UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended
December 31, 2008.
[ ] 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 000-32409
UNITED MORTGAGE TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 75-6493585
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1301 Municipal Way, Grapevine TX 76051
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (214) 237-9305
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Shares of Beneficial interest, par value $0.01 per share
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [] No [X]
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 in response to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the 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]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
.
Large accelerated Filer[ ] Accelerated Filer[ ] Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed with reference to the price at which the common equity as last sold, or the average of the bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter.
There is currently no established public market on which the Company’s common shares are traded. The aggregate market value of the registrant’s shares of beneficial interest held by non-affiliates of the registrant at June 30, 2008 computed by reference to the price at which the common equity was last sold was $130,948,411.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
As of March 31, 2009, 6,412,299 of the Registrant's Shares of Beneficial Interest were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference to the Registrant’s definitive proxy statement for the 2008 annual meeting of shareholders.
| Table of Contents | |
| PART I | Page No. |
| Item 1. Business | 4 |
| Item 1A. Risk Factors | 10 |
| Item 1B. Unresolved Staff Comments | 14 |
| Item 2. Properties | 14 |
| Item 3. Legal Proceedings | 14 |
| Item 4. Submission of Matters to a Vote of Security Holders | 14 |
| | |
| PART II | | |
| Item 5. Market for Registrant’s Common Equity Related Shareholder Matters and Issuer Purchases of Equity Securities | 15 |
| Item 6. Selected Financial Data | 16 |
| Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company | 17 |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 35 |
| Item 8. Consolidated Financial Statements and Supplementary Data | 36 |
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 53 |
| Item 9A. Controls and Procedures | 53 |
| Item 9B. Other Information | 54 |
| | | |
| PART III | | |
| Item 10. Directors and Executive Officers of the Registrant | 55 |
| Item 11. Executive Compensation | 59 |
| Item 12. Security Ownership of Certain Beneficial Owners and management and Related Stockholder Matters | 60 |
| Item 13. Certain Relationships and Related Transactions | 61 |
| Item 14. Principal Accounting Fees and Services | 63 |
| Item 15. Exhibits and Financial Statement Schedules | 65 |
PART I
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, our ability to find suitable mortgage investments; the difficulties of the real estate industry generally in response to the “sub-prime crisis,” the “credit crisis,” the current difficulties in the housing and mortgage industries, the current economic environment and changes in economic conditions and the requirement to maintain qualification as a real estate investment trust. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore we cannot give assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or by any other person that the results or conditions described in such statements or in our objectives and plans will be realized. Readers should carefully review our financial statements and the notes thereto, as well as the risk factors described in Item 1A and in our other filings with the Securities and Exchange Commission.
ITEM 1. BUSINESS.
GENERAL
United Mortgage Trust (which we refer to in this report as “we,”, “us”, “our” and the “Company”) is a Maryland real estate investment trust formed on July 12, 1996. We acquire mortgage investments from several sources, including from affiliates of our Advisor. The amount of mortgage investments acquired from such sources depends upon the mortgage investments that are available from them or from other sources at the time we have funds to invest. We believe that all mortgage investments purchased from affiliates of the Advisor are at prices no higher than those that would be paid to unaffiliated third parties for mortgages with comparable terms, rates, credit risks and seasoning.
Our principal investment objectives are to invest proceeds from our dividend reinvestment plan, financing proceeds, capital transaction proceeds and retained earnings in the following types of investments: (i) first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”; (ii) secured, subordinate line of credit to UMTH Lending Company, L.P. for origination of Interim Loans; (iii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (iv) lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; (v) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (vi) loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans”, (vii) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans; and (viii) first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”. We collectively refer the above listed loans as “Mortgage Investments”. Additionally, our portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse loans.”
The typical terms for residential mortgages, contracts for deed and interim loans (collectively referred to as “mortgage investments”) are 360 months, 360 months and 12 months, respectively. The line of credit we have extended to United Development Funding, L.P. (“UDF”) has a five year term. Finished lot loans and builder model home loans are expected to have terms of 12 to 48 months. The majority of interim loans are covered by recourse agreements that obligate either a third party with respect to the performance of a purchased loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan if the underlying borrower defaults. Our loans to UDF are secured by the pledge of all of UDF’s land development loans and equity participations, and are subordinated to its bank lines of credit. In addition, as an enhancement, in October 2006, United Development Funding III, L.P. (“UDF III”), a newly formed public limited partnership that is affiliated with UDF and with our Advisor, entered into a limited guaranty, effective as of September 1, 2006, for our benefit (the “UDF III Guarantee”). Pursuant to the UDF III Guarantee, UDF III guaranteed the repayment of up to $30 million under the Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF. The UDF III guarantee was released effective January 1, 2008.
We seek to produce net interest income from our mortgage investments while maintaining strict cost controls in order to generate net income for monthly distribution to our shareholders. We intend to continue to operate in a manner that will permit us to qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. As a result of that REIT status, we are permitted to deduct dividend distributions to shareholders, thereby effectively eliminating the "double taxation" that generally results when a corporation earns income (upon which the corporation is taxed) and distributes that income to shareholders in the form of dividends (upon which the shareholders are taxed).
The overall management of our business is vested in our Board of Trustees. UMTH General Services, L.P., a Delaware limited partnership (“Advisor” or “UMTHGS”) and a subsidiary of UMT Holdings, L.P. (“UMTH”), has been retained to manage our day-to-day operations and to use its best efforts to seek out and present, whether through its own efforts or those of third parties retained by it, investment opportunities that are consistent with our investment policies and objectives and consistent with the investment programs the trustees may adopt from time to time in conformity with our Declaration of Trust. Our President, Christine “Cricket” Griffin, is a limited partner of UMTH.
In addition to this annual report, we file quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). All documents that we file with the SEC are available free of charge on our website, which is www.unitedmorgagetrust.com. You may also read and copy any document that we file at the public reference facilities of the SEC at 450 Fifth Street NW, Washington DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also my be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the internet (http://www.sec.gov).
Our principal executive offices are located at 1301 Municipal Way, Grapevine TX 76051, telephone (214) 237-9305 or (800) 955-7917, facsimile (214) 237-9304.
TERMINATION OF THE MERGER AGREEMENT
On June 13, 2006, the Board of Trustees voted to take no action to prevent the Agreement and Plan of Merger dated September 1, 2005 ("Merger Agreement") between the Company and UMTH pursuant to which the Company would have merged with and into UMTH ("Merger") from terminating for failure to satisfy the condition that the Merger would terminate if the Merger was not consummated by June 30, 2006. On June 13, 2006, the Company received a letter from UMTH in which UMTH also expressed the view that the Merger would terminate on June 30, 2006. On June 30, 2006 the merger terminated and as a result the Company wrote-off approximately $1,040,000 in capitalized merger costs as reflected in the statements of income. The Company did not incur any termination penalties as a result of the termination of the merger.
RESTATED INVESTMENT OBJECTIVES AND POLICIES OF UNITED MORTGAGE TRUST
February 20, 2009
PRINCIPAL INVESTMENT OBJECTIVES
Our principal investment objectives are to invest proceeds from our dividend reinvestment plan, financing proceeds, capital transaction proceeds and retained earnings in five types of investments:
Our principal investment objectives are to invest proceeds from our dividend reinvestment plan, financing proceeds, capital transaction proceeds and retained earnings in following types of investments:
(i) first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”;
(ii) secured, subordinate line of credit to UMTH Lending Company, L.P. for origination of Interim Loans;
| | (iii) | lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; |
| | (iv) | lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; and, |
| | (v) | lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; and, |
| | (vi) | loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans” and, |
| | (vii) | lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans; and, |
| | (viii) | first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages” |
We collectively refer the above listed loans as “Mortgage Investments”.
In addition, we intend to generate fee income by providing credit enhancements associated with residential real estate financing transactions in the various forms as recommended from time-to-time by our Advisor and approved by our Board of Trustees, including but not limited to, guarantees, pledges of cash deposits, letters of credit and tri-party inter-creditor agreements, all of which we refer to as “Credit Enhancements”. Mortgage Investments and Credit Enhancements are expected to:
| | (1) | produce net interest income and fees; |
| | (2) | provide monthly distributions from, among other things, interest on Mortgage Investments and fees from credit enhancements; and |
| | (3) | permit reinvestment of payments of principal and proceeds of prepayments, sales and insurance net of expenses. |
There is no assurance that these objectives will be attained.
INVESTMENT POLICY
Most of our Mortgage Investments to date are geographically concentrated in the Texas market. We anticipate that the concentration will continue in the near future, but it is our intention to expand our geographic presence through the purchase of Mortgage Investments in other geographic areas of the United States. In making the decision to invest in other areas, we consider the market conditions prevailing at the time we invest.
As of December 31, 2008, our portfolio was comprised of:
| Percentage of Mortgage Portfolio: |
First lien secured interim mortgages 12 months or less and residential mortgages and contracts for deed | |
Secured, subordinate LOC to UMTH Lending Co., L.P. | |
| |
| |
| |
We no longer purchase Interim Loans that are secured by modular and manufactured homes. We increased our investment in our affiliated line of credit to UMTH Lending Co., L.P., secured by Interim Loans, by approximately $8,000,000 in the first quarter of 2009. We plan to invest in Residential Mortgages to facilitate the sale of homes securing our Interim Loans. We plan to invest in Construction Loans for the construction of new single family homes. We plan to continue to invest in Land Development Loans, Finished Lot Loans, and Model Home Loans because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; and, 2) Model Home Loans and Construction Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home and Construction Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot Loans and the Subordinate Line of Credit secured by Interim Loans. As we phase out of non-affiliate Interim Loans we will increase the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans, Model Home Loans, Debtor in Possession Loans, and Construction Loans, until market conditions indicate the need for an adjustment of the portfolio mix.
UNDERWRITING CRITERIA
We will not originate loans, except to facilitate the resale of a foreclosed property. Funds awaiting investment in Mortgage Investments will be invested in government securities, money market accounts or other assets that are permitted investments for REITs. See “Temporary Investments” below.
The underwriting criteria for Mortgage Investments are as follows:
| | · | Land Development Loans and Finished Lot Loans must be secured by a first lien, second lien or a pledge of partnership interest that is insured by a title company. Second liens are subject to the Loan-to-Value (“LTV”) limitations set forth below. |
| | · | Subordinate Line of Credit Secured by Interim Loans will be secured by a second lien, insured by a title company, and is subject to the Loan-to-Value limitations set forth below. |
| | · | Interim Loans purchased must be secured by a first lien that is insured by a title insurance company. |
| | · | Model Home Loans and Construction Loans will be secured by a first lien that is insured by a title insurance company. |
| | · | Residential Mortgages will be secured by a first lien that is insured by a title insurance company. |
| | · | Credit Enhancements must be secured by first or second liens or pledges of partnership interests. |
| | · | Debtor in Possession Loans will be secured by a priority lien over pre-bankruptcy secured creditors and a claim with super-priority over administrative expenses allowed by the bankruptcy court. |
| | · | Our advisor, UMTH General Services, L.P. (“UMTHGS” or our “Advisor”) seeks to acquire Mortgage Investments that will provide us with a satisfactory net yield. Net yield is determined by the yield realized after payment of note servicing fees, if any, and administrative costs (ranging from 1% to 2% of our average invested assets). Rates will be either adjustable or fixed. No loans will be purchased at a premium above the outstanding principal balance. Our investment policy allows for acquisition of loans at various rates. Fees charged for Credit Enhancements will be determined by the degree of risk as determined and recommended by our Advisor. Credit Enhancement fees are expected to range between 0.5% and 3% per annum. |
| (3) | Term and Amortization. |
| | · | There is no minimum term for the loans we acquire. |
| | · | Land Development Loans, Finished Lot Loans and Model Home Loans will generally have terms from 24 to 48 months. |
| | · | Construction Loans will generally have terms of 12 to 18 months. |
| | · | Interim Loans and Subordinate Interim Loans will generally have terms of 12 months or less. |
| | · | Generally, Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Interim Loans do not amortize. They are interest only loans with the principal paid in full when the loans mature. |
| | · | Residential Mortgages will generally have terms and amortizations from 180 to 360 months. |
| | · | Debtor in Possession Loans will generally have terms and amortizations from 6 to 60 months. |
| | · | Credit Enhancements will range from 12 to 48 months. |
| (4) | LTV, Investment-to-Value Ratio (“ITV”), Combined LTV Ratio (“CLTV”). |
| | · | Land Development Loans, Finished Lot Loans, Residential Mortgages and Construction Loans: Except as set forth below, loans purchased may not exceed an 85% ITV. Except as set forth below, Land Development Loans, Finished Lot Loans, Residential Mortgages and Construction Loans will not exceed 85% of the value of the collateral securing the indebtedness (the LTV of the loan). The purchase of, or investment in, subordinate liens secured loans or partnership interests securing loans will not exceed a CLTV of 85%, (subject to the exceptions listed below). CLTV shall mean the sum of all indebtedness senior to us plus the sum of our investment or loan. |
| | · | Model Home Loans: LTV may not exceed 93% each loan, will be a part of a pool of model home collateral and will also be cross-collateralized. All expenses associated with the model home are borne by the home builder. |
| | · | Subordinated Interim Loans and Interim Loans: Loans will not exceed a 75% CLTV without approval by our Board of Trustees. |
| | · | Debtor in Possession Loans will not exceed a 75% ITV. |
| | · | None of the types of loans we currently purchase, or intend to purchase, are subject to seasoning requirements. |
| (6) | Borrower, Loan and Property Information. |
| | · | Land Development Loans, Finished Lot Loans, Model Homes Loans, Construction Loans, and Credit Enhancements: Borrower, loan and property information will be in accordance with guidelines set forth by the originating entities, United Development Funding and UMTH Land Development, L. P., including economic feasibility studies, engineering due diligence reports, exit strategy analysis, and construction oversight requirements. UMTH General Services, L.P. (“UMTHGS” or our “Advisor”), our Advisor, will periodically monitor compliance and changes to underwriting guidelines. |
| | · | ·Residential Mortgages: Borrower, loan and property information will be in accordance with guidelines set forth by the originating entities, UMTH Lending Company, L. P. UMTH General Services, L.P. (“UMTHGS” or our “Advisor”), our Advisor will periodically monitor compliance and changes to underwriting guidelines. |
| | · | Interim Loans: Loans shall be underwritten in accordance with the guidelines established by the originating company, UMTH Lending Company, L.P., including borrower and property information. Our Advisor will periodically monitor compliance and changes to underwriting guidelines. |
| | · | Debtor in Possession Loans will be reviewed and underwritten on a case by case basis by our Advisor, due to their unique characteristics. Our Advisor will employ the services of outside consultants, when and if necessary, to effectively evaluate each opportunity. |
| | · | Land Development Loans, Finished Lot Loans, Construction Loans, Residential Mortgages and Model Home Loans: Appraisal must demonstrate that the LTV, ITV or CLTV is in compliance with the above referenced LTV, ITV and CLTV standards. Loans exceeding LTV, ITV and CLTV guidelines must note the criteria on which the exception was based. |
| | · | Subordinate Interim Loans and Interim Loans: Appraisal must demonstrate that the CLTV or ITV is not more than 75% (subject to the exceptions set forth in 4 above). |
| | · | Debtor in Possession loans will be underwritten on a case by case basis, given their unique characteristics and circumstances. |
| | · | The appraisals must be performed by appraisers approved by our Advisor. |
| | · | Subordinate Interim Loans, Residential Mortgages and Interim Loans: Minimum credit scores and corresponding down payment requirements will be in accordance with the guidelines set by the originating company (currently UMTH Lending Company, L.P.). UMTHGS will periodically monitor compliance and changes to underwriting guidelines. |
| | · | Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Credit Enhancements: Extensions of credit to borrowers will be determined in accordance with net worth and down payment requirements prescribed by the originating companies (currently United Development Funding and UMTH Land Development, L.P.). UMTHGS as Advisor to UMT shall periodically monitor compliance and changes to underwriting guidelines. |
| | · | Loans that are secured by a residence must have an effective, prepaid hazard insurance policy with a mortgagee's endorsement for our benefit in an amount not less than the outstanding principal balance on the loan. We reserve the right to review the credit rating of the insurance issuer and, if deemed unsatisfactory, request replacement of the policy by an acceptable issuer. |
| (10) | Geographical Boundaries. |
| | · | We may purchase Mortgage Investments and provide Credit Enhancements for real estate projects in any of the 48 contiguous United States. |
| (11) | Mortgagees' Title Insurance. |
| | · | Each Mortgage Investment purchased must have a valid mortgagees' title insurance policy insuring our lien position in an amount not less than the outstanding principal balance of the loan. |
| 12) | Guarantees, Recourse Agreements, and Mortgage Insurance. |
| | · | Subordinate Interim Loans, Interim Loans and Residential Mortgages purchased shall contain personal guarantees of the borrower or principal of the borrower. |
| | · | Subordinate Interim Loans and Interim Loans shall afford full recourse to the originating company. |
| | · | ·Land Development Loans, Finished Lot Loans, Model Home Loans, Construction Loans and Credit Enhancements shall have guarantees and collateral arrangements as determined by the originating companies (United Development Funding and UMTH Land Development, L.P). Our Advisor shall review guarantees and recourse obligations. |
| | · | Debtor in Possession loans shall be secured by a priority lien over pre-bankruptcy secured creditors. |
| | · | Our Advisor shall review guarantees and recourse obligations. |
| | · | Mortgage Investments will be purchased at no minimum percentage of the principal balance, but in no event in excess of the outstanding principal balance. |
| | · | Yields on our loan portfolio and fees charged for Credit Enhancements will vary with perceived risk, interest rate, credit, LTV ratios, down payments, guarantees or recourse agreements among other factors. Our objectives will be accomplished through purchase of high rate loans, reinvestment of principal payments and other short-term investment of cash reserves and, if utilized, leverage of capital to purchase additional Mortgages Investments. |
The principal amounts of Mortgage Investments and the number of Mortgage Investments in which we invest will be affected by market availability and also depends upon the amount of capital available to us from proceeds of our dividend reinvestment plan, retained earnings, repayment of our loans and borrowings. There is no way to predict the future composition of our portfolio since it will depend in part on the loans available at the time of investment.
TEMPORARY INVESTMENTS
We intend to use proceeds from our dividend reinvestment plan, retained earnings, proceeds from the repayment of our loans and bank borrowings to acquire Mortgage Investments. There can be no assurance as to when we will be able to invest the full amount of capital available to us in Mortgage Investments, although we will use our best efforts to invest or commit for investment all capital within 60 days of receipt. We will temporarily invest any excess cash balances not immediately invested in Mortgage Investments or for the other purposes described above, in certain short-term investments appropriate for a trust account or investments which yield "qualified temporary investment income" within the meaning of Section 856(c)(6)(D) of the Code or other investments which invest directly or indirectly in any of the foregoing (such as repurchase agreements collateralized by any of the foregoing types of securities) and/or such investments necessary for us to maintain our REIT qualification or in short-term highly liquid investments such as in investments with banks having assets of at least $50,000,000, savings accounts, bank money market accounts, certificates of deposit, bankers' acceptances or commercial paper rated A-1 or better by Moody's Investors Service, Inc., or securities issued, insured or guaranteed by the United States government or government agencies, or in money market funds having assets in excess of $50,000,000 which invest directly or indirectly in any of the foregoing.
OTHER POLICIES
We will not: (a) issue senior securities; (b) invest in the securities of other issuers for the purpose of exercising control; (c) invest in securities of other issuers, other than in temporary investments as described under "Investment Objectives and Policies - Temporary Investments"; (d) underwrite the securities of other issuers; or (e) offer securities in exchange for property.
We may borrow funds to make distributions to our shareholders or to acquire additional Mortgage Investments. Our ability to borrow funds is subject to certain limitations set forth in the Declaration of Trust, specifically, the Trust may not incur indebtedness in excess of 50% of the Net Asset Value of the Trust.
Other than in connection with the purchase of Mortgage Investments or issuance of Credit Enhancements, which may be deemed to be a loan from us to the borrower, we do not intend to loan funds to any person or entity. Our ability to lend funds to the Advisor, a Trustee or Affiliates thereof is subject to certain restrictions as described in "Summary of Declaration of Trust - Restrictions on Transactions with Affiliates.”
We will not sell property to our Advisor, a Trustee or Affiliates thereof at terms less favorable than could be obtained from a non-affiliated party.
Although we do not intend to invest in real property, to the extent we do, a majority of the Trustees shall determine the consideration paid for such real property, based on the fair market value of the property. If a majority of the Independent Trustees so determine, or if the real property is acquired from the Advisor, as Trustee or Affiliates thereof, a qualified independent real estate appraiser shall determine such fair market value selected by the Independent Trustees.
We will use our best efforts to conduct our operations so as not to be required to register as an investment company under the Investment Company Act of 1940 and so as not to be deemed a "dealer" in mortgages for federal income tax purposes. See "Federal Income Tax Considerations.”
We will not engage in any transaction which would result in the receipt by the Advisor or its Affiliates of any undisclosed "rebate" or "give-up" or in any reciprocal business arrangement which results in the circumvention of the restrictions contained in the Declaration of Trust and in applicable state securities laws and regulations upon dealings between us and the Advisor and its Affiliates.
The Advisor and its Affiliates, including companies, other partnerships and entities controlled or managed by such Affiliates, may engage in transactions described in our prospectus, including acting as Advisor, receiving distributions and compensation from us and others, the purchasing, warehousing, servicing and reselling of mortgage notes, property and investments and engaging in other businesses or ventures that may be in competition with us.
CHANGES IN INVESTMENT OBJECTIVES AND POLICIES
The investment restrictions contained in the Declaration of Trust may only be changed by amending the Declaration of Trust with the approval of the shareholders. However, subject to those investment restrictions, the methods for implementing our investment policies may vary as new investment techniques are developed. The Board of Trustees shall periodically, no less than annually review our investment policies and objectives and publish same in a public filing and direct mail communication to our shareholders.
COMPETITION
We believe that our principal competition in the business of acquiring and holding mortgage investments is from financial institutions such as banks, saving and loan associations, life insurance companies, institutional investors such as mutual funds and pension funds, and certain other mortgage REITs. While most of these entities have significantly greater resources than we do, we believe that we are able to compete effectively and to generate relatively attractive rates of return for shareholders due to our relatively low level of operating costs, our relationships with our sources of mortgage investments and the tax advantages of our REIT status.
EMPLOYEES
We have no employees however, our Advisor is staffed with employees who possess expertise in all areas required to fulfill its obligation as manager of our day-to-day management. Our President is a limited partner of UMTH. UMTH owns 99.9% of UMTHGS, our Advisor.
ITEM 1A. RISK FACTORS.
The following are certain risk factors that could affect our business, financial condition, operating results and cash flows. These risk factors should be considered in connection with the forward-looking statements contained in this Annual Report on Form 10-K because these risk factors could cause our actual results to differ materially from those expressed in any forward-looking statement. The risks highlighted below are not the only ones we face. If any of these events actually occur, our business, financial condition, operating results or cash flows could be negatively affected. We caution readers to keep these risk factors in mind and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this report.
Our operations and results are subject to the risks associated with the real estate industry.
Our operating results and the value of our mortgage investments, and consequently the value of your shares, are subject to the risk that if our mortgage investments do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to you will be adversely affected. The following factors, among others, may adversely affect our results:
| - | downturns in the national, regional and local economic climate; |
| - | competition from other real estate lenders; |
| - | local real estate market conditions, such as oversupply or reduction in demand for properties; |
| - | trends and developments in the homebuilding industry; |
| - | conditions in financial markets, including changes in interest rates, the availability and cost of financing, the fiscal and monetary policies of the United States government and the Board of Governors of the Federal Reserve System and international financial conditions; |
| - | increased operating costs, including, but not limited to, insurance expense, utilities, real estate taxes, state and local taxes; |
| - | civil disturbances, natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; and |
| - | declines in the financial condition of our borrowers and our ability to collect on the loans we make to our borrowers. |
Recent Developments in the Residential Sub-prime Mortgage Market Could Adversely Affect Our Results.
During 2008, the mortgage lending industry continued to experience significant instability due to, among other things, defaults on sub-prime and prime loans and a resulting decline in the market value of such loans. These developments were initially referred to as the “sub-prime crisis” but it became evident in 2008 that the crisis had progressed beyond “sub-prime” mortgages as the default rate on prime mortgages also increased. The sub-prime crisis had become a credit crisis. As part of the credit crisis, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led generally to reduced investor demand for mortgage loans and mortgage-backed securities, tightened credit requirements, reduced liquidity and increased credit risk premiums.
The deterioration in the housing market resulting from the credit crisis may have an adverse impact on our portfolio of mortgage investments because our interim loan borrowers rely on prospective home buyers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, seasoning, employment history and liquidity requirements of conventional mortgage financing. These factors place the loans in the “non-conforming” category, meaning that they are not insured or guaranteed by a federally owned or guaranteed mortgage agency. Accordingly, the risk of default by the borrower in those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing.
We believe that the impact of these factors on our operations has been significant. We have adopted active strategies to monitor and manage our credit risk and our portfolio of mortgage investments, such as reducing our investments in interim loans secured by conventionally built homes, with the objective of limiting to the extent possible adverse financial effects from the credit crisis. However, we have two loans in California, which is one of the states where the sub-prime crisis has been felt the most and conditions could change in Texas and in our other markets. Therefore, we can give no assurances that there will not be a marked increase in defaults under our interim loans accompanied by a rapid decline in real estate values that could have further material adverse effect upon our financial condition and operating results.
We may not be successful in managing credit risk, particularly as such risk is impacted by the credit crisis, which could adversely affect our results and our ability to pay distributions to our shareholders.
Despite our efforts to manage credit risk, there are many aspects of credit risk that we cannot control. In addition, the credit crisis has created new circumstances that increase the difficulty of predicting the credit risks to which we will be exposed and limiting future delinquencies, defaults, and losses. Our borrowers may default and we may experience delinquencies at a higher rate than we anticipate. Our underwriting reviews may not be effective. Our loan loss reserves may prove to be inadequate. The value of the homes collateralizing our mortgage investments may decline. We may have difficulty selling any homes that are repossessed which could delay or prevent us from recovering our investment. Changes in lending trends, consumer behavior, bankruptcy laws, tax laws, regulations impacting the mortgage industry, and other laws may exacerbate loan losses. Other changes or actions by judges or legislators regarding mortgage loans and contracts including the voiding of certain portions of these agreements may reduce our earnings, impair our ability to mitigate losses, or increase the probability and severity of losses. Our loss mitigation efforts will impact our operating costs and may not be effective in reducing our future credit losses.
Our dividend can fluctuate because it is based on earnings.
The dividend rate is fixed quarterly by our trustees, based on earnings projections. As such, the dividend rate may fluctuate up or down. Earnings are affected by various factors including use of leverage, cash on hand, current yield on investments, loan losses, general and administrative operating expenses and amount of non-income producing assets. We distributed in excess of earnings between 1999 and 2005 and in 2008. The amount of the excess constituted a return of capital.
A portion of our investments are subject to a higher risk of default than conventional mortgage loans.
Most of our mortgage investments are “non-conforming” in that they are not insured by a federally owned or guaranteed mortgage agency. Also, a portion of our loans involve, directly or indirectly, borrowers who do not satisfy all of the income ratios, credit record criteria, loan-to-value ratios, employment histories and liquidity requirements of conventional mortgage financing. Accordingly, the risk of default by the borrower in those "non-conforming loans" is higher than the risk of default in loans made to persons who qualify for conventional mortgage financing. The three year average default rate for our residential mortgages and contracts for deed was approximately 6.0% and for our interim loans was approximately 2.0%. The interim loan default rate increased in 2008 primarily due to the foreclosures of the RDC portfolio.
Fluctuations in interest rates may affect our return on investment.
Mortgage interest rates may be subject to abrupt and substantial fluctuations. Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make. If prevailing interest rates rise above the average interest rate being earned by our mortgage investments, we may be unable to quickly liquidate our existing investments in order to take advantage of higher returns available from other investments. Furthermore, interest rate fluctuations may have a particularly adverse effect on the return we realize on our mortgage investments if we use money borrowed at variable rates to fund fixed rate mortgage investments. A portion of the loans we finance for UDF are junior in the right of repayment to senior lenders, who will provide loans representing 70% to 80% of total project costs. As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.
We have a dependence upon the UDF line of credit which also concentrates our credit risk.
Our line of credit to UDF is currently $45 million, and, if fully funded, we generate a significant amount of our total earnings through that lending arrangement. The line of credit expires December 31, 2009. The large amount that we have committed to the UDF line of credit means that we face a concentrated credit risk with UDF so that, in the event of delinquencies or defaults by UDF, a significant portion of our total portfolio of mortgage investments could be adversely affected. In addition, if we are unable to renew the line of credit when it expires or to find an alternative lending arrangement either with UDF or other borrowers that will allow us to use an equivalent amount of our lending resources and that will generate an equivalent or better return to us, our earnings will be negatively impacted which may result in an adverse impact on our ability to make distributions to our shareholders.
Our loans to UDF are junior to other lenders and expose us to the risks of the homebuilding industry.
Our loans to UDF are secured by UDF’s interest in mortgages and equity participations that it has obtained to secure its loans to real estate developers. Some of those mortgages are junior mortgages. The developers obtain the money to repay the development loans by reselling the residential home lots to home builders or individuals who build single-family residences on the lots. The developer’s ability to repay their loans is based primarily on the amount of money generated by the developer’s sale of its inventory of single-family residential lots. As a result, we are exposed to the risks of the homebuilding industry, which is undergoing a significant downturn due in large part to the credit crisis, the duration and ultimate severity of which are uncertain. Accordingly, continued or further deterioration of home building conditions or in the broader economic conditions of the homebuilding market could cause the number of homebuyers to decrease, which would increase the likelihood of defaults on the development loans and, consequently, increase the likelihood of a default on the UDF line of credit loan. If this were to occur, we may face the inability to recover the outstanding loan balance on foreclosure of collateral securing our loans because our rights to this collateral will be junior to the rights of senior lenders and because of the potentially reduced value of the underlying properties.
We purchase mortgage investments from affiliates of our Advisor, which may present a conflict of interest from our Advisor.
We acquire many of our mortgage investments from affiliates of the Advisor. Due to the affiliation between the Advisor and those entities and the fact that those entities may earn fees on the origination of mortgage investments sold to us, the Advisor has a conflict of interest in determining if mortgage investments should be purchased from affiliated or unaffiliated third parties.
We face competition for the time and services of our officers and the officers and employees of our Advisor.
We rely on our Advisor and its affiliates, including our President, who is a partner of the parent of our Advisor, for management of our operations. Because our Advisor and its affiliates engage in other business activities, conflicts of interest may arise in operating more than one entity with respect to allocating time between those entities.
We have a high geographic concentration of mortgage investments in Texas.
A large percentage of the properties securing our mortgage investments are located in Texas, with approximately 38% in the Dallas/Fort Worth area. As a result, we have a greater susceptibility to the effects of an economic downturn in that area or from slowdowns in certain business segments that represent a significant part of that area’s overall economic activity such as energy, financial services and tourism.
We face the risk of loss on non-insured, non-guaranteed mortgage loans.
We generally do not obtain credit enhancements for our mortgage investments, because the majority of those mortgage loans are "non-conforming" in that they do not meet all of the underwriting criteria required for the sale of the mortgage loan to a federally owned or guaranteed mortgage agency. Accordingly, during the time we hold mortgage investments for which third party insurance is not obtained, we are subject to the general risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods). In the event of a default on any mortgage investment held by us, including, without limitation, defaults resulting from declining property values and worsening economic conditions, we would bear the risk of loss of principal to the extent of any deficiency between the value of the related mortgage property and the amount owing on the mortgage loan. Defaulted mortgage loans would also cease to be eligible collateral for borrowings and would have to be held or financed by us out of other funds until those loans are ultimately liquidated, which could cause increased financing costs and reduced net income or a net loss.
Bankruptcy of borrowers may delay or prevent recovery on our loans.
The recovery of money owed to us may be delayed or impaired by the operation of the federal bankruptcy laws. Any borrower has the ability to delay a foreclosure sale for a period ranging from a few months to several months or more by filing a petition in bankruptcy, which automatically stays any actions to enforce the terms of the loan. The length of this delay and the associated costs will generally have an adverse impact on the return we realize on our investments.
We face risks under the representations, warranties and guarantees that we gave in connection with our securitization activities.
We have engaged in two securitizations of our mortgage investments as a means of providing funding. In these transactions, we receive the proceeds from third party investors for securities issued from our securitization vehicles which are collateralized by transferred mortgage investments from our portfolio. As part of those securitizations we made certain representations and warranties concerning the portfolio of mortgage investments conveyed and we also guaranteed certain obligations. If, because of irregularities in the underlying loans, our representations and warranties are inaccurate, we may be obligated to repurchase the loans from the purchasing entities at principal value, which may exceed market value.
We are exposed to potential environmental liabilities.
In the event that we are forced to foreclose on a defaulted mortgage investment to recover our investment, we may be subject to environmental liabilities in connection with that real property which may cause its value to be diminished. Hazardous substances or wastes, contaminants, pollutants or sources thereof (as defined by state and federal laws and regulations) may be discovered on properties during our ownership or after a sale of that property to a third party. If those hazardous substances are discovered on a property, we may be required to remove those substances or sources and clean up the property. We could incur full recourse liability for the entire cost of any removal and clean up and the cost of such removal and clean up could exceed the value of the property or any amount that we could recover from any third party. We may also be liable to tenants and other users of neighboring properties for environmental liabilities. In addition, we may find it difficult or impossible to sell the property prior to or following any such clean up.
We face risks from borrowed money.
We are allowed to borrow an aggregate amount not to exceed 50% of our net assets to acquire mortgage investments. An effect of leveraging is to increase the risk of loss. The higher the rate of interest on the financing, the more difficult it would be for us to meet our obligations and the greater the chance of default. These borrowings may be secured by liens on our mortgage investments. Accordingly, we could lose our mortgage investments if we default on the indebtedness.
We rely on appraisals that may not be accurate or may be affected by subsequent events.
Because our investment decisions are based in major part upon the value of the real estate underlying our mortgage investments and less upon the creditworthiness of the borrowers, we rely primarily on the real property securing the mortgage investments to protect our investment. We rely on appraisals and on Broker Price Opinions ("BPO's"), both of which are paid for and most of which are provided by note sellers, to determine the fair market value of real property used to secure the mortgage investments we purchase. BPO’s are determinations of the value of a property based on a study of the comparable values of similar properties prepared by a licensed real estate broker. We cannot be sure that those appraisals or BPO's are accurate. Moreover, since an appraisal or BPO is given with respect to the value of real property at a given point in time, subsequent events could adversely affect the value of real property used to secure a loan. Such subsequent events may include changes in general or local economic conditions, neighborhood values, interest rates and new construction. Moreover, subsequent changes in applicable governmental laws and regulations may have the effect of severely limiting the permitted uses of the property, thereby drastically reducing its value. Accordingly, if an appraisal is not accurate or subsequent events adversely affect the value of the property, the mortgage investment would not be as secure as anticipated, and, in the event of foreclosure, we may not be able to recover our entire investment.
Our mortgages may be considered usurious.
Usury laws impose limits on the maximum interest that may be charged on loans and impose penalties for violations that may include restitution of the usurious interest received, damages for up to three times the amount of interest paid and rendering the loan unenforceable. Most, if not all, of the mortgage investments we purchase are subject to state usury laws and therefore we face the risk that the interest rate for our loans could be held usurious in states with restrictive usury laws.
We face the risk of an inability to maintain our qualification as a REIT.
We are organized and conduct our operations in a manner that we believe enables us to be taxed as a REIT under the Internal Revenue Code (the "Code"). To qualify as a REIT and avoid the imposition of federal income tax on any income we distribute to our shareholders, we must continually satisfy two income tests, two asset tests and one distribution test.
If, in any taxable year, we fail to distribute at least 90% of our taxable income, we will be taxed as a corporation and distributions to our shareholders will not be deductible in computing our taxable income for federal income tax purposes. Because of the possible receipt of income without corresponding cash receipts due to timing differences that may arise between the realization of taxable income and net cash flow (e.g. by reason of the original issue discount rules) or our payment of amounts that do not give rise to a current deduction (such as principal payments on indebtedness), it is possible that we may not have sufficient cash or liquid assets at a particular time to distribute 90% of our taxable income. In that event, we could declare a consent dividend or we could be required to borrow funds or liquidate a portion of our investments in order to pay our expenses, make the required distributions to shareholders, or satisfy our tax liabilities, including the possible imposition of a four percent excise tax. We may not have access to funds to the extent, and at the time, required to make such payments.
If we were taxed as a corporation, our payment of tax will substantially reduce the funds available for distribution to shareholders or for reinvestment and, to the extent that distributions had been made in anticipation of our qualification as a REIT, we might be required to borrow additional funds or to liquidate certain of our investments in order to pay the applicable tax. Moreover, should our election to be taxed as a REIT terminate or be voluntarily revoked, we may not be able to elect to be treated as a REIT for the following four-year period.
We did not have an audit committee in 2006.
During 2006 our Board of Directors did not appoint an audit committee. The Company did have an audit committee in 2008 and 2007. Typically, an audit committee is responsible for reviewing and discussing with management a company's financial controls and accounting, audit and reporting activities. A typical audit committee will also review the qualifications of the Company's independent registered public accounting firm, select the independent registered public accounting firm and recommend the ratification of the accounting firm to the board, review the scope, fees and results of any audit and review the non-audit services provided by the accounting firm. An audit committee will also be responsible for approving any transactions between the Company and its directors, officers, or significant shareholders. Failing to have a properly constituted audit committee could expose the Company to a greater risk of error or fraud in the compilation, analysis and reporting of the Company's financial results. In addition, having an audit committee is a requirement for a listing of the Company’s securities on a stock exchange.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We do not maintain any physical properties.
ITEM 3. LEGAL PROCEEDINGS.
We are unaware of any threatened or pending legal action or litigation that individually or in the aggregate could have a material effect on us.
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
SHARE REDEMPTION PLAN
There is currently no established public trading market for our shares. As an alternative means of providing limited liquidity for our shareholders, we maintain a Share Redemption Plan, (“SRP”). Under the terms of our plan that were effective during 2008, shareholders who have held the shares for at least one year are eligible to request that we repurchase their shares. In any consecutive 12 month period we may not repurchase more than 5% of the outstanding shares at the beginning of the 12 month period. The repurchase price was based on the value of our properties or a fixed pricing schedule, as determined by the trustees' business judgment based on our book value, operations to date and general market and economic conditions and may not, in any event, exceed any current public offering price. We have also purchased a limited number of shares outside of our SRP from shareholders with special hardship considerations.
Share repurchases have been at prices of $16.34 to $20.00 through our SRP. Shares repurchased for less than $20 per share were 1) shares held by shareholders for less than 12 months or 2) shares purchased outside of our Share Redemption Program.
The repurchase price of $20 was determined by our Board of Trustees based on their business judgment regarding the value of the shares with reference to our book value, our operations to date and general market and economic conditions.
The following table summarizes the share repurchases made by us in 2008:
| Total number of shares repurchased | | Total number of shares purchased as part of a publicly announced plan | Total number of shares purchased outside of plan |
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On December 31, 2008, we had 6,436,569 shares outstanding compared to 6,649,916, and 6,917,443 shares outstanding at December 31, 2007 and 2006, respectively. The decrease in shares is the net between fewer DRP shares issued and more SRP shares repurchased. The shares were held by 2,244, 2,373, and 2,760 beneficial owners in 2008, 2007 and 2006, respectively. No single shareholder owned 5% or more of our outstanding shares.
On March 18, 2009, the Board approved certain modifications to the Company’s SRP and its Dividend Reinvestment Plan (“DRIP”), which modifications were disclosed in a Report on Form 8-K which we filed with the SEC on March 19, 2009. Pursuant to the requirements of the SRP and the DRIP, the Company sent its shareholders notice of amendment of the SRP and the DRIP, both to be effective on May 1, 2009. The modifications consist of the following:
Modifications to the Share Redemption Plan (SRP)
The redemption price shall be equal to the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2008 the NAV was $16.03 per share. Under the current SRP, the redemption price is $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRIP or the Company’s credit line.
Modifications to the Dividend Reinvestment Plan (DRIP)
Effective May 1, 2009, our DRIP share purchase price will be set at the NAV. Previously, the share purchase price was $20.00 per share.
Please refer to our Report on Form 8-K filed on March 19, 2009 for further information about the modifications to the SRP and DRIP.
DIVIDEND POLICY
Under our current dividend policy, we intend to retain up to 10% of our earnings to build share value, (“Retained Earnings”), and distribute to shareholders at least 90% of our taxable income each year (which does not ordinarily equal net income as calculated in accordance with accounting principles generally accepted in the United States) so as to comply with the REIT provisions of the Code. To the extent we have available funds, we declare regular monthly dividends (unless the trustees determine that monthly dividends are not feasible, in which case dividends would be paid quarterly). Any taxable income remaining after the distribution of the final regular monthly dividend each year, excluding our Retained Earnings, is distributed together with the first regular monthly dividend payment of the following taxable year or in a special dividend distributed prior thereto. The dividend policy is subject to revision at the discretion of the Board of Trustees. All distributions are made by us at the discretion of the Board of Trustees and depend on our taxable earnings, our Retained Earnings, our financial condition, maintenance of our REIT status and such other factors as the Board of Trustees deems relevant.
Distributions to shareholders are generally subject to taxation as ordinary income, although a portion of those distributions may be designated by us as capital gain or may constitute a tax-free return of capital. Although we do not intend to declare dividends that would result in a return of capital, we did so from 1997 through 2005 and in 2008. Any distribution to shareholders of income or capital assets from us is accompanied by a written statement disclosing the source of the funds distributed. If, at the time of distribution, this information is not available, a written explanation of the relevant circumstances accompanies the distribution and the written statement disclosing the source of the funds is distributed to the shareholders not later than 60 days after the close of the fiscal year in which the distribution was made. In addition, we annually furnish to each of our shareholders a statement setting forth distributions during the preceding year and their characterization as ordinary income, capital gains, or return of capital.
We began making distributions to our shareholders on September 29, 1997. Monthly distributions have continued each month thereafter. At year-end 2008 we had paid 136 consecutive monthly dividends. Distributions for the years ended December 31, 2008, 2007, and 2006 were made at a rate of 6.8% ($1.35), 7.4% ($1.47), and 7.0% ($1.40), respectively. The dividend portion of the distribution was 5.2% ($1.04), 7.4% ($1.47), and 7.0% ($1.40), per weighted share for 2008, 2007, and 2006, respectively. The portion of these distributions that did not represent a dividend represented a return of capital.
ITEM 6. SELECTED FINANCIAL DATA.
We present below selected financial information. We encourage you to read the financial statements and the notes accompanying the financial statements in this Annual Report. This information is not intended to be a replacement for the financial statements.
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Interest income from affiliate investments | | | | | |
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Weighted average shares outstanding | | | | | |
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Investment in trusts receivable | | | | | |
Foreclosed residential mortgages and contracts for deed | | | | | |
Interim mortgages, affiliates | | | | | |
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Interim mortgages foreclosed | | | | | |
Allowance for loan losses | | | | | |
Line-of-credit receivable, affiliates | | | | | |
Line-of-credit receivable, non-affiliates | | | | | |
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Deficiency notes, affiliates | | | | | |
Recourse obligations, affiliates | | | | | |
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Participation payable, affiliates | | | | | |
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Total shareholders' equity | | | | | |
Total liabilities and shareholders' equity | | | | | |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY.
GENERAL
We invest (i) first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”; (ii) secured, subordinate line of credit to UMTH Lending Company, L.P. for origination of Interim Loans; (iii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (iv) lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; (v) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (vi) loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans”, (vii) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans; and (viii) first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”. We collectively refer the above listed loans as “Mortgage Investments”. Additionally, we our portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse loans.”
The typical terms for residential mortgages, contracts for deed and interim loans (collectively referred to as “mortgage investments”) are 360 months, 360 months and 12 months, respectively. The UDF line of credit has a five year term. Finished lot loans and builder model home loans are expected to have terms of 12 to 48 months. The majority of interim loans are covered by recourse agreements that obligate either a third party with respect to the performance of a purchased loan, or obligate a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan if the underlying borrower defaults. Our loans to UDF are secured by the pledge of all of UDF’s land development loans and equity participations, and are subordinated to its bank lines of credit. In addition, as an enhancement, in October 2006, UDF III, a newly formed public limited partnership that is affiliated with UDF and with our Advisor, entered into a limited guaranty effective as of September 1, 2006, for our benefit (the “UDF III Guarantee”). Pursuant to the UDF III Guarantee, UDF III guaranteed the repayment of up to $30 million under the Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF. This guarantee was released in 2008 as a result of UDF’s increased net worth.
We seek to produce net interest income from our mortgage investments while maintaining strict cost controls in order to generate net income for monthly distribution to our shareholders. We intend to continue to operate in a manner that will permit us to qualify as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. As a result of that REIT status, we are permitted to deduct dividend distributions to shareholders, thereby effectively eliminating the "double taxation" that generally results when a corporation earns income (upon which the corporation is taxed) and distributes that income to shareholders in the form of dividends (upon which the shareholders are taxed).
At the end of 2008, our mortgage portfolio totaled approximately $99,827,000. Approximately 29% of our income producing assets were first lien secured interim mortgages and residential mortgages and contracts for deed, approximately 18% were secured, subordinate LOC to UMTH Lending Co., L.P., approximately 47% were land development loans, approximately 3% were invested in finished lot loans and approximately 3% were invested in construction loans. As noted above, our portfolio also includes obligations of affiliates of our Advisor, which we refer to as “recourse loans” and deficiency notes.
We no longer purchase Interim Loans that are secured by modular and manufactured homes. We increased our investment in our affiliated line of credit to UMTH Lending Co., L.P., secured by Interim Loans, by approximately $8,000,000 in the first quarter of 2009. We plan to invest in Residential Mortgages to facilitate the sale of homes securing our Interim Loans. We plan to invest in Construction Loans for the construction of new single family homes. We plan to continue to invest in Land Development Loans, Finished Lot Loans, and Model Home Loans because, 1) Land Development Loans and Finished Lot Loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; and, 2) Model Home Loans and Construction Loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. Model Home and Construction Loans are expected to produce higher yields commensurate with Land Development Loans, Finished Lot Loans and the Subordinate Line of Credit secured by Interim Loans. As we phase out of non-affiliate Interim Loans we will increase the percentage of our portfolio invested in Land Development Loans, Finished Lot Loans. Model Home Loans, Debtor in Possession Loans, and Construction Loans, until market conditions indicate the need for an adjustment of the portfolio mix.
The following table summarizes mortgage loans by type and original loan size held by United Mortgage Trust at December 31, 2008.
| | | | | | Face amount of Mortgage (1) | Carrying amount of Mortgage (2) | |
Single family residential 1st mortgages and interim loans (4): | | | | | | | | |
Original balance > $100,000 | | | | | | | | |
Original balance $50,000 - $99,999 | | | | | | | | |
Original balance $20,000 - $49,999 | | | | | | | | |
Original balance under $20,000 | | | | | | | | |
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First Lien secured interim mortgages | | | | | | | | |
Ready America Funding (5) | | | | | | | | |
Howe Note Consolidation (6) | | | | | | | | |
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Secured, subordinate LOC to UMTH Lending Co., L.P. (5), (6) | | | | | | | | |
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UDF III Economic Interest Participation | | | | | | | | |
UDF III Bear Creek Participation | | | 12/31/09 | | | | | |
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| | (1) | Current book value of loans. |
| | (2) | Net of mortgage allowance for loan losses on mortgage loans of $3,827,873 at December 31, 2008. |
| | (3) | Amounts greater than thirty (30) days past due. |
| | (4) | Does not include Rental Foreclosure Properties (18). |
| | (5) | Lines of credit with Ready America Funding and UMTH Lending Co., L.P. are collateralized by 18 and 173 loans, respectively |
| | (6) | The Company has a first lien collateral position in these loans funded by the originator. The advances to the originator do not have specific maturity dates. |
Below is a reconciliation and walk forward of mortgage loans, net of allowance for loan losses for the year ended December 31, 2008.
Balance at beginning of period | | $ | 82,060,938 | |
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| | | 60,592,738 | |
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| | | (30,004,444 | ) |
| | | (15,165,108 | ) |
Other (net change of Allowance) | | | (1,484,710 | ) |
Balance at close of period | | $ | 95,999,414 | |
MATERIAL TRENDS
Housing Industry
The U.S. housing market has suffered declines in over the past three years, particularly in geographic areas that had experienced rapid growth, steep increases in property values and speculation. We believe that the demand for new homes continued to deteriorate progressively throughout 2008 and accelerated with the cascading events in credit and equity markets in September and October. Consumer confidence has sunk to historic lows. Market conditions remain challenging as many potential home buyers appear to have postponed the purchase of new homes until signs that the economy and employment are improving, or at least are not continuing to deteriorate. Our view is that the perspective of many potential home buyers has changed from “have home prices stabilized, and is this the right price at which to purchase a home?,” to “we will wait to purchase a home until such time as we are comfortable we are not going to lose our jobs.”
Material Trends Affecting Our Business
Nationally, the number of new single-family residential homes sold and average and median sales prices have been declining. The sales of new single-family residential homes in December 2008 were at a seasonally adjusted annual rate of 331,000 units, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. This is approximately 44.8% below the December 2007 estimate of 600,000. According to the same sources, the average sales price of new houses sold in 2008 was $291,800; the median sales price was $230,600. This is approximately 6.95% below the 2007 average new home sales price of $313,600. In addition, the median sales price is approximately 6.98% below the 2007 median new home sales price of $247,900. The seasonally adjusted estimate of new houses for sale at the end of December 2008 was 357,000, which represents a supply of 12.9 months at the December 2008 sales rate. We believe that this significant drop in the number of new houses for sale, year-over-year, by an estimated 137,000 units reflects the homebuilding industry’s extensive efforts to bring the new home market back to equilibrium by continuing to reduce new housing starts and selling existing new home inventory. We continue to believe that housing inventories will continue to fall until they reach between 350,000 and 375,000 units in the first half of 2009, a point we believe will mark a tightened housing market. We further believe that new home inventories are at or close to equilibrium and that what is necessary to regain prosperity in housing markets is the return of healthy levels of demand.
Also, according to the sources identified above, new single-family residential home permits and starts have declined nationally, as a result and in anticipation of a rising supply of new single-family residential homes and a declining demand for new single-family residential homes. Single-family homes authorized by building permits in December 2008 were at a seasonally adjusted annual rate of 363,000 units. This is 49.2% below the December 2007 estimate of 714,000 units. Single-family home starts for December 2008 were at a seasonally adjusted annual rate of 398,000 units. This is 48.9% below the December 2007 estimate of 779,000 units.
Housing markets generally remain difficult and generally are declining on a national basis with those declines and difficulties most pronounced in those markets that had experienced rapid growth, steep increases in property values and speculation, such as in California, Florida, Arizona and Nevada. However, a few markets, such as Texas, are continuing to remain fairly healthy, compared to what has been occurring nationally. The table below illustrates the recent declines in home price appreciation nationally, as well as in California and Florida, while showing that Texas has not experienced such pronounced declines.
10 Year Home Price Appreciation
Source: Office of Federal Housing Enterprise Oversight
The Office of Federal Housing Enterprise Oversight (“OFHEO”) analyzes the combined mortgage records of Fannie Mae and Freddie Mac, which form the nation’s largest database of conventional, conforming mortgage transactions. OFHEO’s all-transactions house price index tracks average house price changes in repeat sales or refinancing of the same single-family properties and is based on data obtained from Fannie Mae and Freddie Mac for mortgages originated over the past 34 years.
The OFHEO 4th Quarter 2008 all-transactions house price index reports that over the past twelve months, home prices have risen on average 2.09% in Texas while home prices have fallen nationally 8.20% in that same period. Also, home prices in the states of Arizona, Florida, California and Nevada have fallen 15.18%, 19.51%, 20.51% and 21.78%, respectively, during that same period. According to that same source, only 21 states have seen home prices increase over the past twelve months, while twenty-nine states and the District of Columbia have seen home prices fall. The OFHEO reports that only 3 states, North Dakota, South Dakota and Texas have seen home prices rise by more than 2.0% over that period. The OFHEO also reports that only four states, Arizona, Florida, Nevada and California have seen home prices fall by more than 15.0% over that period.
As of December 31, 2008, the great majority of our loans are secured by assets located in Texas. While housing woes beleaguer the national economy, Texas housing markets have held up as some of the best in the country. We believe the Texas markets have remained fairly healthy due to strong demographics, economies and housing affordability ratios.
According to numbers publicly released by Residential Strategies, Inc. or Metrostudy, leading providers of primary and secondary market information, the median new home prices for 2008 in the metropolitan areas of Austin, Houston, Dallas, and San Antonio are $219,810, $205,878, $208,000, and $186,956, respectively. These amounts are below the 2008 national median sales price of new homes sold of $230,600. Using the Department of Housing and Urban Development’s estimated 2008 median family income for the respective metropolitan areas of Austin, Houston, Dallas, and San Antonio, the median income earner in those areas has 1.21 times, 1.14 times, 1.20 times, and 1.13 times the income required to qualify for a mortgage to purchase the median priced new home in the respective metropolitan area. Using the U.S. Census Bureau’s income data to project estimated median income for the United States for 2008 of $61,458 and the 2008 national median sales prices of new homes sold of $230,600, we conclude that the national median income earner has 1.03 times the income required to qualify for a mortgage loan to purchase the median priced new home in the United States. We further conclude that the aforementioned Texas metropolitan areas have new home housing affordability ratios that are 1.10 to 1.18 times the national new home housing affordability ratio. These numbers reflect the increase in home affordability in housing markets outside of Texas over the past 24 months as new home prices in other housing markets outside of Texas generally have fallen. The above housing affordability is determined as the ratio of median family income to the income required to qualify for a 90 percent, 30-year fixed-rate mortgage to purchase the median-priced new home, assuming an annual mortgage insurance premium of 50 basis points for private mortgage insurance and a cost that includes estimated property taxes and insurance for the home.
Additional indicators that provide insight into the extent of new home affordability are the ratio of new home prices to median income and new home payments as a percentage of income. Historically, the ratio of new home prices to median income in stable markets is between 3 and 4, and the average monthly income to service a conforming mortgage has been between 19% and 25%, and 29% and 37% for the first time home purchase. Both nationally and within the four major Texas markets, new prices are affordable by each of these historical measures.
The Winter 2009 U.S. Market Risk Index, a study prepared by PMI Mortgage Insurance Co., the U.S. subsidiary of The PMI Group, Inc., which ranks the nation’s 50 largest metropolitan areas according to the likelihood that home prices will be lower in two years, reported that Texas cities lead the nation in home price stability. The San Francisco-based company recently analyzed housing price trends in its quarterly report, released January 14, 2009. The index also considers the impact of foreclosure rates and excess housing supply and the consequential impact on home prices. The study predicts there is less than a 1% chance that the Dallas/Fort Worth-area, Houston-area, San Antonio-area and Austin-area home prices will fall during the next two years. All Texas metropolitan areas included in the report are in the Top 12 least likely areas to experience a decline in home prices in two years, of the nation’s 50 largest metropolitan areas. Dallas-Plano-Irving, Texas is the nation’s least likely metropolitan area included in the study to see a price decline in the next two years, Fort Worth-Arlington, Texas is second-least likely, Houston-Sugar Land-Baytown, Texas is third-least likely, San Antonio, Texas is fifth-least likely and Austin, Texas is twelfth-least likely.
We also believe that changes in population and employment greatly affect new home demand. The United States Census Bureau reported in its 2008 Estimate of Population Change July 1, 2007 to July 1, 2008 that Texas led the country in population growth during that period. The estimate concluded that Texas grew by 483,542 people, or 2.00%, a number which was 1.28 times greater than the next closest state in terms of raw population growth, California, and more than 2.67 times the second closest state in terms of raw population growth, North Carolina. According to the same source, Texas also led the country in population growth during the period July 1, 2006 to July 1, 2007 with an estimated population growth of 496,751 people, or 2.12%.
The United States Census Bureau also reported that Texas had the largest number of counties of any state, 19, among the 100 fastest-growing counties in the nation. Texas had the largest number of counties that added the largest number of residents between July 1, 2007 and July 1, 2008, 6 of the top 15 counties were in Texas (Harris (Houston), Tarrant (Fort Worth), Bexar (San Antonio), Collin (North Dallas), Dallas (Dallas) and Travis (Austin). On March 19, 2009, the United States Census Bureau reported that Texas’ five major cities – Austin, Houston, San Antonio, Dallas and Fort Worth – were among the top ten in the nation for population growth from 2007 to 2008 for metropolitan statistical areas with a population estimate exceeding 1 million. Dallas-Fort Worth-Arlington led the nation in numerical population growth with an estimated population increase of 146,532, with Dallas-Plano-Irving being an estimated increase of 97,036 and Fort Worth-Arlington being an estimated increase of 49,496. Houston-Sugarland-Baytown was second in the nation in numerical population growth with an estimated increase of 130,185. Austin-Round Rock had an estimated population growth of 60,012 and San Antonio had an estimated population growth of 46,524 over this same period. The percentage increase in population for these major Texas cities ranged from 2.34% to 3.77%.
The United States Department of Labor reports that as of December 2008, Texas led the nation with the largest job gains over the past twelve months with 154,700 new jobs created. This is over 10.05 times greater than the number of jobs created during this period in the nation’s second largest state for job growth, Oklahoma, and more than 18.20 times the jobs created during this period in the nation’s third largest state for job growth, Louisiana. The United States Department of Labor reports that nationally, the United States lost approximately 2,956,000 jobs over that same period. The Texas metropolitan areas of Austin, Houston, Dallas, San Antonio and Lubbock experienced, during the last twelve months, the creation of 9,600, 57,300, 43,300, 14,900 and 1,500 new jobs, respectively. The largest over-the-year employment increase was recorded in Houston-Sugar Land-Baytown, Texas, followed by Dallas-Fort Worth Arlington, Texas, and San Antonio, Texas. Austin-Round Rock, Texas had the 5th largest over-the-year employment increase. The United States Department of Labor reports that the over-the-year percentage increases in employment in the country’s large metropolitan areas were recorded in the four top metropolitan areas of Texas: Austin-Round Rock (+1.2%), Houston-Sugar Land-Baytown, (+2.2%), San Antonio (+1.8%), and Dallas-Fort Worth-Arlington, (+1.4%).
The United States Department of Labor reports that as of December 2008, the unemployment rate for Texas in December 2008 was 6.0%, up from 4.2% in December 2007. The national unemployment rate in December 2008 was 7.2%, up from 4.9% a year earlier. The unemployment rate for Austin-Round Rock, Texas in December 2008 was 5.2%, up from 3.6% in December 2007; Dallas-Fort Worth-Arlington, Texas was 5.5%, up from 4.4%; Houston-Sugar Land-Baytown, Texas was 5.5%, up from 4.4%; Lubbock, Texas was 3.8%, up from 3.3%; and San Antonio, Texas was 5.3%, up from 4.0%.
Due to the extent of the national and global recession , we belieive that the Texas economy will slow in 2009 and that it is likely that Texas will suffer a net loss of jobs in 2009. The National Bureau of Economic Research has concluded that the U.S. economy entered into a recession in December 2007, ending an economic expansion that began in November 2001. We believe that the recent transition from significant month over month and year over year job gains in Texas, to month over month job losses indicates that the Texas economy slowed significantly in the fourth quarter of 2008 and also is at risk of recession. We further believe that the Texas economy will continue to outperform the national economy. According to the Texas Workforce Commission, Texas tends to enter into recessions after the national economy has entered a recession and tends to lead among states in the economic recovery.
In sharp contrast to the conditions of other homebuilding markets in the country where unsold housing inventory remains a challenge, in Texas markets, new home sales are greater than new home starts, which indicates that home builders in Texas are focused on maintaining a balance of new home demand and new home supply. Home builders and developers in Texas have remained disciplined on new home construction and project development. New home starts have been declining year-on-year and are outpaced by new home sales in all of our Texas markets where such data is readily available. Inventories of finished new homes and total new housing (finished vacant, under construction and model homes) remain at healthy and balanced levels in all four major Texas markets, Austin, Dallas-Fort Worth, Houston and San Antonio. Each major Texas market is experiencing a rise of finished lot inventories as homebuilders continue to reduce the number of new home starts, with Houston, San Antonio and Austin reaching slightly elevated levels of 30-36 months. A 24-28 month supply is considered equilibrium for finished lot supplies. Though the absolute number of finished lots has not changed significantly for several years, Dallas-Fort Worth has an estimated inventory of finished lots of approximately 52.8 months which has been the result of a significant decline of new home starts.
Austin continues to be one of the strongest homebuilding markets in the country. Annual new home sales in Austin outpace starts 10,936 versus 8,988, with annual new home sales declining year-on-year by approximately 26%. With the decline in housing starts, the Austin new homebuilding market has changed from an area with a very tight lot supply to a market that is now generally balanced. Finished housing inventory and total new housing inventory (finished vacant, under construction and model homes) remain at healthy and balanced levels of 2.94 months and under 6.0 months, respectively. The considered equilibrium levels for finished housing inventory and total new housing inventory are a 2 to 2.5 month supply and a 6.0 month supply, respectively. Finished lot supplies have edged up to slightly elevated levels of 41.8 months. San Antonio is also a healthy homebuilding market. Annual new home sales in San Antonio outpace starts 10,778 versus 8,838, with annual new home sales declining year-on-year by approximately 31%. Finished housing inventory and total new housing inventory remain at healthy levels with a 2.6 month supply and 5.7 month supply, respectively, each within or below the considered equilibrium levels. Finished lot supplies have increased to 54.0 months. Houston is also a healthy homebuilding market. Annual new home sales in Houston outpace starts 31,284 versus 26,223, with annual new home sales declining year-on-year by approximately 26.8%. Finished housing inventory and total new housing inventory have been increasing to a 3.1 month supply and 7.5 month supply, respectively, each slightly above the considered equilibrium level. Finished lot supplies remain at slightly elevated levels of 33.2 months. Dallas-Fort Worth is also a healthy homebuilding market. Annual new home sales in Dallas-Fort Worth outpace starts 25,273 versus 19,512, with annual new home sales declining year-on-year by approximately 34.0%. Finished housing inventory and total new housing inventory have been increasing to a 3.4 month supply and 6.3 month supply, respectively, each slightly above the considered equilibrium level. Finished lot supplies remain at elevated levels of 52.8 months. All numbers are as publicly released by Residential Strategies, Inc. or Metrostudy, leading providers of primary and secondary market information. The Real Estate Center at Texas A&M University has reported that the sales of existing homes remain healthy in our Texas markets, as well, but the year-over- year sales pace has fallen between 15 and 20% in each of the four largest Texas markets though the months supply of inventory levels generally have fallen. The number of months of home inventory for sale in Austin, San Antonio, Houston, Dallas, Fort Worth and Lubbock is 5.5 months, 7.6 months, 6.5 months, 6.2 months, 5.9 months, and 5.4 months, respectively. A 6-month supply of inventory is considered a balanced market with more than 6 months of inventory generally being considered a buyer’s market and less than 6 months of inventory generally being considered a seller’s market. As of December 2008, the number of existing homes sold year-to-date in (a) Austin is 22,393, down 20.1% year-on-year; (b) San Antonio is 19,313, down 19.4% year-on-year; (c) Houston is 65,072, down 16.2% year-on-year, (d) Dallas is 50,477, down 15.4% year-on-year, (e) Fort Worth is 9,679, down 16.1% year-on-year, and (f) Lubbock is 3,245, down 6.9% year-on-year.
The OFHEO reports that Texas had healthy existing home price appreciation between the fourth quarter of 2007 and the fourth quarter of 2008 of 2.09%. That same report provides that existing home price appreciation between the fourth quarter of 2007 and the fourth quarter of 2008 for (a) Austin is 4.44%, (b) Houston is 3.72%, (c) Dallas is 1.86%, (d) Fort Worth is 1.21%, and (e) Lubbock is 4.55%. The city of San Antonio experienced a fourth quarter year-over-year price decline of 1.62%. The OFHEO tracks average house price changes in repeat sales or refinancings of the same single-family properties utilizing conventional, conforming mortgage transactions.
In managing and understanding the markets and submarkets in which we purchase, we monitor the fundamentals of supply and demand. We monitor the economic fundamentals in each of the markets in which we purchase loans, analyzing demographics, household formation, population growth, job growth, migration, immigration and housing affordability. We also monitor movements in home prices and the presence of market disruption activity, such as investor or speculator activity that can create false demand and an oversupply of homes in a market. Further, we study new home starts, new home closings, finished home inventories, finished lot inventories, existing home sales, existing home prices, foreclosures, absorption, prices with respect to new and existing home sales, finished lots and land, and the presence of sales incentives, discounts, or both, in a market.
The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing for acquisition, construction and permanent mortgages, interest rate levels and demand for housing. Sales of new homes are also affected by the condition of the resale market for used homes, including foreclosed homes. Housing demand is, in general, adversely affected by increases in interest rates, housing costs and unemployment, by decreases in the availability of mortgage financing, and by a decrease in consumer confidence, which can occur for numerous reasons including increases in energy costs, interest rates, housing costs and unemployment.
Outlook
We expect the difficulties and challenges to the housing and mortgage lending marketplace to continue over the next few years. Those conditions could increase delinquencies and credit losses for us above those we have experienced on a historical basis. However, we believe we have established appropriate reserves for such potential increased losses, and we anticipate that our assets will overall produce positive returns. We believe that United Mortgage Trust has been active in monitoring the current crisis and in implementing various measures to manage our risk and protect our return on our investments by shifting our portfolio to investments that are less directly sensitive to the adverse market conditions and that produce higher yields and by aggressively liquidating non-performing loans. Based on that assessment, we do not anticipate a significant disruption to our normal business operations or on our ability to continue making distributions to our. Nevertheless, our assessments inherently involve predicting future events and we cannot be sure of the length or extent of the current credit crisis and if it continues over an extended period of time, or if its severity increases, its impact on the economy as a whole and on the housing and mortgage lending market could cause us to suffer a higher level of delinquencies and losses than we are currently predicting and result in a material adverse impact on our business.
MERGER AGREEMENT
On June 13, 2006, the Board of Trustees voted to take no action to prevent the Agreement and Plan of Merger dated September 1, 2005 ("Merger Agreement") between the Company and UMTH pursuant to which the Company would have merged with and into UMTH ("Merger") from terminating for failure to satisfy the condition that the Merger would terminate if the Merger was not consummated by June 30, 2006. On June 13, 2006, the Company received a letter from UMTH in which UMTH also expressed the view that the Merger would terminate on June 30, 2006. On June 30, 2006 the merger terminated and as a result the Company wrote-off approximately $1,040,000 in capitalized merger costs as reflected in the statements of income. The Company did not incur any termination penalties as a result of the termination of the merger.
RECOURSE OBLIGATIONS
Prior to July 1, 2003, we made loans with recourse to (1) Capital Reserve Group, Inc. (“CRG”), which is owned by Todd Etter and William Lowe, (2) Ready America Funding Corp. (“RAFC”), which is owned by South Central Mortgage Inc. (“SCMI”), which is owned by Todd Etter and by Eastern Intercorp, Inc., a company owned by Craig Pettit, and (3) SCMI, (we refer to these three companies as the "originating companies"), each of which has used the funds to originate underlying loans that are pledged to us as security for such originating company's obligations to us under the recourse obligations of affiliates. In addition to the originating companies discussed above, the Company made loans with recourse to Wonder Funding; LP (“Wonder”); a Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”). RMC is beneficially owned by Craig Pettit.
When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to us is also due in full.
In addition, some of the originating companies have sold loans to us, which we refer to as the "purchased loans," and have entered into recourse agreements under which the originating company agreed to reimburse us for certain losses that we incur with respect to those purchased loans.
Before year end 2005, our arrangement was if the originating company foreclosed on property securing an underlying loan, or if we foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to us associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to us an unsecured deficiency note in the amount of the deficiency.
The owners of the originating companies are among the founders of UMT Holdings. Since July 1, 2003 they have originated interim mortgage loans through UMT Holdings, rather than through the originating companies. As a result, the originating companies do not intend to borrow additional funds from or to sell additional loans to us.
On March 30, 2006, but effective December 31, 2005, each originating company agreed to give us secured promissory notes to consolidate (1) all outstanding amounts owed by such originating company to us under the recourse obligations of such originating company and the deficiency notes described above and (2) the estimated maximum future liability to us under the recourse arrangements described above. Each originating company issued to us a secured variable amount promissory note dated December 31, 2005 (we refer to each of those notes as a “Secured Note”) in the initial principal amounts shown below. The initial amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to possible increases up to the maximum amounts shown below, if losses are incurred upon the foreclosure of purchased loans covered by recourse arrangements. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on Class C units, Class D units and Class EIA units of limited partnership interest of UMTH held by the originating companies as detailed in the following table and the paragraphs following the table.
| Name | Initial principal amount | Balance at December 31, 2008 | Promissory Note principal amount (2) | | Units pledged as security | C Units distributed during 2008 | Units remaining | Nominal Collateral Value (3) | |
| | | | | 4,984 Class C and 2,710 Class D | | 3,752 Class C and 2,710 Class D | |
| | | | | 11,165Class C, 6,659 Class D & 1,066 Class EIA | | 9,530 Class C, 6,659 Class D & | |
| | | | | 4,545 Class C and 3,000 Class D | | 3,077 Class C and 3,000 Class D | |
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| (1) | Wonder is collateralized by an indemnification agreement from RMC in the amount of $1,134,000, which includes the pledge of 3,870 C Units. 2,213 of the pledged C Units also cross-collateralize the RAFC obligation. |
| (2) | The CRG and Wonder balances at December 31, 2008 exceeded the stated principal amount per their variable Secured Notes by approximately $192,000 and $558,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) that we originally anticipated and outpaced the minimum principal reductions scheduled for the loans. |
| (3) | Nominal collateral value does not reflect pledge of D units of limited partnership interest of UMTH held by WLL, Ltd., RAFC and KLA, Ltd. UMTH D units represent equity interests in UMT Holdings, LP. Pledge of the UMTH D units entitles the beneficiary to a pro-rata share of UMTH partnership D unit cash distributions. |
Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG, RAFC and RAF/Wonder Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or 2) the amount of any distributions paid to the originating company with respect to the pledged Class C and EIA units. Effective, October, 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, suspend the principal component of the amortized loans for the period of July 2007 through June 2009, and reduce the interest rate from 10% to 6%.
The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:
| - | UMT Holdings. This guaranty is limited to a maximum of $10,582,336 of all amounts due under the Secured Notes. |
| - | WLL, Ltd., an affiliate of CRG. This guaranty is of all amounts due under Secured Note from CRG, is non-recourse and is secured by an assignment of 2,492 Class C Units and 1,355 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd. |
| - | RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings. |
| - | Wonder. Wonder Funding obligations are evidenced by a note from RAFC (RAFC Wonder Note) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above. |
In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made by UMT Holdings to William Lowe. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to us to secure its guaranty of CRG’s obligations under its Secured Note, we and UMT Holdings entered into an Intercreditor and Subordination Agreement dated as of December 31, 2005 under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to our lien on such units.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
Residential Mortgages, Contracts for Deed, Interim Mortgages and Foreclosed Properties.
As of December 31, 2008, our residential mortgage portfolio, including foreclosed properties, consisted of 323 residential mortgages (including loans in a securitization), 3 contracts for deed, 18 rental properties, 16 vacant properties and 201 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $50,091,000. The average loan in the portfolio had a current annual yield of 13.35%, an investment-to-value ratio of 65.44%, an average UPB of $89,000, and a remaining term of 209 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.
As of December 31, 2007, our mortgage portfolio consisted of 338 residential mortgages (including loans in a securitization), 4 contracts for deed, 1 rental property, 11 vacant properties and 402 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $57,486,000. The average loan in the portfolio had a current annual yield of 12.48%, an investment-to-value ratio of 66.50%, an average UPB of $76,000, and a remaining term of 243 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.
As of December 31, 2006, our mortgage portfolio consisted of 362 residential mortgages (including loans in a securitization), 4 contracts for deed, 1 rental property, 34 vacant properties and 1,090 interim loans. The portfolio had an unpaid principal balance (“UPB”) of approximately $88,307,000. The average loan in the portfolio had a current annual yield of 13.57%, an investment-to-value ratio of 59.43%, an average UPB of $59,000, and a remaining term of 245 months for residential mortgages and contracts for deed. Interim loans have terms of 12 months or less, depending on the collateral securing the interim mortgage and the borrower. The more extensive the rehabilitation work on the property or the construction requirements, the longer the term of the loan. The average construction loan has a term of nine months; the average rehabilitation loan has a term of six months.
RESIDENTIAL MORTGAGE PORTFOLIO TABLE &# 160; As of December 31, | |
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Residential mortgages owned outright | | | | | | | | | | | | |
Contracts for deed owned outright | | | | | | | | | | | | |
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Loans remaining in first securitization | | | | | | | | | | | | |
Loans remaining in second securitization | | | | | | | | | | | | |
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Line of Credit, Affiliate – Land Development Loans.
On June 20, 2006, we entered into a Second Amended and Restated Secured Line of Credit Promissory Note (the "Amendment") with United Development Funding ("UDF"); a Nevada limited partnership that is affiliated with our Advisor, UMTHGS. The Amendment increases to $45 million an existing revolving line of credit facility ("Loan"). The Loan matures on December 31, 2009. The purpose of the Loan is to finance UDF's loans to, and investments in, real estate development projects.
The Loan is secured by the pledge of all of UDF's land development loans and equity investments and is subordinated to certain UDF bank loans and line of credit. Those UDF loans may be first lien loans or subordinate loans.
Through 2007, the Loan interest rate was the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement (see below) to a minimum of 14%.
UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF. In addition, as an enhancement, in October 2006, UDF III entered into a limited guaranty effective as of September 1, 2006 for our benefit (the “UDF III Guarantee”). Pursuant to the UDF III Guarantee, UDF III guaranteed the repayment of an amount up to $30 million with respect to that certain Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF I. The UDF III Guarantee was released effective January 1, 2008, as a result of UDF’s increased net worth.
The Loan is subordinate to UDF Senior Debt, which is defined as all indebtedness due and owing by UDF pursuant to (i) that certain loan guaranty to Colonial Bank in the amount of $8,750,000, (ii) that certain loan to OU Land Acquisition, L.P. in the principal amount of $25,000,000, (iii) a line of credit provided by Textron Financial Corporation in the amount of $30,000,000, and (iv) all other indebtedness of UDF to any national or state chartered banking association or other institutional lender that is approved by Lender in writing.
The lending facility to UDF represents the continuing evolution of the Company's investment policy away from its original investment objective of long term residential mortgages to a portfolio which consists primarily of the increase in the Loan to UDF, an affiliate of our Advisor, lot banking and model home loans. The Company's Trustees believe that the interest rate environment, increasing default rates, which have resulted in lower yields from traditional residential mortgage investments and the recent broader deterioration of the sub-prime mortgage market, requires that we seek other investments that are capable of providing superior returns, credit and collateral for our shareholders. Our Trustees were also influenced by the results of our existing loan arrangement with UDF. From June 2003 through December 2008, UMT has funded to UDF approximately $115 million in first lien, subordinate loans and equity investments and received approximately $115 million in loan and equity repayments.
We anticipate the increasing concentration of our investments in the Loan, lot banking, model home loans and construction loans and that residential mortgages and interim loans will continue to diminish as a significant component of our total investment portfolio.
On June 14, 2006, in connection with the above-described Amendment of our loan to UDF, we entered into a Subordination Agreement with Textron Financial Corporation ("Textron") pursuant to which we agreed to subordinate our existing loan to UDF to the all indebtedness owed to Textron by UDF, including the $45 million credit facility extended to UDF pursuant to the Second Amended and Restated Secured Line of Credit Promissory Note.
The Amendment represents the continuing shift in our investments away from our original investment strategy of investing in residential mortgages and contracts for deed. In late 2007, we began to reduce our investments in loans of 12 months or less in term, made to investors, including affiliates of our Advisor, for the purchase, renovation, and sale of single-family homes (we refer to those investments as "interim mortgages") We continue to increase our investment in our line of credit loan to UDF, lot loans and construction loans. In addition, we intend to invest in model home loans. Based upon the expected loan activity under our above-described amendment of the UDF Loan, we believe that our investments to be made under the Loan will represent approximately 37.5% of the Company's entire portfolio.
On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility (“Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”).
The Loan is the $45,000,000 revolving line of credit facility evidenced by a Second Amended and Restated Secured Line of Credit Promissory Note dated as of June 20, 2006, as modified by an amendment effective September 1, 2006 (as amended, the “Amendment””). The UMT Loan is secured by a security interest in the assets of UDF including UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”).
Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UMT Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UMT Loan increases proportionately. UDF III’s economic interest in the UMT Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UMT Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.
The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Loan and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while UDF III owns an economic interest in the UMT Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. The UMT Loan matures on December 31, 2009. The purpose of the UMT Loan is to finance UDF's investments in real estate development projects. The UMT Loan interest rate is the lower of 14% or the highest rate allowed by law. UDF may use the UMT Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the UMT Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no less than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF. At December 31, 2008 UDF III had funded approximately $38,322,000 to UDF under this agreement.
The UMT Loan is subordinate to UDF Senior Debt, which includes a line of credit provided by Textron Financial Corporation in the amount of $30,000,000, and all other indebtedness of UDF to any national or state chartered banking association or other institutional lender that is approved by UMT in writing.
The Company monitors the line of credit for collectability on a continuing basis based on the affiliate’s payment history. No valuation allowance or charge to earnings was recorded for the years ended December 31, 2008, 2007 and 2006 based on the Company’s evaluation. Outstanding balances were approximately $47,889,000, $25,083,000, and $33,056,000 at year end 2008, 2007, and 2006, respectively.
Properties Pledged as Collateral.
At year end 2008, approximately 38% of the properties securing our interim loan Mortgage Investments were located in Texas, 25% in California, 11% in Tennessee, 6% in Missouri, 4% in Ohio, 3% in each of Georgia, Indiana, and Illinois, 1% or less in 17 other states.
At year end 2007, approximately 58% of the properties securing our interim loan Mortgage Investments were located in Texas, 22% in California, 6% in Tennessee, 3% in each of Missouri, and Georgia, 2% in each of Illinois, and Ohio, and 1% or less in 18 other states.
At year end 2006, approximately 59% of the properties securing our interim loan Mortgage Investments were located in Texas, 10% in Tennessee, 8% in California, 4% in Missouri, 3% in each of Colorado and Georgia, 2% in each of Illinois, Indiana and Ohio, and 1% or less in 17 other states.
We expect to continue making loans in most of the 27 states in which our borrowers, principally UMTHLC and UDF are licensed to do business.
Each of the properties serving as security for our Mortgage Investments is covered by a mortgagee’s title insurance policy and hazard insurance in an amount sufficient to cover the outstanding balance. Some of our mortgage investments are covered by full or limited recourse agreements with note sellers. In making the decision to invest in loans secured by property located in other states, we consider the availability of non-judicial foreclosure, as is available in Texas, to be the primary legal consideration. While Texas does not provide a statutory right of redemption and permits deficiency judgments, we do not rely upon those provisions in the enforcement of our liens and therefore we believe that the risks in mortgage investments in most other states will not be significantly different than those we face in Texas.
Loan Servicing.
We neither buy nor sell servicing rights to the loans we purchase, nor do we retain servicing rights. Residential mortgages and contracts for deed are serviced by PSC, an affiliate of our Advisor. We pay monthly loan servicing fees to Prospect Service Corp., (“PSC”), which is owned by UMTH, of 1/12th of 1/2 of 1% of the UPB of each loan. In addition, we paid a monthly loan servicing fee of 0.8% of the UPB to REOPC, an affiliate of our Advisor, for maintaining our foreclosed properties. This arrangement with respect to interim loans ended in the last quarter 2006; however, PSC continues to service our long term residential loans. Interim loans are serviced by us or by the entity to which we loaned funds, the majority of which are affiliates of our Advisor, including UMTHLC and RAFC. We do not pay monthly servicing fees other than as listed above.
Comparative Income and Expenses.
During the years ended December 31, 2008, 2007 and 2006, total revenues were approximately $11,173,000, $16,833,000, and $17,211,000 respectively, representing an increase (decrease) over the prior year of ($5,660,000) or (34%), ($378,000) or (2%), and $2,197,000 or 15% respectively. The 2008 and 2007 decreases were primarily attributable to the decline in our outstanding interim mortgage investments in the fourth quarter of 2007 and the reduced balance in the UDF line of credit. The decline in outstanding interim mortgages resulted from UMTHLC obtaining third party financing from another lender in October 2007 and reduced leverage on our entire portfolio with the expiration of the Company’s existing credit facility. See Liquidity and Capital Resources section for further discussion. The increase in 2006 was primarily due to use of leverage, which allowed us to grow our interim loan portfolio by approximately 13% and our UDF investment by 9%.
Revenue derived from affiliates increased (decreased) ($5,021,000) or (36%), $822,000 or 6% and $1,938,000 or 17% and revenues from non-affiliates increased (decreased) ($639,000) or (23%), ($1,200,000) or (30%) and $259,000 or 7% during the years ended December 31, 2008, 2007 and 2006, respectively. The 2008 decrease in affiliate income is due to the reduction in the UMTHLC interim mortgages outstanding, resulting from their obtaining third party financing in October 2007, and the lower outstanding balance in the UDF LOC. The 2007 and 2006 increases were due primarily to the growth in the UMTHLC interim mortgage portfolio and the higher balance outstanding in the UDF LOC compared to the prior years.
Total expenses during 2008, 2007, and 2006 were approximately $4,390,000, $6,025,000, and $7,103,000, respectively, representing an increase (decrease) over the prior year of (27%), (15%), and 23%, respectively. The 2008 decrease was primarily attributable to reduced interest expense, as the Company’s line of credit matured in November 2007. The decrease in 2007 and the increase in 2006 were primarily attributable to the non-recurring merger expenses recognized in 2006 of approximately $1,040,000. Listed below are the significant expense accounts and explanations of change:
MERGER EXPENSES: One time charge during 2006.
Upon termination of the merger agreement between UMT and UMTH, we wrote-off capitalized merger costs of approximately $1,040,000.
PROVISION FOR LOAN LOSSES: decreased 10% in 2008, decreased 13% in 2007, and increased 31% in 2006, respectively.
The increase or decrease in provisions for loan losses between years depending on how many loans are foreclosed since we create the allowance for loan losses on default rates and foreclosure trends. The tables below illustrate loss rates as a percentage of nonrecourse portfolio for 1) interim loans and 2) residential mortgages and contracts for deed:
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| Unpaid principal balance at year ends of unaffiliated loans | | Loss rate as a percentage of unaffiliated loans |
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Residential Mortgages and Contracts for Deed: |
| Unpaid principal balance including securitized loans | | Loss rate as a percentage of loans |
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Loan loss reserves are established when a trend becomes clear that indicates the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. During 2008 we calculated loan loss reserve at a rate of 47.4% of the unpaid principal balance of foreclosed residential mortgages, contracts for deed and interim loans. The Company’s three year historical default rate for residential mortgages and contracts for deed is approximately 6.0% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company’s three year historical default rate for interim mortgages is approximately 2.0%.
INTEREST EXPENSE: Decreased 100% in 2008, decreased 17% in 2007, and increased 248% in 2006.
The Company’s primary credit facility matured in November 2007. We used our credit facility to provide additional funds for investment. The use of our credit facility depended on the number of suitable investments available at any given time and the amount of cash we have on hand. Interest expense fluctuated based on 1) how heavily we rely on our credit facility and 2) the increase or decrease in the interest rate we pay under the credit facility. Interest expense was approximately $1,000, $1,934,000, and $1,647,000 respectively, in 2008, 2007, and 2006. See Liquidity and Capital Resources section for further discussion.
LOAN SERVICING FEES: Decreased 34%, 75%, and 15% in 2008, 2007, and 2006 respectively
Loan servicing fees paid to PSC and REOPC for servicing some of our Mortgage Investments decreased as a result of the amount we had invested in residential mortgages and contracts for deed which decreased 2%, 1%, and 6% in 2008, 2007, and 2006, respectively. Further decreases in the loan servicing fee are expected as the remaining loans in the portfolio prepay and as principal amortizes. Loan servicing fees were approximately $6,000, $10,000, and $38,000 in 2008, 2007, and 2006, respectively.
TRUST ADMINISTRATION FEES: Increased 23% in 2008, increased 3% in 2007 and decreased 5% in 2006.
The trust administration fee was paid to our Advisor. We engaged a new Advisor in August 2006 when UMT Advisors, Inc. (“UMTA”) was replaced by UMTHGS. The current monthly fee is calculated as 1/12th of 1% of our average invested assets. The trust administration fee increases and decreases as our invested assets increase or decrease as we draw on or pay down the credit facility that we use to acquire mortgage investments. As consideration for granting the Advisory Agreement to UMTHGS, the Advisor agreed to (i) pay a $500,000 fee to us and (ii) assume responsibility for payment of $377,300 owed to us by our former Advisor. Monthly payments of (i) and (ii) above began in August 2006 and were made in twelve equal installments. The $500,000 fee was netted against the trust administration fee and paid in full. Net trust administration fees paid in 2008, 2007, and 2006 were approximately $1,074,000, $872,000, and $843,000, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES: Increased 34%, 1%, and 52% in 2008, 2007, and 2006, respectively.
The major categories of general and administrative expenses include transfer agent fees, legal fees, printing and reproduction costs, accounting and audit fees, recording fees, trustee fees and insurance. The increase in 2008 expense was primarily due to REO expenses for the 119 interim properties foreclosed in 2008. 2007 expenses were consistent with those of 2006. The increase in 2006 expense was primarily due to legal fees relating to merger and general corporate activities. General and administrative expenses were approximately $1,284,000, $955,000, and $943,000, respectively, in 2008, 2007, and 2006.
Operating expense as a percentage of income, net of interest expense, merger expense and provision for loan losses was 21.15%, 10.91%, and 10.60%, for 2008, 2007, and 2006, respectively. Operating expense as a percentage of average invested assets was 1.82%, 1.62%, and 1.55%, for the years, respectively.
Net income was approximately $6,783,000, $10,808,000, and $10,108,000 for 2008, 2007, and 2006, respectively, representing a decrease of 37% in 2008, and an increase of 7%, and 9% in 2007 and 2006, respectively. The decrease in 2008 was driven primarily by reduced income from affiliates due to the pay-off (reduction) of UMTHLC interim mortgages in the fourth quarter of 2007 and the pay-off of the UDF line of credit in September 2008. This line of credit had an average monthly balance of approximately $12,700,000 in 2008 compared to approximately $25,000,000 in 2007. The increase in 2007 was primarily attributable to the lack of non-recurring merger expenses that were recognized in 2006. The improvement in 2006, despite the one time charge of merger costs, was attributable to the decrease in provision for loan losses, use of leverage to increase our investment in interim loans, less uninvested cash and higher portfolio yield. Earnings per share in 2008, 2007, and 2006 were $1.04, $1.59, and $1.45, for the respective years. Use of leverage was $0 in 2008, compared to $22.0 million in 2007 and $18.9 million in 2006, not impacting earnings in 2008 and positively impacting earnings in 2007 and 2006. Mortgage Investment yields were approximately 13.35%, 12.48%, and 13.63% in 2008, 2007, and 2006, respectively, further positively impacted earnings. Average daily cash balances of $4,073,000 in 2008, compared to $1,145,000 in 2007 and $1,369,000 in 2006, again positively impacted earnings in successive years.
Foreclosed Properties.
Affiliated Foreclosed Properties. We do not reclassify foreclosed loans that have been pledged to us as collateral (an “underlying loan”) for recourse loans we have made to affiliates of our Advisor, because our affiliates are obligated to perform under the term of those recourse loans with us (“affiliate loans”). If the borrower on an underlying loan defaults, the affiliate has the option to accrue interest payable to us while they bring the underlying loan current in its payments. We, in turn, accrue an interest receivable on the recourse loan. When the underlying loan becomes a paying loan again, the affiliate resumes paying us interest on the recourse loan. If the underlying loan is foreclosed and the real estate sells, our affiliate pays us all accrued interest and principal from the proceeds from the sale of the property. Any deficiency is reclassified to Recourse Obligations, affiliates.
Unaffiliated Foreclosed Properties. We began 2008, 2007, and 2006 with 12, 15, and 34 foreclosed residential mortgage and contracts for deed, respectively, and foreclosed an additional 15, 15, and 46 loans during the respective years. We sold 8, 18, and 65, foreclosed properties in 2008, 2007 and 2006, respectively, leaving 19, 12, and 15 foreclosed properties at the end of each of the three years, respectively. Non-affiliate foreclosed properties as a percentage of total unaffiliated residential mortgages and contracts for deed at year end were 7.99%, 3.64%, and 5.61%, respectively.
We began 2008, 2007, and 2006 with 6, 19, and 32 foreclosed interim loans, respectively, and foreclosed an additional 119, 4, and 3 properties during the respective years. We sold 21, 17, and 16 foreclosed properties, during 2008, 2007, and 2006, respectively, leaving 104, 6, and 19 foreclosed interim loans at the respective year ends. In December of 2006 we ceased funding interim loans for the construction of single family homes orginated by an unaffiliated lender, Residential Development Corporation and began liquidating properties securing Residential Development Corporation non-performing loans. Accordingly, 2008 foreclosures were significantly higher than prior years. Unaffiliated foreclosed properties as a percentage of total unaffiliated interim loans at year end were 88.46%, 3.67%, and 8.07% respectively. The increase in this percentage in 2008 was due primarily to the foreclosures in the RDC interim loan portfolio which are discussed below
The following tables detail major categories of foreclosed loans for each of the last three fiscal years:
RESIDENTIAL MORTGAGES & CFDs | | | |
Number of loans defaulted at beginning of year | | | |
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Additional defaults during year | | | |
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Defaulted properties disposed of during year | | | |
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Number of loans defaulted at end of year | | | |
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Number of loans defaulted at beginning of year | | | |
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Additional defaults during year | | | |
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Defaulted properties disposed of during year | | | |
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Number of loans defaulted at end of year | | | |
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Changes in Our Mortgage Portfolio.
The Company no longer purchases interim loans that are secured by modular and manufactured homes or construction loans or residential mortgages or contracts for deed, and we are reducing our investments in interim loans secured by conventionally built homes. Such balances will decrease over time as the existing portfolios liquidate. We plan to continue to invest in land development loans, finished lot loans, model home loans and construction loans secured by conventionally built houses because, 1) land development loans and finished lot loans have provided us with suitable collateral positions, well capitalized borrowers and attractive yields; 2) interim loans, while offering full recourse from our borrowers and attractive yields are dependent on sub-prime mortgage products to facilitate the sale of the properties securing our loans; and, 3) model home and construction loans are expected to provide us with suitable collateral positions, well capitalized borrowers and attractive yields. In addition, blended yields for land development loans and finished lot loans have produced higher returns than those of residential mortgages and contracts for deed. Model home and construction loans are expected to produce higher yields commensurate with land development loans, finished lot loans and interim loans. As we phase out of interim loans secured by modular and manufactured homes and reduce out investments in interim loans secured by conventionally built homes, we will increase the percentage of our portfolio invested in land development loans, finished lot loans, and model home and construction loans, until market conditions indicate the need for an adjustment of the portfolio mix.
The table below summarizes our gross mortgage portfolio by asset type as of December 31, 2008, 2007, and 2006:
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First lien secured interim mortgages 12 months or less and residential mortgages & contracts for deed | | | |
Secured, subordinate LOC to UMTH Lending Co., L.P. | | | |
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| (1) | Interim loans are primarily comprised of advances made to UMTHLC to fund their loan originations. Through October, 2007, the Company was UMTHLC’s primary source of capital. The increase in outstanding loans between 2006 and 2005 was directly attributable to their underlying loan originations and related activity. Effective October, 2007, UMTHLC obtained a line of credit with a third party lender, proceeds from which were used to pay down approximately $18,920,000 of outstanding borrowings from the Company. The remaining decrease between years represents the net payment activity on the outstanding loan portfolio as a whole. Management anticipates these types of loans will become a smaller percentage of our mortgage portfolio as originations funded continue to decline and existing loans pay off. |
| (2) | Land development loans represent one of the primary investment focuses of management going forward as they provide the Company suitable collateral positions, well capitalized borrowers and attractive yields. The December 2007 balance declined compared to December 2006 due to approximately $7,800,000 of pay-offs received within 45 days prior to year-end. |
Deficiency Notes – Affiliate and Non-Affiliate
The Company has made loans in the normal course of business to affiliates and non-affiliates, the proceeds from which have been used to originate underlying loans that are pledged to us as security for such obligations. When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full. If the borrower or the Company foreclosed on property securing an underlying loan, or if we foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to us associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to the Company an unsecured deficiency note in the amount of the deficiency.
As of December 31, 2008, the Company had two deficiency notes with non-affiliates in the amount of approximately $6,981,000. One note in the amount of approximately $ 1,726,000 bears interest at a rate of 14% per annum. The second note is in the amount of approximately $5,255,000 and the company does not accrue interest on this note as the underlying collateral value approximates the note balance. As of December 31, 2007, the Company had one deficiency note with a non-affiliate in the amount of approximately $1,726,000. The note bears interest at a rate of 14% per annum.
As of December 31, 2007, UMTHLC issued to the Company a variable amount promissory note in the amount of $5,100,000 to evidence its deficiency obligations to the Company. The initial principal amount of the note was approximately $1,848,000. The principal balance as of December 31, 2008 is $5,332,000. The principal balance will fluctuate from time to time based on the underlying loan activity and the amount of deficiencies realized by the affiliate. The note bears interest at a rate of 10%, and requires monthly principal and interest payments based on a ten-year amortization for the outstanding principal balance. The note is secured by a limited guaranty by UMTHGS, the Advisor, equal to a monthly amount not to exceed 33% of the advisory fee received by UMTHGS under the terms of its advisory agreement with the Company. No affiliate deficiency notes existed as of December 31, 2006.
Dividends and Distributions to Shareholders.
Distributions per share of beneficial interest were $1.35, $1.47, and $1.40 per weighted share for 2008, 2007, and 2006, respectively, on earnings of $1.04, $1.59, and $1.45, respectively. In 2008, 2007, and 2006 we distributed approximately 130%, 92%, and 97% of our net income. The portion of the distributions that does not represent earnings represents return of capital. (See the table below.) Distributions declared by our trustees during 2008, 2007, and 2006 were at an annualized rate of return of 6.8%, 7.4%, and 7.0%, respectively. We are under no obligation to pay dividends at that same rate and from time to time the rate at which we pay dividends may be adjusted by our trustees.
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Amount paid in excess of earnings per Share | | | |
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEARS ENDED
DECEMBER 31, 2008, 2007 and 2006
We use funds made available from our DRP, funds made available under bank lines of credit and the proceeds from repayments of principal and interest on loans we have made to purchase mortgage investments. We do not have commitments to purchase any mortgage investments but rather purchase them, as funds are available. (Dollars are approximate.) Shares are offered under our DRIP without the payment of any commissions.
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Dividend reinvestment proceeds | | | |
Number of shares returned to treasury | | | |
Value of shares repurchased | | | |
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Principal receipts on first lien mortgage notes | | | |
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Net borrowings - credit line | | | |
Net borrowings - line of credit, affiliate | | | |
As of December 31, 2008, we had issued an aggregate of 8,218,591 shares, with 1,782,022 shares repurchased and retired to treasury, leaving 6,436,569 shares outstanding. Total capital raised from share issuances was approximately $164,172,000.
As of December 31, 2007, we had issued an aggregate of 8,110,684 shares, with 1,460,768 shares repurchased and retired to treasury, leaving 6,649,916 shares outstanding. Total capital raised from share issuances was approximately $162,014,000.
As of December 31, 2006, we had issued an aggregate of 7,985,423 shares, with 1,067,980 shares repurchased and retired to treasury, leaving 6,917,443 shares outstanding. Total capital raised from share issuances was approximately $159,508,000.
During 2006 we increased our then existing line of credit with a bank from $17 million to $30 million. The line-of-credit payable was collateralized by certain interim loans. Interest on the outstanding balance accrued at the higher of the Prime Rate or the sum of the Federal Funds Rate plus 1/2% per annum. The rate of interest at December 31, 2006 and 2005 was 8.75% and 6.52%, respectively. The note expired November 8, 2007. Management is currently negotiating with lenders to replace this credit facility on similar or more favorable terms than the expiring credit facility. Under the terms of its Declaration of Trust, the Company may borrow an amount up to 50% of our Net Assets (total assets less liabilities). We had no line of credit facility at December 31, 2008. The amount outstanding under the line of credit was approximately, 0%, and 25% of Net Assets, respectively and the outstanding balances on the credit facility were approximately $0, and $27,977,000, at December 31, 2007 and 2006, respectively.
Since inception and as of December 31, 2008, we have invested an aggregate of approximately $530 million in interim loans from various sources, and UDF had drawn down an aggregate of $115 million from us on its line of credit. In 2008 we funded approximately $7 million in interim loans and $16 million in draws to UDF, compared to approximately $49 million in interim loans and $2 million funded to UDF in 2007, and approximately $88 million in interim loans and $17 million funded to UDF in 2006. The following table sets forth, as a percentage of total funds invested with all sources, the percentage of mortgage investments made to affiliates during 2008, 2007, and 2006.
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Total of affiliate mortgage investments | | | |
The following table shows the dollar amounts of investments funded with affiliates of our Advisor in the three comparable years:
In 2006 we took direct assignment, with full recourse, of all remaining CRG properties. The funds cited in the table above are expenses that we incurred against properties formerly owned by CRG, and are fully recoursed. In addition, we no longer fund draws directly to RAFC, but we do fund draws directly to vendors for projects that are active and serviced by RAFC.
Outstanding balances for interim loans purchased from affiliates of our Advisor and the UDF line of credit at December 31, 2008, 2007, and 2006 purchased from affiliates were:
We no longer purchase residential mortgages or contracts for deed other than to carry back a note on the sale of a foreclosed property or to reclassify an interim loan.
Transactions With Related Parties.
We do not have employees. All administrative services and facilities are provided to us by our Advisor under the terms of an Advisory Agreement effective August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2008). The services of our Advisor, UMTHGS, include all day-to-day administrative services including managing our development of investment guidelines, overseeing servicing, negotiating purchases of loans and overseeing the acquisition or disposition of investments and managing our assets. We pay UMTHGS a monthly trust administration fee, depending on our annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month. UMTHGS paid us a consideration of $500,000 over a 12 month period, ending July 31, 2007, for entering into the Advisory Agreement with them. In addition they paid the $377,000 receivable from our former Advisor, UMTA over the same 12 month period. The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which our net income for a year exceeds a 10% per annum non-compounded cumulative return on our adjusted contributions. No incentive fee was paid during 2007 or 2006. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 Shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2008, 2007 and 2006, the Advisor has not received options to purchase shares under this arrangement.
The Advisor and its affiliates are also entitled to reimbursement of costs of goods, materials and services obtained from unaffiliated third parties for our benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for us or to dispose of any of our investments. During 2008 and 2007, the Company paid the Advisor $76,000 each year as reimbursement for costs associated with providing shareholder relations activities. No such costs were reimbursed in 2006.
The Advisory Agreement provides for the Advisor to pay all of our expenses and for us to reimburse the Advisor for any third-party expenses that should have been paid by us but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses (except those relating to office space occupied by the Advisor that is maintained by us) and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from us.
The Advisor Agreement also provides for us to pay to the Advisor as debt placement fee. We may engage the Advisor, or an Affiliate of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit.
Loan servicing fees are paid to PSC and were paid to REOPC. The fees are paid monthly and calculated as 1/12th of 1/2% and 0.8% of the outstanding principal balance of each loan or value of each property, respectively. In addition, each received real estate sales commissions on a scale of 1% to 4% of the sales price of a foreclosed property when the property is liquidated.
Below is a chart listing fees paid to PSC, REOPC and the Advisor in the past three years:
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Trust management fee, net | | | | |
Investor relations service fee | | | | |
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Critical Accounting Policies.
We have prepared our financial statements in accordance with accounting principles generally accepted in the United States (GAAP). GAAP represents a comprehensive set of accounting and disclosure rules and requirements, the application of which requires management judgments and estimates. In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, we have identified the most critical accounting policies upon which our financial statements are based on as follows:
Interest Income Accrual.
The Company’s portfolio of residential mortgages, contracts for deed, interim loans and lines of credit produce monthly interest income however, the Company may not receive interest income on a particular loan if a borrower fails to make its monthly interest payment.
The Company has two types of loans and its accrual method differs for them: nonrecourse loans and recourse loans.
A nonrecourse loan is one that is not currently covered under a recourse agreement. The majority of the Company’s nonrecourse loans are residential mortgages and contracts for deed.
A recourse loan is one that is covered under a recourse agreement that obligates either a third party guaranteeing the performance of a loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan to the Company if the underlying borrower defaults. The majority of the Company’s recourse loans are interim loans made to borrowers that make corresponding loans which are pledged to the Company as security for the borrower's obligations to the Company. All loans that the Company makes to affiliates of its Advisor are recourse loans.
With respect to nonrecourse loans, the Company will accrue interest, if based on the underlying borrower’s payment history and based on analysis by the loan servicing staff, when applicable, it is determined that the likelihood of an interest payment being made is probable. The Company will cease accruing interest when the likelihood that an interest payment will be made is less than probable, generally if a payment is more than 60 days past due. If and when the loan is foreclosed, the Company no longer considers the property to be income producing and reclassifies it as foreclosed.
With respect to recourse loans, the Company’s borrower, or a guarantor, is obligated to pay all interest accrued and principal at the end of the loan term, or extensions thereof. As a result, the Company continues to accrue interest on recourse loans even if the likelihood that the underlying borrower will make an interest payment is less than probable. Interest on recourse loans continues to accrue until the loan is fully paid off.
There is no assurance that the interest income accrued by the Company will be paid by a borrower. When income is accrued with respect to a foreclosed loan, the Company sells the mortgage property and receives proceeds from the sale. The Company first applies the proceeds to any accrued interest related to the loan and then applies the balance of the proceeds to the outstanding loan balance. If the proceeds from the sale of the property are not sufficient to reduce the outstanding loan balance to zero, the remaining balance is referred to as the “charge-off amount.” The charge-off amount is recorded against the mortgage investment loss reserve: accrued interest income, plus the outstanding loan balance, less proceeds from the sale of the property equals the amount charged-off against loss reserves. If the loan was a recourse loan, the Company’s borrower or a guarantor is obligated to pay the remaining balance with interest and the borrower or guarantor, as applicable, would deliver a deficiency note (“deficiency note”) to the Company for the remaining balance.
On March 30, 2006, but effective as of December 31, 2005, all outstanding amounts owed by certain of the Company’s affiliates under (1) loans made by the Company to such affiliates, (2) deficiency notes from such affiliates to the Company and (3) the estimated maximum future liability to the Company under recourse arrangements, were consolidated into secured, variable amount promissory notes delivered by such affiliates to the Company, and reflected as recourse obligations in the accompanying balance sheets.
Loan Loss Reserves.
Loan loss reserves are established when it becomes clear that the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. During 2008 the Company calculated its loan loss reserve at a rate of 47.4% of the unpaid principal balance of foreclosed residential mortgages, contracts for deed and interim loans.The Company's three year historical default rate for residential mortgages and contracts for deed is approximately 6.0% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company's three year historical default rate for interim mortgages is approximately 2.0%.
The changes in the reserve for loan losses during the years ended December 31, 2008, 2007, and 2006 are summarized as follows:
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Balance, beginning of year | | | |
Provision for loan losses | | | |
Reduction of values of foreclosed mortgages and loans charged off | | | |
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In December of 2006 we ceased funding interim loans for the construction of single family homes (“Construction Loans”). Prior to December of 2006 we funded Construction Loans through an unaffiliated lender, Residential Development Corp. (“RDC”). In 2007 and 2008, we experienced increased delinquency and foreclosures on loans funded to RDC. Throughout 2007 and 2008, we implemented the following actions with regard to RDC:
| - | Ceased funding loans to RDC |
| - | Began aggressive liquidation of properties securing non-performing loans |
| - | Engaged the services of asset managers to assist in the management of RDC delinquencies and liquidation of RDC assets |
| - | Began detailed examination of RDC lending practices and collateral positions |
| - | Re-evaluated market values of properties securing the RDC loans |
| - | Began review of all recourse afforded us by RDC and its principal owner |
We intend to continue these efforts throughout 2009 and until the RDC portfolio is fully liquidated. Throughout 2008 and 2007 UMT allocated $2,286,000 and $1,347,000 of reserves respectively, for losses associated with the RDC portfolio. In the event that aggressive liquidation of the portfolio may result in additional losses, we will provide for additional reserves as needed.
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
As of December 31, 2008 and 2007, the Company does not have any contractual obligations to make future payments under any debt obligations or long-term lease agreements.
DIVIDENDS DECLARED AND DISTRIBUTIONS MADE
During the year ended December 31, 2008, we declared dividends and made distributions on a monthly basis as shown below. We maintained a 6.8% annualized dividend rate during the year and distributed approximately 130% of our net income. We are under no obligation to make distributions at any particular rate, although we are obligated to distribute 90% of our REIT Taxable Income in order to continue to qualify as a REIT for federal income tax purposes. The amount distributed in excess of earnings per share represents return of capital.
| | For the Years Ended December 31, |
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Amount paid in excess of earnings per Share | | | |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We may be exposed to interest rate changes primarily in connection with obtaining new lines of credit. The Company had no line of credit in place at December 31, 2008. During the negotiations for our $30 million credit facility, a floating interest rate was negotiated. A higher interest rate may have a negative impact on earnings, but we do not anticipate a significant increase during 2008.
As of December 31, 2008 and 2007, the Company had no long-term borrowings.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
UNITED MORTGAGE TRUST
INDEX TO FINANCIAL STATEMENTS
| | Page No. |
| Report of Independent Registered Public Accounting Firm | 37 | |
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| Consolidated Balance Sheets as of December 31, 2008 and 2007 | 38 | |
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| Consolidated Statements of Income for the for the Years Ended December 31, 2008, 2007 and 2006 | 39 | |
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| Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006 | 40 | |
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| Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006 | 41 | |
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| Notes to Consolidated Financial Statements | 42 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
United Mortgage Trust
We have audited the accompanying consolidated balance sheets of United Mortgage Trust as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the three years ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Mortgage Trust as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the three years ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
/s/ Whitley Penn LLP
Dallas, Texas
March 31, 2009
UNITED MORTGAGE TRUST
CONSOLIDATED BALANCE SHEETS
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Cash and cash equivalents | | | | | | | | |
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Investment in trust receivable | | | | | | | | |
Interim mortgages, affiliates | | | | | | | | |
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Allowance for loan losses | | | | | | | | |
Total mortgage investments | | | | | | | | |
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Line of credit receivable, affiliate | | | | | | | | |
Line of credit receivable, non-affiliates | | | | | | | | |
Accrued interest receivable | | | | | | | | |
Accrued interest receivable, affiliates | | | | | | | | |
Recourse obligations, affiliates | | | | | | | | |
Residential mortgages and contracts for deed foreclosed, net | | | | | | | | |
Interim mortgages foreclosed, net | | | | | | | | |
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Deficiency notes, affiliates | | | | | | | | |
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Liabilities and Shareholders’ Equity | | | | | | | | |
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Accounts payable and accrued liabilities | | | | | | | | |
Participation payable, affiliate | | | | | | | | |
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Commitments and contingencies | | | | | | | | |
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Shares of beneficial interest; $0.01 par value; 100,000,000 shares authorized; 8,218,591 and 8,110,684 shares issued, respectively; and 6,436,569 and 6,649,916 outstanding, respectively | | | | | | | | |
Additional paid-in capital | | | | | | | | |
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Cumulative distributions in excess of earnings | | | | | | | | |
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Less treasury stock of 1,782,022 and 1,460,768 shares, respectively, at cost | | | | | | | | |
Total shareholders' equity | | | | | | | | |
Total liabilities and shareholders' equity | | | | | | | | |
See accompanying notes to consolidated financial statements.
UNITED MORTGAGE TRUST
CONSOLIDATED STATEMENTS OF INCOME
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Interest income derived from affiliates | | | | | | | | | | | | |
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General and administrative | | | | | | | | | | | | |
Provision for loan losses | | | | | | | | | | | | |
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Net income per share of beneficial interest | | | | | | | | | | | | |
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Weighted average shares outstanding | | | | | | | | | | | | |
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Distributions per weighted share outstanding | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
UNITED MORTGAGE TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2008, 2007 and 2006
| | Shares of Beneficial Interest | Additional | Advisor's | Cumulative Distributions | | | |
| | Shares | Par Value | Paid-in Capital | Reimburse-ment | in Excess of Earnings | Treasury Shares | Treasury Stock | Total |
Balance at December 31, 2005 | | | | | | | | |
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Proceeds from shares issued | | | | | | | | |
Purchase of treasury stock | | | | | | | | |
Dividends ($1.40 per share) | | | | | | | | |
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Balance at December 31, 2006 | | | | | | | | |
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Proceeds from shares issued | | | | | | | | |
Purchase of treasury stock | | | | | | | | |
Dividends ($1.47 per share) | | | | | | | | |
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Balance at December 31, 2007 | | | | | | | | |
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Proceeds from shares issued | | | | | | | | |
Purchase of treasury stock | | | | | | | | |
Dividends ($1.35 per share) | | | | | | | | |
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Balance at December 31, 2008 | | | | | | | | |
See accompanying notes to consolidated financial statements.
UNITED MORTGAGE TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | 2006 | |
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Adjustments to reconcile net income | | | | | | | | | | | |
to net cash provided by operating activities: | | | | | | | | | | | |
Provision for loan losses | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | |
Net amortization of discount on mortgage notes | | | | | | | | | | | |
and loan acquisition costs | | | | | | | | | | | |
Changes in assets and liabilities: | | | | | | | | | | | |
Accrued interest receivable | | | | | | | | | | | |
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Accounts payable and accrued liabilities | | | | | | | | | | | |
Net cash provided by operating activities | | | | | | | | | | | |
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Investment in first lien mortgage notes | | | | | | | | | | | |
Principal receipts on first lien mortgage notes | | | | | | | | | | | |
Investment in interim mortgages | | | | | | | | | | | |
Principal receipts on interim mortgages | | | | | | | | | | | |
Investments in interim mortgages, affiliates | | | | | | | | | | | |
Principal receipts on interim mortgages, affiliates | | | | | | | | | | | |
Proceeds from (Investments in) recourse obligations, affiliates | | | | | | | | | | | |
Line-of-credit receivable, affiliate | | | | | | | | | | | |
Line-of-credit receivable, non-affiliate | | | | | | | | | | | |
Receivable from affiliate | | | | | | | | | | | |
Investments in residential mortgages and contracts for deed | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | | | | | | | | | |
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Proceeds from issuance of shares of beneficial interest | | | | | | | | | | | |
Net borrowings (repayments) on line-of-credit | | | | | | | | | | | |
Purchase of treasury stock | | | | | | | | | | | |
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Net cash provided by (used in) financing activities | | | | | | | | | | | |
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Net increase (decrease) in cash and cash equivalents | | | | | | | | | | | |
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Cash and cash equivalents at beginning of year | | | | | | | | | | | |
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Cash and cash equivalents at end of year | | | | | | | | | | | |
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Supplemental Disclosure of Cash Flow Information | | | | | | | | | | | |
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Non-Cash Financing and Investing Activity | | | | | | | | | | | |
Transfers of affiliate and non-affiliate loans to foreclosed properties or recourse obligations | | | | | | | - | | | - | |
Participation receivable, affiliate | | | | | | | - | | | - | |
Participation payable, affiliate | | | | | | | - | | | - | |
Participation accrued interest receivable, affiliate | | | | | | | - | | | - | |
| Participation accrued interest payable, affiliate | | $ | 508,378 | | | | - | | | - | |
See accompanying notes to consolidated financial statements.
UNITED MORTGAGE TRUST
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
THE COMPANY
United Mortgage Trust (the “Company”) is a Maryland real estate investment trust that qualifies as a real estate investment trust (a “REIT”) under federal income tax laws. The Company invests exclusively in: (i) first lien secured interim mortgage loans with initial terms of 12 months or less for the acquisition and renovation of single-family homes, which we refer to as “Interim Loans”; (ii) secured, subordinate line of credit to UMTH Lending Company, L.P. for origination of Interim Loans; (iii) lines of credit and secured loans for the acquisition and development of single-family home lots, referred to as “Land Development Loans”; (iv) lines of credit and loans secured by entitled and developed single-family lots, referred to as “Finished Lot Loans”; (v) lines of credit and loans secured by completed model homes, referred to as “Model Home Loans”; (vi) loans provided to entities that have recently filed for bankruptcy protection under Chapter 11 of the US bankruptcy code, secured by a priority lien over pre-bankruptcy secured creditors, referred to as “Debtor in Possession Loans”, (vii) lines of credit and loans, with terms of 18 months or less, secured by single family lots and homes constructed thereon, referred to as “Construction Loans; and (viii) first lien secured mortgage loans with terms of 12 to 360 months for the acquisition of single-family homes, referred to as “Residential Mortgages”. We collectively refer the above listed loans as “Mortgage Investments”. Additionally, the Company’s portfolio includes obligations of affiliates of our Advisor, which we refer to as “recourse loans.”
The Company has no employees. The Company pays a monthly trust administration fee to UMTH General Services, L.P. (“UMTHGS” or “Advisor”), a subsidiary of UMT Holdings, L.P. (“UMTH”), a Delaware real estate finance company and affiliate, for the services relating to its daily operations. The Company’s offices are located in Grapevine, Texas.
THE ADVISOR
The Company uses the services of UMTHGS to manage its day-to-day operations and to recommend investments for purchases. The Company’s President, Christine “Cricket” Griffin, is a partner of UMTH. Besides Ms. Griffin, other UMTH partners and officers include David A. Hanson, who is President of UMTHGS and secretary of UMTH and its subsidiaries. Todd Etter is a shareholder, director and Chairman of the Board of UMT Services, Inc., UMTH’s general partner and a Director of United Development Funding, Inc. (“UDF”) the general partner of UDF. Mr. Etter is also the sole owner of South Central Mortgage, Inc. ("SCMI"), a Texas corporation that sold Mortgage Investments to the Company. In addition, he is a director and shareholder of Capital Reserve Group, Inc. (“CRG”), in addition SCMI owns 50% of Ready America Funding Corp. (“RAFC”). Both CRG and RAFC are Texas corporations that used funds borrowed from the Company to make loans to other borrowers and assign such loans to the Company as security for CRG and RAFC obligations to the Company. Hollis Greenlaw is a shareholder, director and President and Chief Executive officer of UMT Services, Inc. and a partner and the President and Chief Executive Officer of UMTH, and a director and the President and Chief Executive Officer of United Development Funding, Inc., the general partner of UDF, with whom the Company has extended a line of credit. He is Chief Executive Officer of UMTH Land Development, L.P., the general partner of United Development Funding III, L.P. (“UDF III”), which previously provided a limited guarantee of the Company’s UDF line of credit. Craig Pettit is a partner of UMTH, and is the sole proprietor of two companies that own 50% of RAFC. He currently functions as the President of RAFC. William Lowe is a partner of UMTH and owns 50% of CRG. Michael K Wilson is a partner of UMTH and a director of UMT Services, Inc. He is President of UMTH Funding Services, a Delaware partnership and subsidiary of UMTH. Cara Obert is a partner of UMTH. She also serves as Chief Financial Officer and Treasurer of UMT Services, Inc. and UMTH Land Development, L.P. Besides the subsidiaries above referenced, UMTH is the parent company of UMTH Lending Company, L.P. (“UMTHLC”), a Delaware limited partnership that sells interim loans to the Company, REO Property Company, L.P., (“REOPC”), a Delaware limited partnership that has provided services to the Company, and of Prospect Service Corp. (“PSC”), a Texas corporation that services the Company’s residential mortgages and contracts for deed.
ADVISORY AGREEMENT
UMTHGS is responsible for the day-to-day operations of the Company and for seeking out, underwriting and presenting Mortgage Investments to the Company for consideration and purchase, under the guidance of the Company’s trustees. In that regard, it employs the requisite number of staff to accomplish these tasks, leases its own office space and pays its own overhead. The Company pays a trust administration fee for services rendered by the Advisor.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements are as follows:
BASIS OF ACCOUNTING
The accounts are maintained and the consolidated financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, UMT LT Trust. All significant intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts in consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
RESIDENTIAL MORTGAGES, CONTRACTS FOR DEED AND INTERIM LOANS
Residential mortgages, contracts for deed and interim loans are recorded at the lower of cost or estimated net realizable value, net of discounts and loan acquisition costs paid to the Advisor. The Mortgage Investments are collateralized by real property owned by the borrowers.
The majority of residential mortgages and contracts for deed are 360 month real estate lien notes that are purchased by the Company from several sources, including SCMI, an affiliate of the Advisor. Interim loans are real estate lien notes purchased by the Company from various sources including affiliates of the Advisor. Interim loans have terms of 12 months or less. The Company is not a loan originator nor does it purchase Mortgage Investments for resale. The Company intends to hold Mortgage Investments to maturity.
Generally, the Company does not retain servicing rights on its Mortgage Investments. The Company relies on various servicing sources, including affiliated companies, to service its Mortgage Investments.
INTEREST INCOME ACCRUAL
The Company’s portfolio of residential mortgages, contracts for deed, interim loans and lines of credit produce monthly interest income; however, the Company may not receive interest income on a particular loan if a borrower fails to make its monthly interest payment.
The Company has two types of loans and its accrual method differs for them: nonrecourse loans and recourse loans.
A nonrecourse loan is one that is not currently covered under a recourse agreement. The majority of the Company’s nonrecourse loans are residential mortgages and contracts for deed.
A recourse loan is one that is covered under a recourse agreement that obligates either a third party guaranteeing the performance of a loan, or a borrower that has made a corresponding loan to another party (the "underlying borrower"), to repay the loan to the Company if the underlying borrower defaults. The majority of the Company’s recourse loans are interim loans made to borrowers that make corresponding loans which are pledged to the Company as security for the borrower's obligations to the Company. All loans that the Company makes to affiliates of its Advisor are recourse loans.
With respect to nonrecourse loans, the Company will accrue interest, if based on the underlying borrower’s payment history and based on analysis by the loan servicing staff, when applicable, it is determined that the likelihood of an interest payment being made is probable. The Company will cease accruing interest when the likelihood that an interest payment will be made is less than probable, generally if a payment is more than 60 days past due. If and when the loan is foreclosed, the Company no longer considers the property to be income producing and reclassifies it as foreclosed.
With respect to recourse loans, the Company’s borrower, or a guarantor, is obligated to pay all interest accrued and principal at the end of the loan term, or extensions thereof. As a result, the Company continues to accrue interest on recourse loans even if the likelihood that the underlying borrower will make an interest payment is less than probable. Interest on recourse loans continues to accrue until the loan is fully paid off.
There is no assurance that the interest income accrued by the Company will be paid by a borrower. When income is accrued with respect to a foreclosed loan, the Company sells the mortgage property and receives proceeds from the sale. The Company first applies the proceeds to any accrued interest related to the loan and then applies the balance of the proceeds to the outstanding loan balance. If the proceeds from the sale of the property are not sufficient to reduce the outstanding loan balance to zero, the remaining balance is referred to as the “charge-off amount.” The charge-off amount is recorded against the mortgage investment loss reserve: accrued interest income, plus the outstanding loan balance, less proceeds from the sale of the property equals the amount charged-off against loss reserves. If the loan was a recourse loan, the Company’s borrower or a guarantor is obligated to pay the remaining balance with interest and the borrower or guarantor, as applicable, would deliver a deficiency note (“deficiency note”) to the Company for the remaining balance.
On March 30, 2006, but effective as of December 31, 2005, all outstanding amounts owed by certain of the Company’s affiliates under (1) loans made by the Company to such affiliates, (2) deficiency notes from such affiliates to the Company and (3) the estimated maximum future liability to the Company under recourse arrangements, were consolidated into secured, variable amount promissory notes delivered by such affiliates to the Company, and are reflected as recourse obligations in the accompanying balance sheets.
LOAN LOSS RESERVES
Loan loss reserves are established when it becomes clear that the current market value of foreclosed properties is less than the outstanding balances of loans plus accrued interest. A loan loss reserve is created based on a three year look back of default rates. It is calculated as the difference between the outstanding loan balance of a foreclosed property, plus accrued interest income, less the estimated proceeds from the sale of the foreclosed property. During 2008 the Company calculated its loan loss reserve at a rate of 47.4% of the unpaid principal balance of foreclosed residential mortgages, contracts for deed and interim loans. The Company's three year historical default rate for residential mortgages and contracts for deed is approximately 6.0% of the remaining outstanding unpaid principal balance of the loans it owns outright, excluding the securitized loans. The Company's three year historical default rate for interim mortgages is approximately 2.0%.
The changes in the reserve for loan losses during the years ended December 31, 2008, 2007, and 2006 are summarized as follows:
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Balance, beginning of year | | | |
Provision for loan losses | | | |
Reduction of values of foreclosed mortgages and loans charged off | | | |
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In December of 2006 the Company ceased funding interim loans for the construction of single family homes (“Construction Loans”). Prior to December of 2006 the Company funded Construction Loans through an unaffiliated lender, Residential Development Corp. (“RDC”). In 2008 and 2007 the Company experienced increased delinquency and foreclosures on loans funded to RDC. Throughout 2007 and 2008, the Company implemented the following actions with regard to RDC:
| · | Ceased funding loans to RDC |
| · | Began aggressive liquidation of properties securing non-performing loans |
| · | Engaged the services of asset managers to assist in the management of RDC delinquencies and liquidation of RDC assets |
| · | Began detailed examination of RDC lending practices and collateral positions |
| · | Re-evaluated market values of properties securing the RDC loans |
| · | Began review of all recourse afforded the Company by RDC and its principal owner |
The Company intends to continue these efforts throughout 2009 and until the RDC portfolio is fully liquidated. Throughout 2008 and 2007 UMT allocated approximately $2,186,000 and $1,347,000 of reserves respectively, for losses associated with the RDC portfolio. In the event that aggressive liquidation of the portfolio may result in additional losses, we will provide for additional reserves as needed.
ACCOUNTING FOR AND DISPOSITION OF FORECLOSED PROPERTIES
When the Company takes possession of real estate through foreclosure it attempts to resell the property to recover all costs associated with the default, including legal fees, transaction costs, and repair expenses. Initial repair expenses are capitalized because the Company treats them as construction draws. Upon sale of the property, a gain or loss is realized. If a foreclosed loan is subject to a recourse agreement with an unaffiliated borrower and is not fully repaid, the borrower delivers a new promissory note to the Company in the amount of the deficiency. These promissory notes are paid in installments.
EQUIPMENT
Equipment is recorded at cost and depreciated using the straight-line method over an expected five-year useful life. Expenditures for normal maintenance and repairs are charged to expense as incurred, and significant improvements are capitalized.
INCOME TAXES
The Company intends to continue to qualify as a REIT under the Internal Revenue Code of 1986 the (“Code”) as amended. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) that is distributed to its shareholders provided that at least 90% of Taxable Income is distributed. No provision for taxes has been made in the consolidated financial statements, as the Company believes it is in compliance with the requirements in the Code for the treatment as a REIT. Dividends paid to shareholders are considered ordinary income for income tax purposes.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standard (“SFAS”) No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share include no dilution and are computed by dividing income available to shareholders by the weighted average number of shares outstanding for the period. Dilutive earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. Because the Company’s potential dilutive securities are not dilutive, the accompanying presentation is only of basic earnings per share.
DISTRIBUTION POLICY AND DISTRIBUTIONS DECLARED
The Company makes distributions each year (not including return of capital for federal income tax purposes) equal to at least 90% of the REIT’s taxable income. Since September 1997 the Company has made monthly distributions to its shareholders and intends to continue doing so. The trustees declare the distribution rate quarterly and distributions are made at the rate declared at the end of the following month for shareholders of record as of the 15th of the preceding month. The Company distributed 130% and 92% of earnings during 2008 and 2007 respectively and made distributions in excess of earnings of 30% and 0% during 2008 and 2007, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the reporting requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, the Company calculates the fair value of its assets and liabilities that qualify as financial instruments under this statement and includes additional information in notes to the Company’s consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of cash equivalents, accrued interest receivable, receivable from affiliate, accounts payable and accrued liabilities approximate the carrying value due to the relatively short maturity of these instruments. The carrying value of residential mortgages and contracts for deed, interim loans, lines of credit, recourse obligations from affiliates, deficiency notes and the Company’s line of credit payable also approximate fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
On October 10, 2008, the FASB issued FSP 157-3 (“FSP 157-3”), Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active. FSP 157-3 clarifies the application of Statement 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for the financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of FSP 157-3 has not had a material impact on the Company’s financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 161 amends SFAS No. 133 and requires entities to enhance their disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material impact on the Company’s financial position or results of operations.
In December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS 141”), and Statement No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 141R modifies the accounting and disclosure requirements for business combinations and broadens the scope of the previous standard to apply to all transactions in which one entity obtains control over another business. SFAS 160 establishes new accounting and reporting standards for non-controlling interests in subsidiaries. The Company will be required to apply the provisions of the new standards in the first quarter of 2009. Early adoption is not permitted for these new standards. The Company is in the process of evaluating the effect that SFAS 141R and SFAS 160 will have on the Company.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.” The fair value option permits entities to choose to measure eligible financial instruments at fair value at specified election dates. The entity will report unrealized gains and losses on the items on which it has elected the fair value option in earnings. SFAS 159 is effective beginning in fiscal year 2008. The adoption of FAS 159 has not had a material impact on the Company’s financial position or results of operations.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however the application of this statement may change current practice. The requirements of SFAS 157 are first effective for the Company for the fiscal year beginning January 1, 2008. However, in February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter 2009. Accordingly, the Company’s adoption of this standard on January 1, 2008 is limited to financial assets and liabilities. The Company’s adoption of SFAS 157 has not had a material impact on the Company’s financial condition or results of operations. However, the Company is still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities and therefore has not yet determined the impact that it will have on the Company’s financial statements upon full adoption.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentation.
C. DEFICIENCY NOTES – AFFILIATE AND NON-AFFILIATE
The Company has made loans in the normal course of business to affiliates and non-affiliates, the proceeds from which have been used to originate underlying loans that are pledged to the Company as security for such obligations. When principal and interest on an underlying loan is due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full. If the borrower or the Company foreclosed on property securing an underlying loan, or if the Company foreclosed on property securing a purchased loan, and the proceeds from the sale were insufficient to pay the loan in full, the originating company had the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering to the Company an unsecured deficiency note in the amount of the deficiency.
As of December 31, 2008, the Company had two deficiency notes with non-affiliates in the amount of approximately $6,981,000. One note in the amount of approximately $ 1,726,000 bears interest at a rate of 14% per annum. The second note is in the amount of approximately $5,255,000 and the Company does not accrue interest on this note as the underlying collateral approximates the note balance. As of December 31, 2007, the Company had one deficiency note with a non-affiliate in the amount of approximately $1,726,000. The note bears interest at a rate of 14% per annum.
As of December 31, 2007, UMTHLC executed a variable amount promissory note to the Company in the amount of $5,100,000 to evidence its deficiency obligations to the Company. The initial principal amount of the note was approximately $1,848,000. The principal balance as of December 31, 2008 is $5,332,000. The principal balance will fluctuate from time to time based on the underlying loan activity and the amount of deficiencies realized by the affiliate. The note bears interest at a rate of 10%, and requires monthly principal and interest payments based on a ten-year amortization for the outstanding principal balance. The note is secured by a limited guaranty by UMTHGS, the Advisor, equal to a monthly amount not to exceed 33% of the advisory fee received by UMTHGS under the terms of its advisory agreement with the Company.
D. LINE OF CREDIT PAYABLE
During 2006 the Company increased its existing line of credit from $17 million to $30 million. The line of credit was collateralized by certain interim loans. Interest on the outstanding balance accrues at the higher of the Prime Rate or the sum of the Federal Funds Rate plus 1/2% per annum (8.75% as of December 31, 2006.) The note expired and was paid in full on November 8, 2007. Management is currently negotiating with lenders to replace this credit facility on terms similar or more favorable terms than the expiring credit facility. Under the terms of its Declaration of Trust, the Company may borrow an amount up to 50% of the Company’s Net Assets (total assets less liabilities). The Company had no outstanding credit facility at December 31, 2008.
E. OPTIONS TO PURCHASE SHARES OF BENEFICIAL INTEREST
For each year in which an Independent Trustee of the Company serves, the Trustee receives 5-year options vested upon grant to purchase 2,500 shares of Company stock at $20 per share.
Following is a summary of the options transactions:
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Outstanding at beginning of year | | | |
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Outstanding at end of year | | | |
Exercisable at end of year | | | |
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F. RELATED PARTY TRANSACTIONS
1) UMT Holdings, L.P. (“UMTH”) is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in UMTH Lending Company, L.P., which originates interim loans that the Company is assigned, UMTH Land Development, L.P., which holds a 50% profit interest in UDF and acts as UDF's asset manager, and Prospect Service Corp.(“PSC”), which services the Company’s residential mortgages and contracts for deed and manages the Company’s REO. In addition, UMTH has a limited guarantee of the obligations of CRG, RAFC and SCMI under the Secured Notes. United Development Funding III, L.P., (“UDF III”) which is controlled by UMTH Land Development, L.P., has previously provided a limited guarantee of the UDF line of credit. The Company’s President, Christine “Cricket” Griffin, is a partner of UMTH.
2) UMTH Lending Company, L.P. (“UMTHLC”) is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned money to UMTHLC so it can make loans to its borrowers. The loans are collaterally assigned to the Company, as security for the promissory note between UMTHLC and the Company. The unpaid principal balance of the loans at December 31, 2008 and 2007 was approximately $18,195,000 and $19,776,000, respectively.
3) Capital Reserve Group, Inc. (“CRG”) is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which owns the Advisor. CRG was in the business of financing home purchases and renovations by real estate investors. The Company loaned money to CRG to make loans to other borrowers. During 2006 the Company took direct assignment of the remaining loans from CRG with full recourse. The unpaid principal balance of the loans at December 31, 2008 and 2007 was approximately $0.
4) Ready America Funding (“RAFC”) is a Texas corporation that is 50% owned by SCMI, which is owned by Todd Etter. RAFC is in the business of financing interim loans for the purchase of land and the construction of modular and manufactured single-family homes placed on the land by real estate investors. The Company continues to directly fund obligations under one existing RAFC loan, which was collaterally assigned to the Company, but does not fund new originations. The unpaid principal balance of the loans at December 31, 2008 and 2007 was approximately $23,380,000 and $21,866,000, respectively.
5) Wonder Funding, LP (“Wonder”) is a Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”). RMC is beneficially owned by Craig Pettit. Wonder is in the business of financing interim loans for the purchase of land and the construction of single family homes. The Company has ceased funding any new originations. As of December 31, 2008, all remaining obligations owed by Wonder to the Company are included in the recourse obligations discussed below.
6) Recourse Obligations. The Company has made recourse loans to (a) CRG, which is owned by Todd Etter and William Lowe, (b) RAFC, which is owned by SCMI and two companies owned by Craig Pettit, Eastern Intercorp, Inc. and Ready Mortgage Corp. (“RMC”), and (c) SCMI, which is owned by Todd Etter, (these companies are referred to as the "originating companies"). In addition to the originating companies discussed above, the Company made loans with recourse to Wonder. Each of these entities used the proceeds from such loans to originate loans, that are referred to as "underlying loans," that are pledged to the Company as security for such originating company's obligations to the Company. When principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full.
In addition, some of the originating companies have sold loans to the Company, referred to as the "purchased loans," and entered into recourse agreements under which the originating company agreed to repay certain losses the Company incurred with respect to purchased loans.
If the originating company forecloses on property securing an underlying loan, or the Company forecloses on property securing a purchased loan, and the proceeds from the sale are insufficient to pay the loan in full, the originating company has the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering an unsecured deficiency note in the amount of the deficiency to the Company.
On March 30, 2006, but effective December 31, 2005, the Company and each originating company agreed to consolidate (1) all outstanding amounts owed by such originating company to the Company under the loans made by the Company to the originating company and under the deficiency notes described above and (2) the estimated maximum future liability to the Company under the recourse arrangements described above, into secured promissory notes. Each originating company issued to the Company a secured variable amount promissory note dated December 31, 2005 (the “Secured Notes”) in the principal amounts shown below, which amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to increase up to the maximum amounts shown below if the Company incurs losses upon the foreclosure of loans covered by recourse arrangements with the originating company. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on the Class C units, Class D units and Class EIA units of limited partnership interest of UMT Holdings held by each originating company.
| Name | Initial principal amount | Balance at December 31, 2008 | Promissory Note principal amount (2) | | Units pledged as security | C Units distributed during 2008 | Units remaining | Nominal Collateral Value (3) | |
| | | | | 4,984 Class C and 2,710 Class D | | 3,752 Class C and 2,710 Class D | |
| | | | | 11,165Class C, 6,659 Class D & 1,066 Class EIA | | 9,530 Class C, 6,659 Class D & | |
| | | | | 4,545 Class C and 3,000 Class D | | 3,077 Class C and 3,000 Class D | |
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| (1) | Wonder is collateralized by an indemnification agreement from RMC in the amount of $1,134,000, which includes the pledge of 3,870 C Units. 2,213 of the pledged C Units also cross-collateralize the RAFC obligation. |
| (2) | The CRG and Wonder balances at December 31, 2008 exceeded the stated principal amount per their variable Secured Notes by approximately $192,000 and $558,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) that we originally anticipated and outpaced the minimum principal reductions scheduled for the loans. |
| (3) | Nominal collateral value does not reflect pledge of D units of limited partnership interest of UMTH held by WLL, Ltd., RAFC and KLA, Ltd. UMTH D units represent equity interests in UMT Holdings, LP. Pledge of the UMTH D units entitles the beneficiary to a pro-rata share of UMTH partnership D unit cash distributions. |
The CRG and Wonder balances at December 31, 2008 exceeded the stated principal amount per their variable Secured Notes by approximately $192,000 and $558,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) that management originally anticipated and out paced the minimum principal reductions scheduled for the loans.
Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG, RAFC and RAF/Wonder Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or (2) the amount of any distributions paid to the originating company with respect to the pledged Class C and EIA units. Effective, October, 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, suspended the principal component of the amortized loans for the period of July 2007 through June 2009, and reduced the interest rate from 10% to 6%.
The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:
| - | UMT Holdings. This guaranty is limited to a maximum of $10,582,336 due under all of the Secured Notes and is unsecured. |
| - | WLL, Ltd., an affiliate of CRG. This guaranty is of all amounts due under Secured Note from CRG is non-recourse and is secured by an assignment of 2,492 Class C Units and 1,355 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd. |
| - | RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings. |
| - | Wonder. Wonder Funding obligations are evidenced by a note from RAFC (RAFC Wonder Note) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above. |
In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made to William Lowe by UMT Holdings. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to the Company to secure its guaranty of Capital Reserve Corp.'s obligations under its Secured Note, UMT Holdings and the Company entered into an Intercreditor and Subordination Agreement under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to the Company’s lien on such units.
7) On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note (the "Amendment") with UDF, a Nevada limited partnership that is affiliated with the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("Loan") to $45 million. The Loan matures on December 31, 2009. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects.
The Loan is secured by the pledge of all of UDF's land development loans and equity investments. Those UDF loans may be first lien loans or subordinate loans.
The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%.
UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF.
As a condition of the Amendment, UDF III, a newly formed public limited partnership that is affiliated with UDF and with the Company’s Advisor, had provided a guarantee of payment and performance of the Loan up to $30 million. The Company released the UDF III Guarantee effective January 1, 2008.
On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility (“Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”).
The Loan is the $45,000,000 revolving line of credit facility evidenced by a Second Amended and Restated Secured Line of Credit Promissory Note dated as of June 20, 2006, as modified by an amendment effective September 1, 2006 (as amended, the “Amendment””). The UMT Loan is secured by a security interest in the assets of UDF including UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”).
Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UMT Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UMT Loan increases proportionately. UDF III’s economic interest in the UMT Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UMT Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.
The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Loan and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while UDF III owns an economic interest in the UMT Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. The UMT Loan matures on December 31, 2009. The purpose of the UMT Loan is to finance UDF's investments in real estate development projects. The UMT Loan interest rate is the lower of 14% or the highest rate allowed by law. UDF may use the UMT Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the UMT Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no less than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF. At December 31, 2008 UDF III had funded approximately $38,322,000 to UDF under this agreement.
The UMT Loan is subordinate to UDF Senior Debt, which includes a line of credit provided by Textron Financial Corporation in the amount of $30,000,000, and all other indebtedness of UDF to any national or state chartered banking association or other institutional lender that is approved by UMT in writing.
8) Loans made to affiliates of the Advisor. Below is a table of the aggregate principal amount of mortgages funded each year indicated, from the companies affiliated with the Advisor, and named in the table and aggregate amount of draws made by UDF under the line of credit, during the three years indicated:
All loans purchased from affiliates during the past three years have been purchased at par value.
9) Until July 31, 2006 the Company’s Advisor was UMTA. As of August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2008) the Company entered into an Advisory Agreement with UMTHGS. Under the terms of the agreement, UMTHGS is paid a monthly trust administration fee. The fee is calculated monthly depending on the Company’s annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month. During 2008, 2007, and 2006 the net fees paid to the Company’s Advisors were approximately $1,074,000, $872,000, and $843,000, respectively. Upon entering into the Advisory Agreement with UMTHGS, they agreed to pay the Company $500,000 and assume the $377,000 due from the previous advisor over a period of 12 months. During 2007 and 2006, approximately $300,000 and $200,000, respectively, of the consideration fee was received by the Company and netted against trust administration fees, while $200,000 and $157,000 of the assumed debt was paid in 2007 and 2006, respectively.
The agreement also provides for a subordinated incentive fee equal to 25% of the amount by which the Company’s net income for a year exceeds a 10% per annum non-compounded cumulative return on its adjusted contributions. No incentive fee was paid during 2008, 2007 or 2006. In addition, for each year in which it receives a subordinated incentive fee, the Advisor will receive a 5-year option to purchase 10,000 Shares at a price of $20.00 per share (not to exceed 50,000 shares). As of December 31, 2008 and 2007, the Advisor has not received options to purchase shares under this arrangement.
The Advisor and its affiliates are also entitled to reimbursement of costs of goods, materials and services obtained from unaffiliated third parties for the Company’s benefit, except for note servicing and for travel and expenses incurred in connection with efforts to acquire investments for the Company or to dispose of any of its investments. During 2008 and 2007, the Company paid the Advisor $76,000 each year as reimbursement for costs associated with providing shareholder relations activities. No such costs were reimbursed in 2006.
The Advisory Agreement provides for the Advisor to pay all of the Company’s expenses and for the Company to reimburse the Advisor for any third-party expenses that should have been paid by the Company but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses and (3) the cost of other items that are part of the Advisor's overhead that is directly related to the performance of services for which it otherwise receives fees from the Company.
The Advisor Agreement also provides for the Company to pay to the Advisor a debt placement fee. The Company may engage the Advisor, or an Affiliate of the Advisor, to negotiate lines of credit on behalf of the Company. UMT shall pay a negotiated fee, not to exceed 1% of the amount of the line of credit secured, upon successful placement of the line of credit.
10) The Company pays loan servicing fees to PSC, a subsidiary of UMTH, under the terms of a Mortgage Servicing Agreement. The Company paid loan servicing fees of approximately $6,000, $10,000, and $20,000 during 2008, 2007, and 2006, respectively.
11) RMC, a Texas based real estate finance company, is owned by Craig Pettit, who is a limited partner of UMTH. The Company loaned money to RMC to make loans to its borrowers. The loans were collaterally assigned to the Company as security for the promissory note between RMC and the Company. There were no outstanding borrowings owed to the Company from RMC as of December 31, 2008 and 2007.
12) REOPC was a Texas limited partnership owned by UMTH. Its mission was to manage and sell REO properties, including the Company’s, for which it received a fee. The Company loaned money to REOPC to acquire foreclosed properties from CRG and UMTHLC. There were no unpaid principal balances owed to the Company as of December 31, 2008, 2007 and 2006. Until September 2006, when PSC assumed management of REOPC, the Company paid a monthly loan servicing fee based on 0.8% of the Company’s basis in the property. Fees paid to REOPC were $0 in 2008 and 2007, and $18,000 in 2006. The Company also paid real estate commissions to REOPC of approximately $22,000 in 2006. No commissions were paid in 2008 or 2007.
G. TERMINATION OF MERGER AGREEMENT
On June 13, 2006, the Board of Trustees voted to take no action to prevent the Agreement and Plan of Merger dated September 1, 2005 ("Merger Agreement") between the Company and UMTH pursuant to which the Company would have merged with and into UMTH ("Merger") from terminating for failure to satisfy the condition that the Merger Agreement would terminate if the Merger was not consummated by June 30, 2006. On June 13, 2006, the Company received a letter from UMTH in which UMTH also expressed the view that the Merger would terminate on June 30, 2006. On June 30, 2006 the merger terminated and as a result the Company wrote-off approximately $1,040,000 in capitalized merger costs as reflected in the statement of income. The Company did not incur any termination penalties as a result of the termination of the merger.
H. COMMITMENTS AND CONTINGENCIES
The Company’s shares are not traded on an exchange. Below is a description of the Company’s Share Redemption Plan (“SRP”) and Dividend Reinvestment Plan (“DRIP”).
On March 18, 2009, the Board approved certain modifications to the Company’s SRP and its DRIP. Pursuant to the requirements of the SRP and the DRIP, the Company sent its shareholders notice of amendment of the SRP and the DRIP, both to be effective on May 1, 2009. The modifications consist of the following:
Modifications to the Share Redemption Plan (SRP)
The redemption price shall be equal to the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2008 the NAV was $16.03 per share. Under the current SRP, the redemption price is $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRIP or the Company’s credit line.
Modifications to the Dividend Reinvestment Plan (DRIP)
Effective May 1, 2009, our DRIP share purchase price will be set at the NAV. Previously, the share purchase price was $20.00 per share.
I. CONCENTRATION OF CREDIT
Financial instruments that potentially expose the Company to concentrations of credit risk are primarily temporary cash equivalents, mortgage notes receivable, investment in trust receivable, line of credit receivable, deficiency notes and recourse obligations from affiliates. The Company maintains deposits in financial institutions that may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.
At December 31, 2008, 2007, and 2006, 38%, 58% and 59%, respectively, of the Company’s investments were secured by property located in Texas. All of the Company’s mortgage investments are in the United States.
Interim loans made to affiliates of the Company’s Advisor, lines of credit receivable, deficiency notes and recourse obligations are monitored by the Company for collectability, and the Company believes the unreserved amounts will be fully collectible.
J. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data (unaudited) for the years ended December 31, 2008 and 2007 is set forth below:
| | | Net Income (Loss) Per Share Basic/Diluted | Weighted Average Shares Outstanding |
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| | | Net Income (Loss) Per Share Basic/Diluted | Weighted Average Shares Outstanding |
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K. SUBSEQUENT EVENTS
On December 31, 2008, we had 6,436,569 shares outstanding compared to 6,649,916, and 6,917,443 shares outstanding at December 31, 2007 and 2006, respectively. The decrease in shares is the net between fewer DRIP shares issued and more SRP shares repurchased. The shares were held by 2,244, 2,373, and 2,760 beneficial owners in 2008, 2007 and 2006, respectively. No single shareholder owned 5% or more of our outstanding shares.
On March 18, 2009, the Board approved certain modifications to the Company’s SRP and its DRIP which modifications were disclosed in a Report on Form 8-K which we filed with the SEC on March 19, 2009. Pursuant to the requirements of the SRP and the DRIP, the Company sent its shareholders notice of amendment of the SRP and the DRIP, both to be effective on May 1, 2009. The modifications consist of the following:
Modifications to the Share Repurchase Plan (SRP)
The redemption price shall be equal to the “Net Asset Value” (NAV) as of the end of the month prior to the month in which the redemption is made. The NAV will be established by our Board of Trustees no less frequently than each calendar quarter. For reference, at December 31, 2008 the NAV was $16.03 per share. Under the current SRP, the redemption price is $20.00 per share. The Company will waive the one-year holding period ordinarily required for eligibility for redemption and will redeem shares for hardship requests. A “hardship” redemption is (i) upon the request of the estate, heir or beneficiary of a deceased shareholder made within two years of the death of the shareholder; (ii) upon the disability of a shareholder or such shareholder’s need for long-term care, providing that the condition causing such disability or need for long term care was not pre-existing at the time the shareholder purchased the shares and that the request is made within 270 days after the onset of disability or the need for long term care; and (iii) in the discretion of the Board of Trustees, due to other involuntary exigent circumstances of the shareholder, such as bankruptcy, provided that that the request is made within 270 days after of the event giving rise to such exigent circumstances. Previously, there was no hardship exemption. Shares will be redeemed quarterly in the order that they are presented. Any shares not redeemed in any quarter will be carried forward to the subsequent quarter unless the redemption request is withdrawn by the shareholder. Previously, shares were redeemed monthly. Repurchases are subject to cash availability and Trustee discretion. Previously, the SRP provided that repurchases were subject to the availability of cash from the DRIP or the Company’s credit line.
Modifications to the Dividend Reinvestment Plan (DRIP)
Effective May 1, 2009, our DRIP share purchase price will be set at the NAV. Previously, the share purchase price was $20.00 per share.
Please refer to our Report on Form 8-K filed on March 19, 2009 for further information about the modifications to the SRP and DRIP.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2008 was performed by the Company’s Principal Executive Officer and Principal Financial Officer. Based on such evaluation, management has concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
The Company does not control the financial reporting process, and is solely dependent on UMTHGS, its Advisor, who is responsible for providing the Company with financial statements in accordance with generally accepted accounting principles in the United States. The Advisor’s disclosure controls and procedures were effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Management’s Report on Internal Control Over Financial Reporting
The Management of UMTHGS, the Company’s Advisor, is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f) for the Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2008. The internal control process of UMTHGS, as is applicable to the Company, was designed to provide reasonable assurance to Management regarding the preparation and fair presentation of published financial statements, and includes those policies and procedures that:
| 1. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States, and that the Company’s receipts and expenditures are being made only in accordance with authorization of management, and |
| 2. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
All internal control processes, no matter how well designed, have inherent limitations. Therefore, even those processes determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the effectiveness of its internal control over financial reporting, as is applicable to the Company, as of December 31, 2008. In making this assessment, it used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management concluded that the Advisor’s internal control over financial reporting, as is applicable to the Company, was effective as of December 31, 2008.
The Company is a “smaller reporting company” for the 2008 fiscal year. Accordingly, the Company’s independent registered public accounting firm is not currently required to issue an audit report on the Company’s internal control over financial reporting.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter of 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We do not have any employees. The trustees are responsible for the overall management and control of the Company’s business. The Advisor manages the day-to-day operations and The Company has retained the Advisor to use its best efforts to seek out and present to management suitable and a sufficient number of investment opportunities that are consistent with the Company’s investment policies and objectives.
The Company’s Declaration of Trust provides for not less than three or more than nine trustees, a majority of which must be independent trustees, except for a period of 60 days after the death, removal or resignation of an independent trustee. Each trustee serves for a one-year term. There are currently five trustees, four of which are independent trustees.
THE COMPANY’S TRUSTEES AND OFFICERS
The Company’s trustees and officers are as follows:
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Christine "Cricket" Griffin | | Trustee, Chairman of the Board, President, Chief Executive Officer, and Chief Financial Officer |
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Charles Michael Gillis, JDs | | |
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Douglas R. Evans served as a Trustee during 2007 and 2006 until his resignation on April 2, 2008. Mr. Gillis was elected to the Board of Trustees on April 30, 2008 to fill the vacancy created by Mr. Evan’s resignation.
Christine “Cricket” Griffin has been our President, Chief Executive Officer, and Chief Financial Officer and a Trustee since July 1996. Since 2003 Ms. Griffin has been a limited partner of UMTH, which owns our Advisor. From 2003 until 2006 she was secretary for UMTH and President of UMTHGS. From June 1995 until July 1996, Ms. Griffin served as Chief Financial Officer of SCMI, a Texas based mortgage banking firm that is an Affiliate of the Advisor and that sold Mortgages Investments to us and provides mortgage servicing services for us. Her responsibilities at SCMI included day-to-day bookkeeping through financial statement preparation, mortgage warehouse lines administration, and investor communications and reporting. Additionally, Ms. Griffin was responsible for researching and implementing a note servicing system for SCMI and its sub servicer. Before joining SCMI, Ms. Griffin was Vice President of Woodbine Petroleum, Inc., a publicly traded oil and gas company for 10 years, during which time her responsibilities included regulatory reporting, shareholder relations, and supervision. Ms. Griffin is a 1978 graduate of George Mason University, Virginia with a Bachelor of Arts degree, summa cum laude, in Politics and Government. Ms. Griffin is a member of the Audit Committee, Liquidity Committee, and Investment Committee.
Michele A. Cadwell has been one of the Company’s trustees since August 1997. She was a fee attorney for Commonwealth Land Title of Dallas, Texas, from 1999 until May, 2006, when she returned to private practice as an attorney for the oil and gas industry. From 1998 to 1999, Ms. Cadwell was Manager – Onshore Land Operations with EEX Corp. Her primary responsibilities included drafting and negotiating exploration and marketing agreements, analysis of legislation and regulatory proposals, researching complex mineral titles, organization and management of non-core property divestitures, settlement of land owner disputes and advising and testifying on matters before the Oklahoma Corporation Commission. From 1980 until 1998 she was employed with Enserch Exploration, Inc. as Senior Land Representative. Ms. Cadwell is a 1974 graduate of the University of Oklahoma with a Bachelors of Arts Degree in English and a Juris Doctor Degree in 1978. She is admitted to both the Oklahoma and Texas bars. Ms. Cadwell is a member of the Investment Committee, Business Model Committee, and Liquidity Committee.
Phillip K. Marshall has served as one of the Company’s independent trustees since September, 2006. Mr. Marshall is a certified public accountant in the State of Texas. From May, 2007 to the present, Mr. Marshall has served as Chief Financial Officer of Rick’s Cabaret International, Inc., a publicly traded restaurant and entertainment company. From 2003 to May 2007, he has served as Chief Financial Officer of CDT Systems, Inc., a publicly-held company located in Addison, Texas that is engaged in water technology. From 2001 to 2003, he was a principal of Whitley Penn, independent certified public accountants. Prior to 2001, Mr. Marshall served as Director of Audit Services at Jackson & Rhodes PC and was previously an audit partner at Toombs, Hall and Foster and at KPMG Peat Marwick. Mr. Marshall received a BBA in Accounting, Texas State University in 1972. Mr. Marshall is a member of the Audit Committee. Mr. Marshall is a member of the Audit Committee, Financial Reporting Committee, and Liquidity Committee.
Roger C. Wadsworth has served as one of the Company’s independent trustees since September 2006. Mr. Wadsworth has been the Chief Operating Officer of IMS Securities, Inc., a National Association of Securities Dealers member firm, since 2002. He holds a Series 7, 24, and 66 FINRA License and is a licensed insurance agent in the State of Texas. Since 2003, he has also served as the National Director and Board Member of The National Due Diligence Alliance, Inc., a non-profit trade association of Independent FINRA Broker-Dealer firms. From 1988 to 2002, he served as the Senior Vice President & Chief Administrative Officer of INVESTools, Inc. NASDAQ: SWIM (formerly Telescan, Inc.), a publicly-held company in the financial data, information, and analysis industry. Prior to 1988, he was the Co-Founder and Vice President of Information Management Services, Inc., a financial consulting and management firm. Mr. Wadsworth received a Bachelor of Business Administration in Finance from the University of Houston in 1971. Mr. Wadsworth is a member of the Investment Committee, Business Model Committee, and Audit Committee.
Charles Michael Gillis is the most recent person to join the Company as an independent trustee. Mr. Gillis is an attorney who has been in private practice since 1978. From 1988 through 2000, Mr. Gillis was a partner in the law firm of Gillis & Slogar. From 2000 through the present, Mr. Gillis is a partner at the law firm of Gillis, Paris & Heinrich, PLLC in Houston, Texas. Mr. Gillis practices in the area of Federal income tax with an emphasis on real estate, mergers and acquisitions and international taxation. Mr. Gillis has been an expert witness in legal matters involving Federal income tax and securities. Mr. Gillis is a 1971 graduate of the University of California at Los Angeles, a 1974 graduate of Bates College of Law, University of Houston (and a member of its honor society) and a 1975 Masters of Law (In Taxation) graduate of New York University. He is admitted to both the Texas and California bars. Mr. Gillis has been frequently listed in The Bar Register of Preeminent Lawyers published by Martindale-Hubbell.
The Company did not have an audit committee during 2006 because the Company did not have a trustee that met the criteria for an audit committee financial expert. With the addition of Mr. Marshall as an Independent Trustee and the qualified accounting staff of the Company’s Advisor, the Company formed an audit committee in 2007.
THE ADVISOR
Effective on August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2008) the Company entered into an Advisory Agreement with UMTHGS (“Advisor”) to manage the Company’s affairs and to select the investments the Company purchases. The Company’s President, Christine “Cricket” Griffin, is a partner of UMTH, the parent company of the Company’s Advisor. The Advisor is controlled by UMT Services, Inc., the general partner of UMT Holdings, L.P. Todd F. Etter, Hollis M. Greenlaw and Michael K. Wilson are directors of UMT Services, Inc.
The directors and officers of UMT Services, Inc. and UMTHGS are set forth below.
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| | Chairman and Director of UMT Services, Inc. |
| | Director and Chief Executive Officer of UMT Services, Inc. |
| | Director of UMT Services, Inc. |
| | President of UMTHGS and CFO of UMTH |
Theodore “Todd” F. Etter, Jr. Mr. Etter serves as the Executive Vice President of UMTH LD and has served as a director, partner and Chairman of UMT Services, the general partner of UMT Holdings and UMTH LD, since March 2003. UMT Holdings originates, purchases, sells and services interim loans for the purchase and renovation of single-family homes and land development loans through its subsidiaries UMTH Lending Company, L.P. and UMTH LD, and it provides real estate-related corporate finance services through its subsidiaries. UMTH GS, a subsidiary of UMT Holdings, has served as the advisor to United Mortgage Trust since August 1, 2006. Mr. Etter serves as Chairman of the general partner of UDF I and UDF II and Executive Vice President of the general partner of UDF III, each of which are limited partnerships formed to originate, purchase, sell and service land development loans and/or equity participations. Since 2000, Mr. Etter has been the Chairman of UMT Advisors, Inc., which served as the advisor to United Mortgage Trust from 2000 through July 31, 2006, and since 1996, he has been Chairman of Mortgage Trust Advisors, Inc., which served as the advisor to United Mortgage Trust from 1996 to 2000. Subsequent to the completion of the terms of their advisory agreements with United Mortgage Trust, neither UMT Advisors, Inc. nor Mortgage Trust Advisors, Inc. has been engaged in providing advisory services. Mr. Etter has overseen the growth of United Mortgage Trust from its inception in 1997 to over $150 million in capital. Since 1998, Mr. Etter has been a 50% owner of and has served as a director of Capital Reserve Corp. Since 2002, he has served as an owner and director of Ready America Funding Corp. Both Capital Reserve Corp. and Ready America Funding Corp. are Texas corporations that originate, sell and service mortgage loans for the purchase, renovation and construction of single-family homes. In 1992, Mr. Etter formed, and since that date has served as President of, South Central Mortgage, Inc. (“SCMI”), a Dallas, Texas-based mortgage banking firm. In July 2003, Mr. Etter consolidated his business interests in Capital Reserve Corp., Ready America Funding Corp. and SCMI into UMT Holdings. From 1980 through 1987, Mr. Etter served as a Principal of South Central Securities, an NASD member firm. In 1985, he formed South Central Financial Group, Inc., a Dallas, Texas-based investment banking firm, and he continues to serve as its President; however, since 1992, South Central Financial Group, Inc. has not actively engaged in investment banking activities. From 1974 through 1981, he was Vice President of Crawford, Etter and Associates, a residential development, marketing, finance and construction company. Since February 2004, Mr. Etter has served as an Advisory Director of American Bank of Commerce, Plano, Texas. Mr. Etter received a Bachelor of Arts degree from Michigan State University in 1972.
Hollis M. Greenlaw. Mr. Greenlaw has served as President and Chief Executive Officer of UMTH LD since March 2003. He also has served as partner, President and Chief Executive Officer of UMT Holdings and as President, Chief Executive Officer and a director of UMT Services since March 2003. From March 2003 through December 2007, Mr. Greenlaw directed the funding of over approximately $237 million in loans and land banking transactions and over $86 million of equity investments for UDF I and UDF II, and over $132 million in loans for UDF III. During that same period, UDF I and UDF II received over approximately $184 million in loan repayments and over $31 million in equity investment distributions, and since inception, UDF III has received over $32 million in repayments. Since May 1997, Mr. Greenlaw has been a partner of The Hartnett Group, Ltd., a closely-held private investment company managing over $40 million in assets. The Hartnett Group, Ltd. and its affiliated companies engage in securities and futures trading; acquire, develop, and sell real estate, including single-family housing developments, commercial office buildings, retail buildings and apartment homes; own several restaurant concepts throughout the United States; and make venture capital investments. From March 1997 until June 2003, Mr. Greenlaw served as Chairman, President and CEO of a multi-family real estate development and management company owned primarily by The Hartnett Group, Ltd. and developed seven multi-family communities in Arizona, Texas and Louisiana with a portfolio value exceeding $80 million. Prior to joining The Hartnett Group, Ltd., from 1992 until 1997, Mr. Greenlaw was an attorney with the Washington, D.C. law firm of Williams & Connolly, where he practiced business and tax law. Mr. Greenlaw received a Bachelor of Arts degree from Bowdoin College in 1986, where he was a James Bowdoin Scholar and elected to Phi Beta Kappa, and received a Juris Doctorate from the Columbia University School of Law in 1990. Mr. Greenlaw is a member of the Maine, District of Columbia and Texas bars.
Michael K. Wilson. Mr. Wilson has served as President of UMTH FS and as Executive Vice President and a director of UMT Services since August 2005 and has been a partner of UMT Holdings since January 2007. Mr. Wilson is currently responsible for Sales, Marketing and Investor Relations for UMT Holdings, and from August 2005 through June 2008 directed the capital raise of over approximately $200 million in United Development Funding securities through independent FINRA-member broker-dealers. From January 2004 through July 2005, Mr. Wilson served as Senior Vice President of Marketing for UMT Holdings. From January 2003 through January 2004, Mr. Wilson served as Senior Vice President of Operations of Interelate, Inc., a marketing services business process outsourcing firm. From September 2001 to December 2002, Mr. Wilson was the sole principal of Applied Focus, LLC, an independent management consulting company that provided management consulting services to executives of private technology companies. Mr. Wilson continues to serve as a consultant for Applied Focus, LLC. From April 1998 to September 2001, Mr. Wilson served as Senior Director and Vice President of Matchlogic, the online database marketing division of Excite@Home, where he directed outsourced ad management and database marketing services for Global 500 clients including General Motors and Procter & Gamble. From July 1985 to April 1998, Mr. Wilson was employed with Electronic Data Systems in Detroit, Michigan where he led several multi-million dollar IT services engagements in the automotive industry, including GM OnStar. Mr. Wilson is a registered representative of IMS Securities, a FINRA-member firm. Mr. Wilson graduated from Oakland University in 1985 with a Bachelor of Science degree in Management Information Systems and earned a Master of Business Administration degree from Wayne State University in 1992.
David A. Hanson. Since June of 2007 Mr. Hanson has served as President, Chief Operating Officer and Chief Accounting Officer for UMTH General Services, LP. Mr. Hanson also serves as Chief Financial Officer of UMT Services. Mr. Hanson has over 20 years of experience as a financial executive in the residential housing industry as an accountant with an international public accounting firm. From 2006 to 2007, he was a Director of Land Finance for the Central/Eastern Region at Meritage Homes Corporation (Meritage), the twelfth largest publicly traded homebuilder. While at Meritage, Mr. Hanson handled all aspects of establishing, financing, administering and monitoring off-balance sheet FIN 46 compliant entities for the Central/Eastern Region. From 2001 to 2006, he was employed with Lennar Corporation, a national homebuilding company, as the Regional Finance Manager and served as acting homebuilding Division President, Regional Controller, and Controller for both homebuilding and land divisions. From 1999 to 2001, Mr. Hanson was the Director, Finance and Administration for One, Inc., a technology consulting firm. From 1996 to 1999, Mr. Hanson was the Vice President, Finance and Accounting for MedicalControl, Inc., a publicly traded managed healthcare company. Prior to 1996, he was employed with Arthur Andersen LLP, an international accounting and consulting firm, for approximately nine years. He graduated from the University of Northern Iowa in 1984 with a Bachelor of Arts degree in Financial Management/Economics and in 1985 with a Bachelor of Arts degree in Accounting. He is a Certified Public Accountant and Certified Management Accountant.
Christine “Cricket” Griffin. Since 2003, Ms. Griffin has been a partner of UMTH and until 2006 served as President of UMTHGS and as the secretary for UMTH. For Ms. Griffin’s biographical information, please see above under “Trustees and Officers”.
SUMMARY OF THE ADVISORY AGREEMENT
With the approval of the Company’s trustees, including all of the Independent trustees, the Company entered into a contract with the Advisor (the “Advisory Agreement”) effective on August 1, 2006, under which the Advisor provides the Company with the Company’s day-to-day administrative services. In addition, the Advisor is obligated to use its best efforts to develop and present to management, whether through its own efforts or those of third parties retained by it, a sufficient number of suitable investment opportunities that are consistent with the Company’s investment policies and objectives as well as any investment programs that the trustees may adopt from time to time in conformity with the Declaration of Trust.
Although the Company’s trustees retain exclusive authority over the Company’s management, the conduct of the Company’s affairs and the management and disposition of the Company’s assets, the trustees have initially delegated to the Advisor, subject to the supervision and review of the trustees and consistent with the provisions of the Company’s Declaration of Trust, the following responsibilities:
| · | develop underwriting criteria and a model for the Company’s investment portfolio; |
| · | acquire, retain or sell the Company’s mortgage investments; |
| · | seek out, present and recommend investment opportunities consistent with the Company’s investment policies and objectives, and negotiate on the Company’s behalf with respect to potential investments or the disposition thereof; |
| · | pay the Company’s debts and fulfill the Company’s obligations, and handle, prosecute and settle any of the Company’s claims, including foreclosing and otherwise enforcing mortgages and other liens securing investments; |
| · | obtain such services as may be required by the Company for mortgage brokerage and servicing and other activities relating to the Company’s investment portfolio; |
| · | evaluate, structure and negotiate prepayments or sales of mortgage investments; |
| · | manage the structuring and registration of additional shares for the Company’s offering; |
| · | develop the Company’s administrative budget; |
| · | administer the Company’s day-to-day operations; |
| · | coordinate marketing and sales of the Company’s shares; |
| · | develop and maintain the Company’s web site; |
| · | administer the Company’s Share Repurchase and Dividend Reinvestment Programs; |
| · | coordinate engagement of market makers and listing of the Company’s shares at the appropriate time; |
| · | develop institutional and retail secondary market interest for the Company’s shares; |
| · | arrange the Company’s note warehousing credit facility and provide required financial guarantees; |
| · | negotiate the Company’s loan purchases; |
| · | develop and monitor the Company’s investment policies; |
| · | develop a high yield loan acquisition program; |
| · | oversee loan servicing for the Company’s portfolio; |
| · | oversee acquisition and disposition of the Company’s investments; |
| · | manage the Company’s assets; and from time to time, or as requested by the trustees, make reports to the Company regarding the Advisor's performance of the foregoing services. |
The Advisory Agreement had an initial term of one year and is subject to an annual evaluation of the performance of the Advisor by the trustees. The Advisory Agreement may be terminated (1) without cause by the Advisor or (2) with or without cause by a majority of the independent trustees. Termination under either of those provisions may be made without penalty and upon 60 days' prior written notice to the non-terminating party.
The Advisor may engage in other business activities related to real estate, mortgage investments or other investments whether similar or dissimilar to those made by the Company or act as advisor to any other person or entity having investment policies whether similar or dissimilar to ours (including other REITs). Except for the allocation of investments between the Company and other affiliated programs as described in related party transactions, the officers and directors of the Advisor and all persons controlled by the Advisor and its officers and directors may take advantage of an opportunity for their own account or present or recommend it to others, however, they are obligated to present an investment opportunity to the Company if (1) that opportunity is of a character which could be taken by the Company, (2) that opportunity is compatible with the Company’s investment objectives and policies and (3) the Company has the financial resources to take advantage of that opportunity.
The Declaration of Trust provides that the independent trustees are to determine, at least annually, that the amount of compensation the Company pays the Advisor is reasonable in relation to the nature and quality of the services performed, based on the factors set forth in the Declaration of Trust and such other factors as they deem relevant, including the size of the fee in relation to the size, composition and profitability of the Company’s investment portfolio, the success of the Advisor in generating opportunities that meet the Company’s investment objectives, the rates charged to other REITs and to investors other than REITs by advisors performing similar services, the amount of additional revenues realized by the Advisor and its Affiliates for other services performed for the Company, the quality and extent of service and advice furnished by the Advisor, the performance of the Company’s investment portfolio and the quality of the Company’s investment portfolio in relationship to the investments generated by the Advisor for its own account.
The Advisory Agreement provides for the Advisor to pay all of the Company’s expenses and for the Company to reimburse the Advisor for any third-party expenses that should have been paid by the Company but which were instead paid by the Advisor. However, the Advisor remains obligated to pay: (1) the employment expenses of its employees, (2) its rent, utilities and other office expenses (except those relating to office space occupied by the Advisor that is maintained by the Company) and (3) the cost of other items that generally fall under the category of the Advisor's overhead that is directly related to the performance of services for which it is otherwise receiving fees from the Company.
CODE OF ETHICS
The Company’s Board of Trustees has adopted a Code of Conduct and Business Ethics that is applicable to all trustees, officers and employees of the company. You may obtain a copy of this document free of charge by mailing a written request to: Investor Relations, United Mortgage Trust, 1301 Municipal Way, Suite 220, Grapevine, TX 76051, or by sending an email request to: cgriffin@UMTH.com. You may also access the Company’s Code of Conduct through the Company’s website: www.unitedmortgagetrust.com
ITEM 11. EXECUTIVE COMPENSATION.
The Company has no employees. The Company’s operations are maintained by the Company’s Advisor, under the guidance of the Company’s trustees.
Compensation of Trustees
Trustees who are not independent trustees do not receive any compensation for acting as trustees. During 2006 and prior, Independent trustees were entitled to receive the greater of $1,000 per meeting or a minimum of $15,000 per year. During 2007, Independent trustees were entitled to receive $1,000 per regular meeting or committee meeting attended. For each year in which they serve, each Independent Trustee will also receive 5-year options to purchase 2,500 shares at an exercise price of $20 per share (not to exceed 12,500 shares per Trustee). In addition, independent trustees, serving prior to the Company’s merger termination have received compensation for their activities as part of the independent committee formed to evaluate and negotiate the proposed merger.
The table below provides information on Trustee Compensation:
| | | Value of Options Awarded if Exercised(5) | Non-Equity Incentive Plan Comp.(1) | Change in Pension Value and Non-Qualified Deferred Comp. Earnings (2) | | |
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(1) The Company does not have an incentive plan. | | | | | |
(2) The Company does not have a pension plan. | | | | | |
(3) Denotes a Trustee who is not considered an Independent Trustee. Ms. Griffin is not independent because she is an officer of the company. She therefore is not eligible for options or trustee fees. She has received compensation on a consulting basis, subsequent to her retirement from day-to-day operations. |
(4) Denotes a Trustee who served less than a full year. Mr. Evans resigned from the board effective, April 2, 2008. Mr. Gillis was appointed to the board in April 2008, following the resignation of Mr. Evans. |
(5) All options are priced at the greater of the Company’s initial offering price of $20 per share or the then current market value and therefore carry no intrinsic value. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of December 31, 2008 by each person who is known to the Company to be the beneficial owner of more than 5% of the Company’s shares and the beneficial ownership of all trustees and officers as a group as of such date.
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All Trustees and Executive Officers as a Group (6 persons) | | | |
| (1) | For purposes of this table, shares indicated as being owned beneficially include shares that the beneficial owner has the right to acquire within 60 days of March 1, 2009. For the purpose of computing the percentage of the outstanding shares owned by a shareholder, shares that may be acquired during the 60 days following March 1, 2009 are deemed to be outstanding securities of the class owned by that shareholder but are not deemed to be outstanding for the purpose of computing the percentage by any other person. |
| (2) | A trustee and/or executive officer of the Company. The address of all trustees and officers is c/o United Mortgage Trust, 1301 Municipal Way, Suite 220, Grapevine, TX 76051, telephone (214) 237-9305 or (800)955-7917, facsimile (214) 237-9304. |
| (3) | Includes shares issuable upon the exercise of stock options at an exercise price of $20.00 per share. |
| (4) | Includes the shares described in footnote (3) above. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
1) UMT Holdings, L.P. (“UMTH”) is a Delaware limited partnership which is in the real estate finance business. UMTH holds a 99.9% limited partnership interest in UMTH Lending Company, L.P., which originates interim loans that the Company is assigned, UMTH Land Development, L.P., which holds a 50% profit interest in UDF and acts as UDF's asset manager, and Prospect Service Corp.(“PSC”), which services the Company’s residential mortgages and contracts for deed and manages the Company’s REO. In addition, UMTH has a limited guarantee of the obligations of CRG, RAFC and SCMI under the Secured Notes. United Development Funding III, L.P., (“UDF III”) which is controlled by UMTH Land Development, L.P., has previously provided a limited guarantee of the UDF line of credit. The Company’s President, Christine “Cricket” Griffin, is a partner of UMTH.
2) UMTH Lending Company, L.P. (“UMTHLC”) is a Delaware limited partnership, and subsidiary of UMTH. The Company has loaned and will continue to loan money to UMTHLC so it can make loans to its borrowers. The loans are collaterally assigned to the Company, as security for the promissory note between UMTHLC and the Company. The unpaid principal balance of the loans at December 31, 2008 and 2007 was approximately $18,195,000 and $19,776,000, respectively.
3) Capital Reserve Group, Inc. (“CRG”) is a Texas corporation that is 50% owned by Todd Etter and William Lowe, partners of UMTH, which owns the Advisor. CRG was in the business of financing home purchases and renovations by real estate investors. The Company loaned money to CRG to make loans to other borrowers. During 2006 the Company took direct assignment of the remaining loans from CRG with full recourse. The unpaid principal balance of the loans at December 31, 2008 and 2007 was approximately $0, respectively.
4) Ready America Funding (“RAFC”) is a Texas corporation that is 50% owned by SCMI, which is owned by Todd Etter. RAFC is in the business of financing interim loans for the purchase of land and the construction of modular and manufactured single-family homes placed on the land by real estate investors. The Company continues to directly fund obligations under one existing RAFC loan, which was collaterally assigned to the Company, but does not fund new originations. The unpaid principal balance of the loans at December 31, 2008 and 2007 was approximately $23,380,000 and $21,866,000, respectively.
5) Wonder Funding, LP (“Wonder”) is Delaware limited partnership that is owned by Ready Mortgage Corp. (“RMC”). RMC is beneficially owned by Craig Pettit. Wonder is in the business of financing interim loans for the purchase of land and the construction of single family homes. The Company has ceased funding any new originations. As of December 31, 2008, all remaining obligations owed by Wonder to the Company are included in the recourse obligations discussed below.
6) Recourse Obligations. The Company has made recourse loans to (a) CRG, which is owned by Todd Etter and William Lowe, (b) RAFC, which is owned by SCMI and two companies owned by Craig Pettit, Eastern Intercorp, Inc. and Ready Mortgage Corp. (“RMC”), and (c) SCMI, which is owned by Todd Etter, (these companies are referred to as the "originating companies"). In addition to the originating companies discussed above, the Company made loans with recourse to Wonder. Each of these entities used the proceeds from such loans to originate loans, that are referred to as "underlying loans," that are pledged to the Company as security for such originating company's obligations to the Company. When principal and interest on an underlying loan are due in full, at maturity or otherwise, the corresponding obligation owed by the originating company to the Company is also due in full.
In addition, some of the originating companies have sold loans to the Company, referred to as the "purchased loans," and entered into recourse agreements under which the originating company agreed to repay certain losses the Company incurred with respect to purchased loans.
If the originating company forecloses on property securing an underlying loan, or the Company forecloses on property securing a purchased loan, and the proceeds from the sale are insufficient to pay the loan in full, the originating company has the option of (1) repaying the outstanding balance owed to the Company associated with the underlying loan or purchased loan, as the case may be, or (2) delivering an unsecured deficiency note in the amount of the deficiency to the Company.
On March 30, 2006, but effective December 31, 2005, the Company and each originating company agreed to consolidate (1) all outstanding amounts owed by such originating company to the Company under the loans made by the Company to the originating company and under the deficiency notes described above and (2) the estimated maximum future liability to the Company under the recourse arrangements described above, into secured promissory notes. Each originating company issued to the Company a secured variable amount promissory note dated December 31, 2005 (the “Secured Notes”) in the principal amounts shown below, which amounts represent all principal and accrued interest owed as of such date. The initial principal amounts are subject to increase up to the maximum amounts shown below if the Company incurs losses upon the foreclosure of loans covered by recourse arrangements with the originating company. The Secured Notes (including related guaranties discussed below) are secured by an assignment of the distributions on the Class C units, Class D units and Class EIA units of limited partnership interest of UMT Holdings held by each originating company.
| Name | Initial principal amount | Balance at December 31, 2008 | Promissory Note principal amount (2) | | Units pledged as security | C Units distributed during 2008 | Units remaining | Nominal Collateral Value (3) | |
| | | | | 4,984 Class C and 2,710 Class D | | 3,752 Class C and 2,710 Class D | |
| | | | | 11,165Class C, 6,659 Class D & 1,066 Class EIA | | 9,530 Class C, 6,659 Class D & | |
| | | | | 4,545 Class C and 3,000 Class D | | 3,077 Class C and 3,000 Class D | |
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| (1) | Wonder is collateralized by an indemnification agreement from RMC in the amount of $1,134,000, which includes the pledge of 3,870 C Units. 2,213 of the pledged C Units also cross-collateralize the RAFC obligation. |
| (2) | The CRG and Wonder balances at December 31, 2008 exceeded the stated principal amount per their variable Secured Notes by approximately $192,000 and $558,000, respectively. Per the terms of the Secured Notes, the unpaid principal balance may be greater or less than the initial principal amount of the note and is not considered an event of default. The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the Unpaid Principal Balance (“UPB”) that we originally anticipated and outpaced the minimum principal reductions scheduled for the loans. |
| (3) | Nominal collateral value does not reflect pledge of D units of limited partnership interest of UMTH held by WLL, Ltd., RAFC and KLA, Ltd. UMTH D units represent equity interests in UMT Holdings, LP. Pledge of the UMTH D units entitles the beneficiary to a pro-rata share of UMTH partnership D unit cash distributions. |
The rapid rate of liquidation of the remaining portfolio of properties caused a more rapid increase in the UPB than the Company originally anticipated and out paced the minimum principal reductions scheduled for the loans.
Through September 2007, the Secured Notes incurred interest at a rate of 10% per annum. The CRG and RAFC Secured Notes amortize over 15 years. The SCMI Secured Note amortizes over approximately 22 years, which was the initial amortization of the deficiency notes from SCMI that were consolidated. The Secured Notes required the originating company to make monthly payments equal to the greater of (1) principal and interest amortized over 180 months and 264 months, respectively, or 2) the amount of any distributions paid to the originating company with respect to the pledged Class C and EIA units. Effective, October, 2007, the recourse loans were modified to accommodate the anticipated increases in principal balances throughout the remaining liquidation periods of the underlying assets, suspend the principal component of the amortized loans for the period of July 2007 through June 2009, and reduce the interest rate from 10% to 6%.
The Secured Notes have also been guaranteed by the following entities under the arrangements described below, all of which are dated effective December 31, 2005:
| | · | UMT Holdings. This guaranty is limited to $10,582,336 due under all of the Secured Notes and is unsecured. |
| | · | WLL, Ltd., an affiliate of CRG. This guaranty is of all amounts due under Secured Note from CRG is non-recourse and is secured by an assignment of 2,492 Class C Units and 1,355 Class D units of limited partnership interest of UMT Holdings held by WLL, Ltd. |
| | · | RMC. This guaranty is non-recourse, is limited to 50% of all amounts due under the Secured Note from RAFC and is secured by an assignment of 3,870 Class C units of limited partnership interest of UMT Holdings. |
| | · | Wonder. Wonder Funding obligations are evidenced by a note from RAFC (RAFC Wonder Note) and are secured by a pledge of a certain Indemnification Agreement given by UMTH to RAFC and assigned to UMT in the amount of $1,134,000, which amount is included in the UMTH limited guarantee referenced above. |
In addition, WLL, Ltd. has obligations to UMT Holdings under an indemnification agreement between UMT Holdings, WLL, Ltd. and William Lowe, under which UMT Holdings is indemnified for certain losses on loans and advances made to William Lowe by UMT Holdings. That indemnification agreement allows UMT Holdings to offset any amounts subject to indemnification against distributions made to WLL, Ltd. with respect to the Class C and Class D units of limited partnership interest held by WLL, Ltd. Because WLL, Ltd. has pledged these Class C and Class D units to the Company to secure its guaranty of Capital Reserve Corp.'s obligations under its Secured Note, UMT Holdings and the Company entered into an Intercreditor and Subordination Agreement under which UMT Holdings has agreed to subordinate its rights to offset amounts owed to it by WLL, Ltd. to the Company’s lien on such units.
7) On June 20, 2006, the Company entered into a Second Amended and Restated Secured Line of Credit Promissory Note (the "Amendment") with UDF, a Nevada limited partnership that is affiliated with the Company's Advisor, UMTHGS. The Amendment increased an existing revolving line of credit facility ("Loan") to $45 million. The Loan matures on December 31, 2009. The purpose of the Loan is to finance UDF's loans and investments in real estate development projects.
The Loan is secured by the pledge of all of UDF's land development loans and equity investments. Those UDF loans may be first lien loans or subordinate loans.
The Loan interest rate is the lower of 15% or the highest rate allowed by law, further adjusted with the addition of a credit enhancement to a minimum of 14%. See Subsequent Events footnote in the accompanying notes to the financial statements for further discussion of the credit enhancement.
UDF may use the Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no more than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF.
As a condition of the Amendment, UDF III, a newly formed public limited partnership that is affiliated with UDF and with the Company’s Advisor, had provided a guarantee of payment and performance of the Loan up to $30 million. The Company released the UDF III Guarantee effective January 1, 2008.
On September 19, 2008, UMT entered into an Economic Interest Participation Agreement with UDF III pursuant to which UDF III purchased (i) an economic interest in the $45,000,000 revolving credit facility (“Loan”) from UMT to UDF I and (ii) a purchase option to acquire a full ownership participation interest in the Loan (the “Option”).
The Loan is the $45,000,000 revolving line of credit facility evidenced by a Second Amended and Restated Secured Line of Credit Promissory Note dated as of June 20, 2006, as modified by an amendment effective September 1, 2006 (as amended, the “Amendment”). The UMT Loan is secured by a security interest in the assets of UDF including UDF's land development loans and equity investments pursuant to the First Amended and Restated Security Agreement dated as of September 30, 2004, executed by UDF in favor of UMT (the “Security Agreement”).
Pursuant to the Economic Interest Agreement, each time UDF requests an advance of principal under the UMT Loan, UDF III will fund the required amount to UMT and UDF III’s economic interest in the UMT Loan increases proportionately. UDF III’s economic interest in the UMT Loan gives UDF III the right to receive payment from UMT of principal and accrued interest relating to amounts funded by UDF III to UMT which are applied towards UMT’s funding obligations to UDF under the UMT Loan. UDF III may abate its funding obligations under the Economic Participation Agreement at any time for a period of up to twelve months by giving UMT notice of the abatement.
The Option gives UDF III the right to convert its economic interest into a full ownership participation interest in the UMT Loan at any time by giving written notice to UMT and paying an exercise price of $100. The participation interest includes all rights incidental to ownership of the UMT Loan and the Security Agreement, including participation in the management and control of the UMT Loan. UMT will continue to manage and control the UMT Loan while UDF III owns an economic interest in the UMT Loan. If UDF III exercises its Option and acquires a participation interest in the UMT Loan, UMT will serve as the loan administrator but both UDF III and UMT will participate in the control and management of the UMT Loan. The UMT Loan matures on December 31, 2009. The purpose of the UMT Loan is to finance UDF's investments in real estate development projects. The UMT Loan interest rate is the lower of 14% or the highest rate allowed by law. UDF may use the UMT Loan proceeds to finance indebtedness associated with the acquisition of any assets to seek income that qualifies under the Real Estate Investment Trust provisions of the Internal Revenue Code to the extent such indebtedness, including indebtedness financed by funds advanced under the UMT Loan and indebtedness financed by funds advanced from any other source, including Senior Debt, is no less than 85% of 80% (68%) of the appraised value of all subordinate loans and equity interests for land development and/or land acquisition owned by UDF and 75% for first lien secured loans for land development and/or acquisitions owned by UDF. At December 31, 2008 UDF III had funded approximately $38,322,000 to UDF under this agreement.
The UMT Loan is subordinate to UDF Senior Debt, which includes a line of credit provided by Textron Financial Corporation in the amount of $30,000,000, and all other indebtedness of UDF to any national or state chartered banking association or other institutional lender that is approved by UMT in writing.
8) Loans made to affiliates of the Advisor. Below is a table of the aggregate principal amount of mortgages funded each year indicated, from the companies affiliated with the Advisor, and named in the table and aggregate amount of draws made by UDF under the line of credit, during the three years indicated:
All loans purchased from affiliates during the past three years have been purchased at par value.
9) Until July 31, 2006 the Company’s Advisor was UMTA. As of August 1, 2006, (now subject to an Advisory Agreement effective January 1, 2008) the Company entered into an Advisory Agreement with UMTHGS. Under the terms of the agreement, UMTHGS is paid a monthly trust administration fee. The fee is calculated monthly depending on the Company’s annual distribution rate, ranging from 1/12th of 1% up to 1/12th of 2% of the amount of average invested assets per month. During 2008, 2007, and 2006 the net fees paid to the Company’s Advisors were approximately $1,074,000, $872,000, and $843,000, respectively. Upon entering into the Advisory Agreement with UMTHGS, they agreed to pay the Company $500,000 and assume the $377,000 due from the previous advisor over a period of 12 months. During 2007, and 2006, approximately $300,000, and $200,000, respectively of the consideration fee was received by the Company and netted against trust administration fees, while $200,000 and $157,000 of the assumed debt was paid in 2007, and 2006, respectively. In addition to the administration fee above, the Company paid the Advisor $76,000 each year as reimbursement for costs associated with providing shareholder relations activities during 2008 and 2007. No such costs were reimbursed in 2006.
10) The Company pays loan servicing fees to PSC, a subsidiary of UMTH, under the terms of a Mortgage Servicing Agreement. The Company paid loan servicing fees of approximately $6,000, $10,000, and $20,000 during 2008, 2007, and 2006, respectively.
11) RMC, a Texas based real estate finance company, is owned by Craig Pettit, who is a limited partner of UMTH. The Company loaned money to RMC to make loans to its borrowers. The loans were collaterally assigned to the Company a security for the promissory note between RMC and the Company. There were no outstanding borrowings owed to the Company from RMC as of December 31, 2008, 2007 and 2006.
12) REOPC was a Texas limited partnership owned by UMTH. Its mission was to manage and sell REO properties, including the Company’s, for which it received a fee. The Company loaned money to REOPC to acquire foreclosed properties from CRG and UMTHLC. There were no unpaid principal balances owed to the Company as of December 31, 2008, 2007 and 2006. Until September 2006, when PSC assumed management of REOPC, the Company paid a monthly loan servicing fee based on 0.8% of the Company’s basis in the property. Fees paid to REOPC were $0 in 2008 and 2007, and $18,000 in 2006. The Company also paid real estate commissions to REOPC of approximately $22,000 in 2006. No commissions were paid in 2008 or 2007.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Whitley Penn LLP has served as the Company’s independent registered public accounting firm since July 2002. The Board of Trustees approves all audits, non-audit, tax and other fees payable to the Company’s auditors.
The following table reflects fees billed by Whitley Penn LLP for services rendered to the Company in 2008, 2007 and 2006:
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| | | | | For audit of the Company’s annual financial statements, review of Quarterly financial statements included in the Company’s Forms 10-Q and review of other SEC filings |
| | | | | For preparation of tax returns and tax compliance |
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed:
(1) Financial Statements of the Company are included in Item 8.
(2) Financial Statement Schedules – all schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto included in Item 8.
(3) Exhibits. See the Exhibit Index following for a list of the exhibits that are filed as part of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2009.
UNITED MORTGAGE TRUST
By: /S/CHRISTINE A. GRIFFIN
Christine A. Griffin, President
Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title 60; Date
Principal Executive Officer: | | |
| Trustee, Chairman of the Board and President | |
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Principal Financial and Accounting Officer | | |
| Trustee, Chairman of the Board and President | |
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| Agreement and Plan of Merger, dated as of September 1, 2005, among the Company, UMT Holdings, L.P. and UMT Services, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Firm 8-K/A filed February 12, 2006. | |
| First Amendment to Agreement and Plan of Merger, entered into as of February 10, 2006, by and among the Company, UMT Holdings, L.P. and UMT Services, Inc. (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed on February 16, 2006.) | |
| Form of Second Amended Restated Declaration of Trust | |
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| Form of certificate representing the shares | |
| Dividend Reinvestment Plan (incorporated by reference from the prospectus to the Company's Registration Statement on Form S-3POS (File no, 333-136107), that became effective October 16, 2006)) | |
| Description of Share Repurchase Program (incorporated by reference from the prospectus to the Company's Registration Statement on Form S-3POS (File no, 333-136107), that became effective October 16, 2006)) | |
| Advisory Agreement dated August 14, 2006 between the Company and UMTH General Services, L.P. (incorporated by reference from Form 8-K filed August 16, 2006) | |
| Form of Mortgage Servicing Agreement between the Company and South Central Mortgage, Inc., at a later date assigned to Prospect Service Corp. | |
| Revolving Loan Agreement dated November 8, 2004 between the Company and Texas Capital Bank, N.A. | |
| Fourth Amendment to Revolving Loan Agreement dated November 8, 2004 between the Company and Texas Capital Bank, N.A. together with Promissory Note and Amended and Restated Guaranty (incorporated by reference from Form 8-K/A filed August 2, 2006.) | |
| Second Amended Secured Line of Credit Promissory Note and Security Agreement between the Company and United Development Funding, L.P. dated June 20, 2006 (incorporated by reference from Form 8-K filed June 21, 2006) | |
| Subordination Agreement between the Company and Textron Financial Corporation dated as of June 14, 2006 incorporated by Reference from Form 8-K filed June 21, 2006) | |
| Secured Variable Amount Promissory Note dated December 31, 2005 issued by Capital Reserve Group, Inc. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Secured Variable Amount Promissory Note dated December 31, 2005 issued by South Central Mortgage, Inc. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Secured Variable Amount Promissory Note dated December 31, 2005 issued by Ready America Funding Corp. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Form of Assignment of Limited Partnership Interest as Collateral Dated December 31, 2005 between the Company and Capital Reserve Group, Inc., South Central Mortgage, Inc., Ready America Funding Corp. and WLL, L.P. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Guaranty dated December 31, 2005 between the Company and Ready Mortgage Corp. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Guaranty dated December 31, 2005 between the Company and WLL, L.P. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Guaranty dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Intercreditor and Subordination Agreement dated December 31, 2005 between the Company and UMT Holdings, L.P. (incorporated by reference from Form 8-K filed March 31, 2006) | |
| Subsidiaries of the Registrant (filed herewith) | |
| Consent of Independent Registered Public Accounting Firm (filed herewith) | |
| Certification pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith) | |
| Certification pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith) | |
The exhibits marked with “*” are incorporated by reference from the Company's Registration Statement on Form S-11 (File No. 333-10109) that was declared effective on March 5, 1997. The exhibit marked with “**” is incorporated by reference from the Company's registration statement on Form S-11 (File No. 333-56520) that was declared effective on June 4, 2001. The exhibit marked “***” is incorporated by reference from the Company’s Report on Form 10-K for the period ending December 31, 2000. The exhibit marked “#” is incorporated by reference from the Company’s Report on Form 10-Q for the period ending June 30, 2001. The Exhibit marked “##” is incorporated by reference from the Company’s Report on Form 10-K for the period ending December 31, 2004.
