Caroline Reaves, Chairwoman of Mortgage Contracting Services (MCS), has a large problem. It is a problem that not even the National Association of Mortgage Field Services (NAMFS) Regime could fix. That problem was pointed out by Foreclosurepedia several months ago. You see, the US Department of Housing and Urban Development (HUD) has a little regulation known as HUD 184.108.40.206:
220.127.116.11 Prohibition on Pre-Conveyance Preservation and Protection Work The Field Service Manager or its agent is prohibited from performing both pre-conveyance work on FHA Single Family Insured properties. In the event that the a Field Service Manager or its agent performs pre-conveyance work, the fees associated with post-conveyance work are expressly unallowable and will not be paid. The Field Service Manager must obtain written certification on an annual basis from its subcontractors affirming that they do not perform pre-conveyance work on FHA Single Family Insured properties.
Concentric Equity Partners (CEP) and foreign nationally owned TDR Capital (TDR) recently announced the formation of a new holding company to establish a suite of mortgage field services companies comprising Mortgage Contracting Services, LLC (MCS), Asset Management Specialists, Inc. (AMS) and Vacant Property Specialists, LLC (VPS). This cluster is legally known as MCS AMS Sub Holdings LLC which is holding more than $360 million of rated debt. More on that and their financial frailty below. Nothing novel really; the rich getting richer upon the backs of Contractors.
Reaves and MCS perform almost exclusively upon pre conveyance properties. For those under a rock, that means properties which are still financial institution – real estate owned (REO). Regardless of what Reaves and the rest of her cronies are saying, MCS partnered with AMS is a conflict of interest and illegal — if AMS continues to hold HUD Marketing and Management (M&M) Contracts.
Craig Karnes, HUD M&M Director, knew about this Conflict of Interest for quite some time — if he didn’t then it was dereliction of duty as he is the Director. I also believe that his henchman Kevin M. Simpson, HUD Associate General Counsel for Finance and Administrative Law, Office of General Counsel, knew as well. Strange how these folks have all the time in the world to threaten and intimidate a Member of the Media on behalf of the Obama Administration, but are loathsome to enforce Rules which penalize potential Campaign Contributors.
If I were a betting man, I would opine that AMS has been — or is in the process of being — relieved of their HUD M&M Contracts. I base this upon spikes in Competitor’s Inventories which I am hearing about from Sources in the field as well as from several Beltway tips.
The reality is that the MCS adoption of the NAMFS Regime – Aspen Grove Model followed a distinct timeline. No two ways around it. Additionally, there is no way that a Conflict of Interest could not be present when you look at the fact that Caroline Reaves heads up MCS, AMS and VPS.
Moody’s made an Assessment of MCS AMS Sub Holdings LLC back in September, 2013. That rating DID NOT INCLUDE the salient point that the incestuous MCS AMS relationship could soon be loosing Clients. As a matter of fact, Moody’s was very precise in stating that if they did; if there was a decline in revenue, there would be a further reduction in their Credit Rating. The below is taken from Moody’s rates MCS AMS bank debt B2,
The B2 CFR reflects high customer concentration and Moody’s expectation that the market for MCS AMS’s services will decline in the medium term. However, Moody’s anticipates debt will be reduced through required amortization and the application of free cash flow to optional debt amortization, driving debt to EBITDA (after Moody’s standard adjustments) below 3.5 times in the next 12 to 18 months. Moody’s expects MCS AMS will maintain its share of the property inspection and preservation services market, leading to flat revenues and stable 17% to 20% operating profits over the near term. Moody’s believes that residential mortgage default rates and foreclosure activity should remain elevated for at least the next two years. However, Moody’s expects MCS AMS’s revenue to start to decline in 2015, driven first by a lower rate of residential mortgage loan defaults, then a decline in the number of foreclosed properties (REO), as pre-financial-crisis loans are resolved. The expectation for diminished revenue over the long term leads Moody’s to expect MCS AMS to maintain better than median financial metrics to support the B2 rating. Merger integration related risks also weigh on the rating. Adequate liquidity is provided from free cash flow and a $20 million revolving credit facility.
The stable ratings outlook reflects Moody’s expectation for stable revenue and profits and free cash flow to debt of about 10%. The ratings outlook reflects the expectation that some free cash flow may be used for acquisitions or dividends, but that most will be used to repay debt. The ratings could be lowered if, due to customer losses, diminished pricing or increased competition, revenues or profits decline, leading Moody’s to expect diminished free cash flow and debt to EBITDA to remain above 4 times. [Emphasis Added By Editor] Aggressive financial policies, such as a debt-financed shareholder distribution or acquisition, could also lead to lower ratings. The ratings could be raised if the scope of the business is widened and becomes substantially less closely tied to residential mortgage default and foreclosure rates, and customer concentration is reduced, leading Moody’s to expect long term revenue growth and stable profits.
Let me be extremely candid here: We have been documenting the plethora of NAMFS Regime Members whom have been defrauding Contractors. These NAMFS Regime Members are small fish and have created a scorched earth policy with respect to Labor. As MCS is concentrating on the Wells Fargo Portfolio; as we all well know that Lender Processing Services – Black Knight (LPSBK) hemorrhaged cash due to charge backs and an entire litany of other creative financing techniques, Contractors would do well to begin their exit strategy now.
Make no mistake whatsoever, that those Contractors ignorant enough to continue working with MCS after 01 February, 2014, will get precisely what they deserve. While the Oracle will continue to report upon State of the Industry with respect to this latest unholy alliance, I will render no aid nor comfort to those whom fall as a direct result of their continued addiction to this NAMFS Regime Member.
AMS is ripe for failure now. With the recent canning of their Vendor Department a month or two back coupled with their atrocious pay plan for Contractors, I would see both Employee and Contractor litigation on the imminent horizons. I would place the trifecta for Q2. It would appear that AMS knows the writing is upon the wall as well. The firing – letting go of former owner Ernie Stefkovic and Lee Mertins amongst others by Caroline Reaves is simply the first salvo across the bow.
Only last month, in December, AMS was out spinning up yet new Companies. First, AMS had to create a Doing Business As. They created Asset Management Specialists LLC dba Delaware AMS LLC. Then they spun up Delaware AMS LLC. I mean here we have a Company which was bought out, in part, by foreign nationals. The orders come down to gut any tell tale signs of their previous owners and their relationships with Contractors. This is a page out of the NAMFS Regime Manual on Divide and Conquer.
The further reality of why Contractors should become terrified to work with this monstrosity; this NAMFS Regime Member on steroids, is that the MCS AMS Sub Holdings LLC first shot at the Term B Notes with Bank of America and Merrill – Lynch didn’t go well. After the three day weekend, though, they were both willing to pony up the nearly ONE THIRD BILLION DOLLARS ($340 Million plus $20 Million in Revolving Credit) requested. So, when you look at my predictions for loss of the HUD M&M Contracts by AMS; when you see the statistical reduction in the distressed portfolios, the Perfect Storm is brewing. With interest rates rising — guaranteed — and the Libor (LBO) factored in, this albatross is going to use AMS for their employees (800+) to perform after they decapitate the Contractors.
MCS AMS Sub Holdings went back to the well for capital in October, 2013. The Pacific Select Fund Holdings Floating Rate Portfolio has them in at roughly half a million additional in hock. Seven percent is a pretty damn high rate. Hell, I know crack heads here in Knoxville whom get better deals.
Security ID: 55279UAC5 Security Description: MCS AMS Sub Holdings LLC Amount: 475,000.000 Rate: 7.00 Maturity Date: 10/15/19 Market Value: 461,343.75
Standard and Poor’s (S&P) Xpress Credit Research are FAR LESS enthusiastic than Moody’s. In fact, S&P anticipates default by MCS AMS Sub Holdings LLC. The stark facts are that we are beginning to see a To Big To Fail Model spinning up.
We have assigned preliminary recovery ratings to MCS AMS Sub-Holdings LLC-s proposed $20 million revolving credit facility and $340 million term loan. Our recovery analysis contemplates a simulated default occurring in 2016 due to a steep decline in revenue and operating earnings, the result of a decline in foreclosure activity and customer attrition. [Emphasis Added By Editor] Our default scenario assumes MCS AMS would reorganize in the event of a payment default. We have therefore valued the company as a going concern, using a 5x emergence multiple.
As recent as 13 December, 2013, AMS was back on spin cycle. Remember the MCS AMS Sub Holdings LLC? Yeah, so they spin up in Delaware and respin down in Florida. The problem was that with all the proverbial spinning going on, someone forgot to tell AMS that the music had stopped and their were no chairs left.
We are going to stay on top of this nebulous story. 2014 is shaping up to make the Sub Prime Crisis look like a joke when compared to the anticipated fraud against Contractors.