Has Guardian Asset Management Become Stretched Too Thin?

Was Mike Nierenberg's Purchase of Guardian Asset Management Misguided?

The 100 percent purchase of Guardian Asset Management by New Residential Investment Corp. was announced 19 August 2019. The deal was massive and kept secret even from the US government, whom were legally mandated to be informed. And why is the sale of Guardian so intriguing? Glad you asked. Foreclosurepedia broke the story of Guardian’s sale long before it hit the financial newswires. And while Guardian has never formally announced its sale, to a foreign nationally controlled firm, the reality is the repercussions have impacted the Mortgage Field Services Industry ever since. Part of the problem is that Guardian’s management made promises which could never be kept — take for example their inability to understand that Aspen Grove Solutions was in no way technologically equipped to scale volume at the level they believed — and part of it was the blue skying with respect to promises of tens of millions of dollars in US government contracts which could never legally be delivered. Regardless, you can bet that the earn outs currently negotiated with Guardian’s management, will pale in comparison to the four to five times EBITDA debt they leverage. And the sacred cows — any promises made by Management to Labor or ongoing contractual arrangements for services — will be the first to go. By putting a small amount of cash up front — the shinny pennies paraded around — and leveraging up the business with debt, they can get a much higher return on their investment.

More than half the profits generated by private equity firms in recent years have been made by piling debt on to the books of the companies they invest in.

And let’s not play games. One of the forms of debt that Guardian lays upon Labor, which will dramatically increase in the weeks to come, is their ability to treat their suppliers like a bank. Guardian is borrowing money from Labor in terms of the time between when Labor performs services and when Guardian pays for those services — if should be the better term as Guardian will be pressured into increasing the chargebacks as a line item.

The impact of the Guardian – New Residential deal has weighed heavily upon the shoulders of Guardian’s Management and intrigued the Facebook pundits. Guardian wasn’t the only firm purchased. In fact, New Residential purchased pieces of Ocwen, PHH Mortgage, and CitiMortgage. They purchased Chronos Solutions and Altisource outright. Did I forget to mention Ditech and a myriad of other firms?

Cutting to the chase: New Residential is backed by Fortress whom is, in turn, backed by foreign nationally controlled SoftBank out of Japan. Masayoshi Son, Japan’s richest man, owns SoftBank. SoftBank is involved with a $200 Billion Vision Fund with the Saudi Crown Prince and has deep ties with Communist China by and through investments. In the next economic downturn, SoftBank will be poised to capitalize upon its strategic position. Moreover, though, SoftBank has the ability to put the proverbial camel’s nose under America’s tent. What I mean is that why not buy up a bunch of cash losing firms to be able to see assets on Day 1 and then structure short sale purchases accordingly?

Guardian, which is simply a dba of DGG RE Investments LLC, owned by Margarida Lopez-Leader, is actually controlled by the former all star cast of the former Asset Management Specialists (AMS). Jerry Mavellia, the former Chief Operating Officer of AMS, which was purchased by a then holding company containing Mortgage Contracting Services (MCS) in August of 2013, is now the Chief Executive Officer of Guardian. Dan Leader, Margarida’s husband, is the Chief Operating Officer — at least in title. Rounding out the clan is Ernie Stefkovic, the former owner of AMS, whom plays the role of pater familias, and is a Director at Guardian. As far as we know, Margarida Lopez-Leader has never spent a single meaningful day in the operations of Guardian Asset Management. This is critical as it goes to the very veracity of Guardian’s governmental status which has allowed it access to nearly One Hundred Million Dollars in US government contracts.

To understand Guardian, you have to understand truly whom Guardian Asset Management is,

Many will remember the purchase of AMS by MCS and the aftermath left in its wake. And Stefkovic fought, for months, in depositions, to protect the sale of AMS by the consortium of TDR Capital and Concentric Equity Group. The sale created a vacuum in which AMS alumni such as Lee Mertins, AMS’ former Director of Operations and Brian Nisbet, a former AMS Manager, thrived. They were directly connected to both Leader and Stefkovic. And within several months of the sale of AMS, Mertins and Nisbet had been brought in by Eduardo San Roman to operate three firms: Assero, 24 Asset Management, and Visneta. Visneta’s front page statement best summarizes the orgy,

 

Visneta is like a dating service for everyone in the real estate industry.

Click Image To Enlarge

Secrecy is the only real currency which matters, but I digress. Will the real MCS please stand up? We are not simply talking about Frank Loscalzo’s founding of MCS in 1995 or by way of the merger in 2005. We are talking about who MCS truly is today.

As early as 2009, TDR Capital took an interest in US mortgage field services. Here is what they had to say about to original purchase of the AMS – MCS package,

In 2009, whilst getting to know the VPS business, we developed an understanding of the US mortgage market, where mortgage defaults and repossessions were at an historical high and where the changing regulatory landscape was driving an increased outsourcing of functions by the large lenders.

Given our belief in the opportunity for growth in the US mortgage services market, after the 2010 acquisition of VPS, we refocused the company’s priorities and encouraged the aggressive pursuit of larger, national contracts in the US to grow its existing US business.

In October 2013, we completed the transformational acquisition of MCS in the US. Concurrently we separated VPS US from its European parent and along with MCS it formed the larger MCS Group.

As early as August, 2013, MCS ceased being its own company. Here was the press release announcing that MCS, for all intents and purposes other than name, was bundled up into a package which would later be sliced and diced across two different continents,

Concentric Equity Partners (CEP) and TDR Capital (TDR) announce 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).

The holding company, which will be owned by CEP, TDR and management expects to close the transaction effective October 1, 2013. The current CEO of MCS, Caroline Reaves, will additionally assume the role of CEO of the holding company.

Where the problems began to mount was when MCS moved to purchase AMS. As part of the debt load pitched to the TDR – CEG consortium was that the US Department of Housing and Urban Development (HUD) Management and Marketing (M&M) Field Service Management (FSM) contracts would pass through as novation contracts. Everyone blue skied the deal including Stefkovic. Sounding familiar? The only problem was that HUD was not willing to play ball.

Dating as far back as the leveraging of Innotion Enterprises by Safeguard Properties, under a HUD M&M FSM Award, a little known and quasi-official portion of regulation known as HUD 5.1.12.5 has been part of the fabric of the Award process. HUD realized they had three options: Grant a novational; deny the novational based on HUD 5.1.12.5; or deny the novational based upon the fact that the original signatory to the HUD M&M FSM 3.0 was not part of the new company. The then AMS MCS Subholdings Group was put on notice that they would not be able to perform upon the former AMS HUD M&M FSM contracts.

By April of 2017, TDR Capital realized that MCS was not the pig with lipstick it had originally been prettied up to be. Hundreds of millions of dollars in debt were bogging it down along with a catastrophic drop in asset volume to be serviced. And the AMS deal, with the promises of mullions of dollars in HUD contracts, never materialized. During this time, Arnold & Palmer were hired to seal the deal for the latest purchase of MCS, the apparent red headed stepchild. That deal followed in the same doomed footsteps as the doomed acquisition of Field Asset Services (FAS) by Assurant, later acquired by Xome, a subsidiary of Nationstar. Here is what Arnold & Palmer had to say,

Arnold & Porter represented longtime private equity client American Securities LLC in its acquisition of Mortgage Contracting Services, a leading national provider of outsourced solutions for mortgage services across the mortgage cycle. The financing entered into in connection with the acquisition consisted of a $390 million senior secured term loan and a $35 million senior secured revolving credit facility.

Today, MCS is legally known as  ASP MCS Acquisition Corp. One thing in which AMS, MCS, FAS, and Assurant all share, along with their colleagues at Altisource, ServiceLink, and a half dozen other National Association of Mortgage Field Services (NAMFS) firms, is class action litigation against they for employee misclassification. What this means is that Contractors successfully pursued claims, in court, that they were employees. Several of those firms were represented by Jones Day, a law firm. Robert Bergstrom, a Partner at Jones Day, had this to say about the settlements and federal jury awards,

Jones Day successfully obtained the dismissal of a putative wage-and-hour class action filed against Mortgage Contracting Services, LLC (“MCS”) and Asset Management Specialists, LLC (“AMS”) challenging their fundamental business practices concerning classification of their service providers as independent contractors. In February of 2014, the plaintiff instituted a wage-and-hour class action lawsuit against MCS and AMS, two national companies in the business of supplying “vendors” to preserve properties owned by the government and various banks, asserting he and the putative class members were misclassified as independent contractors, involving approximately $160 million in potential liability. In August of 2016, AMS and MCS asked Jones Day to take over the case from a different law firm. The Jones Day team moved for summary judgment and opposed plaintiff Vinson’s motion for class certification. Shortly after the filing of our opposition to class certification, plaintiff settled the matter on an individual basis and dismissed the class allegations.

Notably, during this same time, plaintiff’s counsel brought a separate action asserting identical claims against a competitor of our clients. In that case, the court certified the class and granted summary judgment for the plaintiff. The case proceeded to trial on damages, where the jury awarded more than $2 million in damages for 11 representative class members. There are approximately 200 additional class members in that matter, and the total damages are likely to exceed $40 million prior to any award of attorneys’ fees or costs.

Whether or not Jones Day successfully defended AMS and MCS from claims by Bennett Vinson, or whether they told AMS and MCS to throw in the towel and simply pay him off, no one will ever know. What we do know is that there are now dozens of these cases stretching from California to Georgia to Massachusetts.

Just like Dan Leader’s pater familias and the AMS – MCS litigation, one of the problems Guardian is faced with is whether or not to obey state and federal rulings as well as state law in California. HUD has been pointed in the fact that Guardian is bound to obey state law — in both the California Supreme Court decision in Dynamex as well as the legislative codification in AB 5. Currently, Dan Leader refuses to do such. In fact, Leader has gone out of his way to absorb the new HUD M&M FSM contracts without ever addressing the issue.

So, has HUD issued an exemption, of any kind, for Dan Leader and Guardian Asset Management? No. Here is what a Senior HUD Official had to say about the matter,

While we’ve used exemptions in the past for a few limited scenarios, I don’t foresee that we would grant an exemption for Federal performance in this instance.  The FSMs are bound to state and local laws under the terms of their contract, so HUD would require them to recognize the state court decisions in performance of their FSM contracts.

Curious why Dan Leader and his pater familias do not want to comply with state law in California? Pretty simple. Guardian is currently servicing HUD M&M FSM Awards totaling over Thirty Five Million Dollars — for only ONE YEAR of maintaining a thousand or so properties. These properties are already in market ready condition, for the most part, and only require bi-monthly lawn, maid, and inspection services. Not a bad haul — especially when you were able to ensure no one was able to bid upon the portfolio! You see, all of these Awards were non competitive and were not made available to the public to bid upon. They were, to the best of my knowledge, the largest set of non competitive bids ever awarded in a non competitive setting. To put that into perspective, a Senior HUD Official stated this, with respect to how much of that money Guardian is likely to pocket,

FPDS captures obligations and base + all options or “ceiling” value of the contracts.  However, it doesn’t show expenditures.  Based on what I’ve seen historically with FSM, I’d say actual expenditures are typically 15% – 20% less than obligations, assuming no major fluctuations in inventory.

That comes in at roughly Twenty Eight Million Dollars, give or take. The bigger picture, as if Dan Leader’s purposeful assault upon Labor is not enough, is that the blue skying to New Residential of the tens of millions of dollars, for a SINGLE YEAR of maintaining a thousand or so properties, may be illegal. You see, Dan Leader is asking us all to take on faith that Guardian Asset Management will stay true to Labor when he himself is not even capable of keeping his word to Labor. The Leader family has enjoyed quite a rosy relationship with the latest HUD M&M Director, Cathy Baker, as US government records show.

Tomorrow, we will begin to dig deep and explore the hierarchy within New Residential.

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