HSBC The Lender


THE BANK

 

The Bank is a federally chartered and federally insured stock savings bank which, at December 31, 2007, was conducting business from 288 full-service offices, including 54 grocery store banking centers, and over 1,000 automated teller machines in Maryland, Virginia, Delaware and the District of Columbia. The Bank’s home office is located in McLean, Virginia and its executive offices are located in Bethesda, Maryland, both suburban communities of Washington, DC. The Bank either directly or through a wholly-owned subsidiary also maintains two commercial loan production offices located in Baltimore, Maryland and Northern Virginia and nine mortgage loan production offices in the mid-Atlantic region. At December 31, 2007, the Bank had total assets of $15.3 billion, total deposits of $11.1 billion and total stockholders’ equity of $826.7 million. Based on total assets at December 31, 2007, the Bank is the largest full-service bank headquartered in the Washington, DC metropolitan area.

 The Company is a subsidiary of the Bank and, therefore, federal regulatory authorities have the right to examine the Company and its activities. Payment of dividends on the Series A Preferred Shares could be subject to regulatory limitations if after the payment the Bank was not “well capitalized” under OTS regulations. See “Risk Factors – Our ability to pay dividends could be affected by regulatory restrictions on our operations.”

 THE ADVISOR

 In 1996, the Company entered into an advisory agreement (the “Advisory Agreement”) with the Bank (the “Advisor”) to administer the day-to-day operations of the Company. The Advisor is principally responsible for: (i) monitoring the credit quality of the Mortgage Assets held by the Company, (ii) advising the Company with respect to the acquisition, management and financing of the Company’s Mortgage Assets, and (iii) maintaining the custody of the documents related to the Company’s Mortgage Loans. The Advisor may from time to time subcontract all or a portion of its obligations under the Advisory Agreement to one or more of its affiliates involved in the business of managing Mortgage Assets.

 The Advisor and its affiliates have substantial experience in the mortgage lending industry, both in the origination and in the servicing of mortgage loans. At December 31, 2007, the Advisor and its affiliates owned approximately $8.3 billion of residential mortgage loans, including all of the Company’s Residential Mortgage Loans. In their residential mortgage loan business, the Advisor and its affiliates originate and purchase residential mortgage loans. A portion of those loans are sold to investors, primarily in the secondary market, generally on a servicing retained basis. The Advisor and its affiliates may purchase servicing rights on residential mortgage loans. Including loans serviced for its own portfolio and loans serviced for the Company, the Advisor and its affiliates serviced residential mortgage loans having an aggregate principal balance of approximately $21.2 billion as of December 31, 2007.

 The Advisory Agreement had an initial term of three years and is renewed automatically for additional one-year periods unless notice of nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement may be terminated by the Company at any time upon sixty days’ prior written notice. As long as any Series A Preferred Shares remain outstanding, any decision by the Company either to not renew the Advisory Agreement or to terminate the Advisory Agreement must be approved by a majority of the Board of Directors, as well as by a majority of the Independent Directors (as defined below under “Market for Registrant’s Common Equity and Related Stockholder Matters”). The Advisor is entitled to receive an annual advisory fee equal to $200,000, payable in equal quarterly installments, with respect to the advisory and management services provided to the Company. See “Certain Relationships and Related Transactions.”

 

CAPITAL AND LEVERAGE POLICIES

 To the extent that the Board of Directors determines that additional funding is required, the Company may raise those funds through additional equity offerings, debt financing or retention of cash flow (after consideration of provisions of the Code requiring the distribution by a REIT of a certain percentage of taxable income and taking into account taxes that would be imposed on undistributed taxable income, including capital gains), or a combination of these methods.

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