 12x90, or 12x60 and 1x90 and 1x120 for the previous 12 months, then the maximum LTV decreases to 70% and the credit score used for pricing falls to 520. If that borrower had a mortgage delinquency of 1x150 or more for the previous 12 months, then the maximum LTV falls to 65% and the loan would be priced as if the credit score were 500.
Credit Scores. "Credit scores" are obtained by many lenders in connection with mortgage loan applications to help assess a borrower's creditworthiness. Credit scores are obtained from credit reports provided by various credit reporting organizations, each of which may employ differing computer models and methodologies. The credit score is designed to assess a borrower's credit history at a single point, using objective information currently on file for the borrower at a particular credit reporting organization. Information utilized to create a credit score may include, among other things, payment history, delinquencies on accounts, level of outstanding indebtedness, length of credit history, types of credit, and bankruptcy experience. Credit scores range from approximately 400 to approximately 800, with higher scores indicating an individual with a more favorable credit history compared to an individual with a lower score. However, a credit score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, that is, a borrower with a higher score is statistically expected to be less likely to default in payment than a borrower with a lower score. In addition, it should be noted that credit scores were developed to indicate a level of default probability over a two-year period, which does not correspond to the life of a mortgage loan. Furthermore, credit scores were not developed specifically for use in connection with mortgage loans, but for consumer loans in general, and assess only the borrower's past credit history. Therefore, a credit score does not take into consideration the differences between mortgage loans and consumer loans generally or the specific characteristics of the related mortgage loan including, for example, the LTV or CLTV, the collateral for the mortgage loan, or the debt to income ratio. There can be no assurance that the credit scores of the mortgagors will be an accurate predictor of the likelihood of repayment of the related mortgage loans.
The tables on the following page present certain information about the Company's loan production through its retail, broker and correspondent channels during the years ended June 30, 2001, 2000 and 1999:
LOAN ORIGINATIONS AND PURCHASES DURING THE YEAR ENDED JUNE 30, 2001
Traditional Underwriting Program and "SNAP" Underwriting Program
LOAN ORIGINATIONS AND PURCHASES DURING THE YEAR ENDED JUNE 30, 2000
Traditional Underwriting Program and "SNAP" Underwriting Program
LOAN ORIGINATIONS AND PURCHASES DURING THE YEAR ENDED JUNE 30, 1999
Traditional Underwriting Program Only
(1)Calculated with respect to the interest rate at the time the loan is originated or purchased by the Company, as applicable.
(2)Loans underwritten under the "SNAP" underwriting program are assigned a credit grade that the Company believes correlates to the credit grades in the "Traditional" underwriting program.
Quality Control. The Company's quality control program is intended to (i) monitor and improve the overall quality of loan production generated by the Company's retail loan channel and independent mortgage broker channel and (ii) identify and communicate to management existing or potential underwriting and loan packaging problems or areas of concern. The quality control file review examines compliance with the Company's underwriting guidelines and federal and state regulations. This is accomplished by focusing on: (i) the accuracy of all credit and legal information; (ii) a collateral analysis which may include a desk or field re-appraisal of the property and review of the original appraisal; (iii) employment and/or income verification; and (iv) legal document review to ensure that the necessary documents are in place.
Loan Disposition
As a fundamental part of its business and financing strategy, the Company sells loans to third party investors in the secondary markets as market conditions allow. The Company generally seeks to dispose of substantially all of its production within 90 days. The Company applies the net proceeds of the loan dispositions, whether through securitizations or whole loan sales, to pay down its warehouse and repurchase facilities in order to make these facilities available for future funding of mortgage loans. The Company maximizes opportunities in its loan disposition transactions by selling its loan production through a combination of securitizations and whole loan sales, depending on market conditions, relative profitability and cash flows. The Company generally realizes higher gain on sale on securitization than it does on whole loan sales for cash. The higher gain on sale in securitization transactions is attributable to the excess servicing spread and mortgage servicing rights associated with retaining a residual interest and the servicing on the mortgage loans in the securitization, respectively, net of transactional costs. In whole loan sales with servicing released, the gain on sale is generally lower than gains realized in securitizations, but the Company receives the gain in the form of cash.
However, in a securitization the underlying securities are generally over-collateralized by the Company depositing a combination of mortgage loans with a principal balance exceeding the principal balance of the securities, and cash into the securitization, which requires an initial period of cash outflow. The upfront over-collateralization and servicing advance obligations required on retaining the servicing in securitizations are generally cash flow negative to the Company in the early years of the securitization. These negative cash flow considerations along with conditions in the securitization market precluded the Company from securitizing mortgage loans in the second half of the fiscal year ended June 30, 2000. The Residual Facility, entered into by the Company on August 31, 2000, strengthened the Company's ability to include securitizations in its loan disposition strategy by reducing the negative cash flow aspects of securitization and by providing another source of cash to the Company through periodic sales of residual interests for cash. The Company completed a securitization and sold for cash its residual interest through the Residual Facility in each of the four quarters during the fiscal year ended June 30, 2001. The initial capacity of the Residual Facility was $75.0 million and at June 30, 2001, the remaining capacity under the Residual Facility was $29.9 million.
The following table sets forth certain information regarding the Company's securitizations and whole loan sales during the periods presented (in thousands):
Each agreement that the Company has entered into in connection with its securitizations requires either the overcollateralization of the trust or the establishment of a reserve account that may initially
be funded by cash deposited by the Company. If delinquencies or losses exceed certain established limits, as applicable, the credit-enhancement aspects of the trust are triggered. In a securitization credit-enhanced by a monoline insurance policy, any further losses experienced in excess of the established overcollateralization amount by holders of the senior interests in the related trust will be paid under such policy. To date, there have been no claims on any monoline insurance policy obtained in any of the Company's securitizations. In a senior/subordinated structure, losses in excess of the overcollateralization amount generally are allocated first to the holders of the subordinated interests and then to the holders of the senior interests of the trust. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-The Securitization and Sale of Mortgage Loans."
Loan Servicing
The Company's servicing portfolio consists mainly of mortgage loans securitized prior to the year ended June 30, 2001 for which the Company retained servicing, and to a lesser extent, loans subserviced for others on an interim basis and loans held for sale. Servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, managing borrower defaults and liquidating foreclosed properties. It is the Company's strategy to maximize opportunities in loan servicing. As a means to maximize profitability and cash flow from securitizations, the Company has sold the servicing rights in securitizations during the year ended June 30, 2001 for cash. Moreover, the Company generally does not retain servicing on loans it sells in whole loan sales for cash.
The following table sets forth certain information regarding the Company's servicing portfolio for the periods indicated:
(1)Includes $334.5 million of loans subserviced for others on an interim basis and approximately $184.0 million of loans subserviced by others.
(2)Includes $280.2 million of loans subserviced for others on an interim basis and approximately $264.0 million of loans subserviced by others.
(3)Includes $84.0 million of loans subserviced for others on an interim basis and approximately $413.0 million of loans subserviced by others. The Company has generally not added any new loans to the servicing portfolio (excluding loan subserviced on an interim basis) since January 1, 2000 due to the Company's sale of all of its mortgage loan production in whole loan sales for cash and securitizations with servicing released since that time. The Company's loan servicing portfolio at June 30, 2001 decreased $843.0 million, or 23.7% to $2.7 billion from $3.6 billion reported at June 30, 2000, reflecting loan servicing portfolio runoff, in the form of principal amortization, prepayments and liquidations, during the year ended June 30, 2001.
Moreover, subsequent to June 30, 2001, the Company transferred to the purchasers or their designated servicers approximately $334.5 million of loans, which represented loans sold in whole loan sales during the June 2001 quarter and in the June 2001 securitization but subserviced by the Company at June 30, 2001 on an interim basis. The Company's servicing portfolio will continue to be impacted in
the future by the Company's dispositions of its loan production through whole loan sales and securitizations on a servicing released basis, which has resulted in a smaller servicing portfolio. See "Risk Factors." In general, the Company's loan servicing portfolio may be adversely affected by lower mortgage interest rates which could accelerate prepayment activity.
The following table illustrates the mix of credit grades in the Company's servicing portfolio as of June 30, 2001 (dollars in thousands):
(1)Loans underwritten under the "SNAP" Underwriting Program are assigned, for loan servicing purposes, a credit grade that the Company believes correlates to the credit grades in the "Traditional" underwriting program.
(2)Consists of older loans that were not assigned a credit grade at origination. At June 30, 2001, of the Company's $2.7 billion servicing portfolio, 93.2% was serviced in-house compared to 92.6% of the Company's $3.6 billion servicing portfolio serviced in-house at June 30, 2000 and 89.2% of the Company's $3.8 billion servicing portfolio at June 30, 1999. The out-sourced servicing resulted from an arrangement with a loan servicing company entered into in fiscal 1999 whereby the servicing company purchased certain cumulative advances and agreed to make future servicing advances with respect to an aggregate of $388.0 million ($184.0 million at June 30, 2001) in principal amount of loans.
The agreements between the Company and the real estate mortgage investment conduit ("REMIC") or owner trusts established in connection with securitizations typically require the Company, in its role as servicer, to advance interest (but not principal) on delinquent loans to the holders of the senior interests in the related trusts. The agreements also require the Company to make certain servicing advances (e.g., for property taxes or hazard insurance) unless the Company determines that such advances would not be recoverable. Realized losses on the loans are paid out of the related credit loss estimates established by the Company at the time of securitization or paid out of principal and interest payments or overcollateralized amounts as applicable, and if necessary, from the related monoline insurance policy or the subordinated interests.
In the case of securitizations credit-enhanced by monoline insurance, the agreements also typically provide that the Company may be terminated as servicer by the monoline insurance company (or by the trustee with the consent of the monoline insurance company) upon certain events of default, including the Company's failure to perform its obligations under the servicing agreement, the rate of over 90-day delinquency (including properties acquired by foreclosure and not sold) exceeding specified limits, losses on liquidation of collateral exceeding certain limits, any payment being made by the monoline insurance company under its policy, and certain events of bankruptcy or insolvency. At June 30, 2001, the dollar volume of loans delinquent more than 90 days in ten of the Company's
twenty-six REMIC trusts exceeded the permitted limit in the related pooling and servicing agreements. All of the aforementioned REMIC trusts plus six additional REMIC trusts have also exceeded certain loss limits. At June 30, 2001, the remaining principal balance of mortgage loans in the securitization trusts which exceeded the permitted delinquency limit was $712.5 million, or 26.2% of the servicing portfolio. At June 30, 2001, the remaining principal balance of mortgage loans in the securitization trusts where certain loss limits have been exceeded was $1.5 billion, or 53.8% of the servicing portfolio. In addition, under the Company's 1999 Securitization Trusts, the Company is appointed as a servicer on a term-to-term basis, and the monoline insurer has the right not to renew the term at any time. None of the servicing rights of the Company have been terminated. Pursuant to agreements relating to the Company's two 1999 securitization trusts, the monoline insurance company providing credit enhancement requires the Company to maintain a specified net worth and level of liquidity in order to be able to continue to service the loans in the trusts. Due to the $33.2 million net loss for the quarter ended March 31, 2001, the Company currently does not satisfy the net worth test, and as a result, the monoline insurer can terminate the Company as servicer. The monoline insurer has to date waived the Company's failure to satisfy the net worth test. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors-Our right to service loans may be terminated because of the high delinquencies and losses on the loans in our servicing portfolio." In the case of the Company's senior/subordinated securitization transactions, holders of 51% of the certificates may terminate the servicer upon certain events of default generally relating to certain levels of loss experience, but not delinquency rates. No such events of default have occurred to date in the Company's senior/subordinated securitizations.
The Company receives a servicing fee based on a percentage of the declining principal balance of each loan serviced. Servicing fees are collected by the Company out of the borrower's monthly payments. In addition, the Company, as servicer, generally receives all late fees and assumption charges paid by the borrower on loans serviced directly by the Company, as well as other miscellaneous fees for performing various loan servicing functions. The Company also generally receives any prepayment fees paid by borrowers. Under arrangements entered into in fiscal 2000 and 1999 with an investment bank to reduce the Company's servicing advances, the Company's right to receive fees, charges and prepayment fees collected on loans in its securitization trusts has been subordinated to the right of the investment bank to such fees to repay advances previously made to those trusts. Under the Company's December 1999 Securitization Trusts, the Company's right to receive any prepayment penalties collected on loans in the trust has been subordinated to the right to such prepayment penalties as payment to trust as additional overcollateralization.
Collections, Delinquencies and Foreclosures
The Company sends borrowers a monthly billing statement approximately ten days prior to the monthly payment due date. Although borrowers generally make loan payments within ten to fifteen days after the due date (the "grace period"), if a borrower fails to pay the monthly payment within the grace period, the Company commences collection efforts by notifying the borrower of the delinquency. In the case of borrowers in the "B," "C," "C-" and "D" credit grades, collection efforts begin immediately after the due date. The Company continues contact with the borrower to determine the cause of the delinquency and to obtain a commitment to cure the delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been successful, a pre-foreclosure notice will be sent to the borrower immediately after the due date of the next subsequently scheduled installment (five days after the initial due date for "C-" and "D" credit grades), providing 30 days' notice of impending foreclosure action. During the 30-day notice period, collection efforts continue and the Company evaluates various legal options and remedies to protect the value of the loan, including arranging for extended prepayment terms, accepting a deed-in-lieu of foreclosure, entering into a short
sale (a sale for less than the outstanding principal amount) or commencing foreclosure proceedings. If no substantial progress has been made in collecting delinquent payments from the borrower, foreclosure proceedings will begin. Generally, the Company will have commenced foreclosure proceedings when a loan is 45 to 100 days delinquent, depending upon credit grade, other credit considerations or borrower bankruptcy status.
Servicing and collection practices change over time in accordance with, among other things, the Company's business judgment, changes in portfolio performance and applicable laws and regulations.
The Company has historically experienced delinquency rates that are higher than those prevailing in its industry due to its origination of lower credit grade loans. The delinquency rate at June 30, 2001 was 13.0% compared to 13.6% at June 30, 2000. However, as the Company has not added new loans to the servicing portfolio since January 1, 2000 except for loans held for sale and loans subserviced on an interim basis, the seasoning of the portfolio without the addition of new loans might cause delinquency rates to rise.
Loans originated or purchased by the Company are secured by mortgages, deeds of trust, security deeds or deeds to secure debt, depending upon the prevailing practice in the state in which the property securing the loan is located. Depending on local law, foreclosure is effected by judicial action or nonjudicial sale, and is subject to various notice and filing requirements. In general, the borrower, or any person having a junior encumbrance on the real estate, may cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation during a statutorily prescribed reinstatement period. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys' fees, which may be recovered by a lender, the minimum time required to foreclose and the reinstatement or redemption rights of the borrower.
Although foreclosure sales are typically public sales, frequently no third-party purchaser bids in excess of the lender's lien because of the difficulty of determining the exact status of title to the property, the possible deterioration of the property during the foreclosure proceedings and a requirement that the purchaser pay for the property in cash or by cashier's check. Thus, the Company often purchases the property from the trustee or referee through a credit bid in an amount up to the principal amount outstanding under the loan, accrued and unpaid interest, servicing advances and the expenses of foreclosure. Depending upon market conditions, the ultimate proceeds of the sale may not equal the Company's investment in the property.
As an alternative to foreclosure, the Company may, under limited circumstances, arrange for a special repayment arrangement, forestall foreclosure to enable a borrower to sell the mortgaged property or accept the payoff of less than the full principal balance and accrued interest owing on a mortgage loan. The Company believes that such loss mitigation efforts reduce overall losses in loan liquidations. However, the loss on such mitigation efforts is realized earlier in the life of the mortgage loan.
During the fiscal year ended June 30, 2001, losses on loan liquidations decreased to $91.8 million from $96.1 million in the prior year, primarily due to the decrease in the size of the Company's loan servicing portfolio. In addition, if the Company's loan servicing portfolio continues to decrease in size, the percentage of annualized losses to the average servicing portfolio could increase.
Credit losses incurred by the Company on liquidations were disproportionately higher for correspondent loans purchased in bulk than experienced upon liquidations of loans originated in the Company's traditional retail and broker production channels. During the year ended June 30, 2001, approximately 41.8% of losses on liquidation were from losses on disposition of real estate collateral for bulk purchased correspondent loans. In turn, bulk purchased correspondent loans comprised approximately 24.5% of the Company's servicing portfolios when measured at July 1, 2000. The seasoning of the bulk purchased portfolio may continue to contribute disproportionately losses during
the current fiscal year. Further, current market conditions and increased regulation of subprime mortgage lending have resulted in the tightening in underwriting guidelines in the secondary market and the exit of several large subprime home equity lenders from the marketplace. These factors have had the effect of decreasing the availability of credit to delinquent lower credit grade borrowers who in the past had avoided default by refinancing. Management believes that continuance of these factors will contribute to the Company's losses on loan liquidations during the current fiscal year.
Because foreclosures and losses typically occur months or years after a loan is originated, data relating to delinquencies, foreclosures and losses as a percentage of the current portfolio can understate the risk of future delinquencies, losses or foreclosures.
The following table sets forth delinquency, foreclosure and loss information relating to the Company's servicing portfolio as of or for the periods indicated:
(1)Delinquent loans are loans for which more than one payment is past due.
(2)The delinquency and foreclosure percentages are calculated on the basis of the total dollar amount of mortgage loans serviced by the Company and any subservicers as of the end of the periods indicated.
(3)At June 30, 2001, the dollar volume of loans delinquent more than 90 days in ten of the Company's twenty-six REMIC trust exceeded the permitted limit in the related pooling and servicing agreements. All of the aforementioned REMIC trusts plus six additional REMIC trusts have also exceeded certain loss limits. At June 30, 2001, the remaining principal balance of mortgage loans in the securitization trusts which exceeded the permitted delinquency limit was $712.5 million, or 26.2% of the servicing portfolio. At June 30, 2001, the remaining principal balance of mortgage loans in the securitization trusts where certain loss limits have been exceeded was $1.5 billion, or 53.8% of the servicing portfolio.
(4)The servicing portfolio used in percentage calculations includes loans subserviced for others by the Company on an interim basis of $334.5 million, $280.2 million and $84.0 million at June 30, 2001, 2000, and 1999, respectively.
(5)Represents loans which are in foreclosure but as to which foreclosure proceedings have not concluded.
(6)Represents properties acquired following a foreclosure sale and still serviced by the Company at period end.
(7)Represents losses, net of gains, on properties sold through foreclosure or other default management activities during the periods indicated.
(8)The percentages were calculated to reflect the dollar volume of loans foreclosed or annualized losses, as the case may be, to the average dollar amount of mortgage loans serviced by the Company and any subservicer's during the related periods indicated.
Competition
The Company faces intense competition in the business of originating, purchasing and selling mortgage loans. The Company's competitors in the industry include consumer finance companies, mortgage banking companies, investment banks, commercial banks, credit unions, thrift institutions, credit card issuers and insurance companies. Many of these competitors are substantially larger and have considerably greater financial, technical and marketing resources than the Company. In addition, the current level of gains realized by the Company and its competitors on the sale of non-conforming loans could attract additional competitors into this market. Competition among industry participants can take many forms, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of the loan, loan origination fees and interest rates. Additional competition may lower the rates the Company can charge borrowers and increase the price paid for purchased loans, thereby potentially lowering gain on future loan sales and securitizations. To the extent any of these competitors significantly expand their activities in the Company's market, the Company could be materially adversely affected. Fluctuations in interest rates and general economic conditions may also affect competition. During periods of rising rates, competitors that have locked in lower rates to potential borrowers may have a competitive advantage. During periods of declining rates, competitors may solicit the Company's customers with loans in its servicing portfolio to refinance their loans.
The Company believes its competitive strengths include: (i) emphasizing customer service to attract borrowers; (ii) providing a high level of service to brokers and their customers; (iii) offering competitive loan programs for borrowers whose needs are not met by conventional mortgage lenders; (iv) providing convenience to the customer through the Company's nationwide network of retail and broker offices and the Internet; and (v) emphasizing customer service in its loan servicing division.
Regulation
The Company's operations are subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. The Company's consumer lending activities are subject to the Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended, and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Federal Real Estate Settlement Procedures Act ("RESPA") and Regulation X, the Home Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the National Housing Act of 1934, as well as other federal and state statutes and regulations affecting the Company's activities. The Company is also subject to the rules and regulations of, and examinations by, state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing loans. These rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination, govern inspections and appraisals of properties and credit reports on loan applicants, regulate assessment, collection, foreclosure and claims handling, investment and interest payments on escrow balances and payment features, mandate certain disclosures and notices to borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan amounts.
A significant portion of the Company's mortgage loans in its servicing portfolio are so-called "high cost mortgage loans" where the borrower is charged points and fees or interest rates above certain levels because of higher credit risk. Such high cost mortgage loans are subject to special disclosure requirements and certain substantive prohibitions under the Home Ownership and Equity Protection Act of 1994 and regulations thereunder, and certain state laws. The federal regulations governing high cost mortgage loans establish guidelines for determination of whether an individual loan is a high cost mortgage loan. Such guidelines may be interpreted differently by different lenders. Federal regulations
on high cost mortgage loans make assignees of such mortgage loans liable for violations of the regulations. As a result of the increased regulation and scrutiny of high cost mortgage loans, the Company no longer originates high cost mortgage loans. In addition, there has been recent class action litigation and regulatory actions by certain state agencies against lenders for violations of high cost mortgage regulations. The Company has not to date been subject to any material class action litigation or regulatory action for violations of such high cost mortgage regulations.
For a significant portion of the Company's mortgage loan production through its broker channel, the broker is paid a broker's fee by the borrower and also receives a form of compensation from the Company generally known as a "yield spread premium." There has been recent class action litigation against lenders, including two putative class action cases against the Company, alleging that the payment of a yield spread premium constitutes an illegal kickback or referral under RESPA. See "Item 3. Legal Proceedings."
Failure to comply with these requirements can lead to loss of approved status, certain rights of rescission for mortgage loans, individual and class action lawsuits and administrative enforcement action. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors-If We are Unable to Comply with Mortgage Banking Rules and Regulations, Our Ability to Make Mortgage Loans May be Restricted."
In the course of its business, the Company may acquire properties as a result of foreclosure. There is a risk that hazardous or toxic waste could be found on such properties. In such event, the Company could be held responsible for the cost of cleaning up or removing such waste, and such cost could exceed the value of the underlying properties.
The Company is also subject to various other federal and state laws regulating the issuance and sale of securities, relationships with entities regulated by the Employee Retirement Income Security Act of 1974, as amended, and other aspects of its business.
Employees
At June 30, 2001, the Company employed 1,500 persons. The Company has satisfactory relations with its employees.
Item 2.
Item 2. Properties
The executive and administrative offices of the Company are located at 350 S. Grand Avenue, Los Angeles, California, and consist of approximately 178,000 square feet of which approximately 44,800 square feet are sublet. The Company is attempting to sublet additional space in these premises. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Fiscal Years 2001, 2000 and 1999-Expenses." The lease and the sublease on these premises extends through February 2012. The Company also leases approximately 39,000 square feet of office space at its former headquarters location at 3731 Wilshire Boulevard, Los Angeles, California. This space is used for retail telemarketing and Internet production related operations. This lease expires in December 2008. The administrative offices of the Company's Irvine office are located at 3347 Michelson Drive, Irvine, California, and consist of approximately 47,000 square feet. The lease on these premises extends through July 31, 2003.
The Company also leases space for its traditional retail branch and broker regional offices. These facilities aggregate approximately 271,000 square feet and are leased under terms which vary as to duration. In general, the leases expire between 2001 and 2006, and provide for rent escalations tied to either increases in the lessor's operating expenses or fluctuations in the consumer price index in the relevant geographical area.
Item 3.
Item 3. Legal Proceedings
The Company and certain of its subsidiaries are defendants in Fowler et. al. v. Aames Financial Corporation and Aames Funding Corporation, a putative class action filed on approximately May 11, 2001, in U.S. District Court of California, case 2:01cv04330. Plaintiff, a former loan executive, filed this putative class action on behalf of himself and current and former loan executives employed by the Company, and seeks certification of class, damages consisting of alleged unpaid overtime, statutory liquidated damages and waiting time penalties, attorneys' fees and costs, restitution, disgorgement of profits and injunctive relief. Plaintiff alleges that during his employment, he and other loan executives worked in excess of 8 hours per day or 40 hours per week, and he contends that the Company willfully failed to pay overtime in violation of the federal Fair Labor Standards Act and, with respect to loan executives employed in California, in violation of the California Labor Code and Business & Professional Code §17200, et seq. Aames filed an answer denying the claims and asserting various affirmative defenses on September 4, 2001. No trial date has been set.
The Company and certain of its subsidiaries are defendants in Alvarez et. al. v. American General Finance, et. al (including One Stop Mortgage, Inc., Aames Funding Corp., d/b/a/ Aames Home Loan), a putative class action filed on approximately July 20, 2001, in U.S. District Court, Northern District, Eastern Div., Illinois, case No. 01C4648. Plaintiff, a former customer, filed this action on behalf of herself and all wholesale borrowers who paid a broker's fee and whose brokers also received a form of compensation from the Company generally known as a "yield spread premium." Plaintiff alleges that such yield spread premium payments constituted kickbacks and/or illegal referrals under RESPA. The complaint seeks certification of the class, unspecified compensatory and statutory damages, attorneys' fees and costs, disgorgement of profits and injunctive relief. The Company has been granted an open extension of time to respond, pending plaintiff's decision on the Company's request that plaintiff submit to arbitration pursuant to the terms of the loan documents. No trial date has been set.
The Company and certain of its subsidiaries are defendants in Aslami et. al. v. Aames Home Loan, Aames Financial Corporation, et. al., a putative class action filed on approximately April 11, 2000, in Los Angeles County Superior Court, case No. BC228027. Plaintiffs, former customers, filed this action on behalf of themselves and all persons who applied for or obtained loans from the Company during the preceding four years. Plaintiffs allege various state law claims premised their contention that the Company routinely "upcharges" third party fees and underdiscloses annual prepayment rates. On September 19, 2001, Plaintiffs amended their complaint to assert claims based upon the payment of a yield spread premium to their broker. Plaintiffs contend that such yield spread premium payments constitute kickbacks and/or illegal referrals under RESPA. Plaintiffs seek certification of the class, damages consisting of fees paid to mortgage brokers, statutory treble damages, attorneys' fees and costs, restitution, disgorgement of improperly collected charges, punitive damages and injunctive relief. Aames' response to the amended complaint is due October 19, 2001. Trial has been set for February 26, 2002.
The Company cannot predict the outcome of these matters. The Company intends to vigorously defend these actions; however, the Company believes that an unfavorable outcome of one or more of the above cases could have a material adverse effect on the Company's consolidated financial position and results of operations.
The Company becomes involved, from time to time, in a variety of mortgage lending related claims and other matters incidental to its business in addition to the matters described above. In the opinion of the Company, the resolution of any of these pending incidental matters is not expected to have a material adverse effect on its consolidated financial position and results of operations.
Item 4.
Item 4. Submission of Matters to Vote of Security Holders
No matter was submitted during the fourth quarter of fiscal 2001 to a vote of the security holders of the Company.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
In November 1995, the Company's common stock began trading under the symbol AAM on the NYSE. As previously reported, the Company received a notice from the New York Stock Exchange (the "NYSE") that the Company's common stock, par value $0.001 per share (the "Common Stock") did not meet the requirements for continued listing because the thirty day average trading price of the Common Stock was below $1.00 per share. After reviewing the Company's stock price performance, as well as other materials, the NYSE notified the Company that the Common Stock would remain listed until July 2, 2001, at which time the stock price performance would be measured for compliance with continued listing standards.
On July 2, 2001, the NYSE acknowledged that the Company had met the stock price requirements of continued listing as of July 2, 2001. The NYSE also informed the Company that the Common Stock would continue to be listed on the NYSE; however, the Common Stock is subject to a follow-up period during which time the NYSE will continue to monitor the Company and, on November 2, 2001, the NYSE will again measure the stock price performance as of the thirty trading days ending November 2, 2001. In addition, if at any time before November 2, 2001, the NYSE determines that the Company has failed to meet any of the continuing listing standards, the NYSE will re-evaluate the continued listing of the Common Stock at that time and may take action including truncating the normal compliance procedures and beginning the initiation of suspension procedures. The closing price and the thirty day average closing price of the Common Stock as of September 26, 2001 was $0.90 and $1.11, respectively.
There can be no assurance that the thirty trading day average closing price of the Common Stock will remain above $1.00 per share or that the Common Stock will not be suspended by the NYSE. If the Common Stock were suspended by the NYSE, it would seriously impair the ability of the holders of the Common Stock to trade their shares.
The following table sets forth the range of high and low sale prices and per share cash dividends declared for the periods indicated.
*As reported by Bloomberg As of September 20, 2001, the Company had 174 stockholders of record. No common share dividends were accrued or paid in the years ended June 30, 2001 and 2000. The Company accrued and subsequently paid an aggregate of $0.17 per common share in dividends for the fiscal year ended
June 30, 1999. The Board of Directors of the Company reviews the Company's dividend policy at least annually in light of the earnings, cash position and capital needs of the Company, general business conditions and other relevant factors. In November 1998, the Board of Directors decided to suspend cash dividends on the common stock until the Company's earnings and cash flows improved. Credit agreements generally limit the Company's ability to pay dividends if such payment would result in an event of default under the agreements or would otherwise cause a breach of a net worth or liquidity covenants. The Company's Indenture relating to its 9.125% Senior Notes due 2003 prohibits the payment of dividends if the aggregate amount of such dividends since October 26, 1996 exceeds the sum of (a) 25% of the Company's net income during that period (minus 100% of any deficit); (b) net cash proceeds from any securities issuances; and (c) proceeds from the sale of certain investments. The Company's Indenture of Trust relating to its 10.50% Senior Notes due 2002 restricts the payment of dividends to an amount which does not exceed (i) $2.0 million, plus (ii) 50% of the Company's aggregate net income for each fiscal year after the year ended June 30, 1994 (minus 100% of net losses for any fiscal year), plus (iii) 100% of the net proceeds received by the Company on offerings of its equity securities after December 31, 1994. Under the most restrictive of these limitations, the Company will be prohibited from paying cash dividends on its capital stock for the foreseeable future.
Item 6.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below with respect to the Company for the five years ended June 30, 2001 have been derived from the audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and other financial information included herein.
(1)Computed on loans originated or purchased during the fiscal year presented.
(2)The weighted average initial combined loan-to-value ratio is determined by dividing the sum of all loans secured by the junior or senior mortgages on the property by the appraised value at origination.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion should be read in conjunction with Item 6. Selected Financial Data and Item 8.
Item 8. Financial Statements and Supplementary Data
The following financial statements are attached to this report:
Reports of Independent Auditors
Consolidated Balance Sheets at June 30, 2001 and 2000
Consolidated Statements of Operations for the Years Ended June 30, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of Registrant
Information regarding directors and executive officers of the Registrant will appear in the proxy statement for the 2001 Annual Meeting of Stockholders or an amendment to this Form 10-K, and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information regarding executive compensation will appear in the proxy statement for the 2001 Annual Meeting of Stockholders or an amendment to this Form 10-K, and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and management will appear in the proxy statement for the 2001 Annual Meeting of Stockholders or an amendment to this Form 10-K, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions will appear in the proxy statement for the 2001 Annual Meeting of Stockholders or an amendment to this Form 10-K, and is incorporated by this reference.
PART IV
[Item 14.