WMF GROUP LTD

Filing Type:	10-K
Filing Date:	Mar 31 1999

Ticker:	WMFG
CIK	1039206
State:	VA
Country:	USA

Date Printed:	Nov 20 2000

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 1998

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF

1934

For the transition period from _________ to _____________

Commission File Number 000-22567

THE WMF GROUP, LTD.

(Exact name of registrant as specified in its charter)

Delaware 54-1647759

--------------------------------------------------------------------------------

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) identification no.)

1593 Spring Hill Road, Suite 400, Vienna, Virginia 22182

(Address of principal executive offices) (Zip code)

Registrant's telephone number, including are code (703) 610-1400

Securities registered pursuant to Section 12 (b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered

Common Stock, $.01 par value The Nasdaq Stock Market

Securities registered pursuant to Section 12 (g) of the Act: NONE

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 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 pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. _____

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $57.7 million based on the closing price of such shares on The Nasdaq Stock Market as of March 29, 1999.

As of March 29, 1999 there were 11,260,415 shares of common stock issued and

outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS IS INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.

The WMF GROUP, LTD.

FORM 10-K

TABLE OF CONTENTS

Item No. Page

-------- ----

PART I

1. Business 3

2. Properties 17

3. Legal Proceedings 17

4. Submission of Matters to a Vote of Security Holders 18

PART II

5. Market for Registrant's Common Equity and Related Stockholder Matters 18

6. Selected Financial Data 19

7. Management's Discussion and Analysis of Financial Condition and

Results of Operations 21

7a. Quantitative and Qualitative Disclosure about Market Risk 32

8. Financial Statements and Supplementary Data 32

9. Changes in and disagreements with Accountants on Accounting and

Financial Disclosure 32

PART III

10. Directors and Executive Officers of the Registrant 32

11. Executive Compensation 32

12. Security Ownership of Certain Beneficial Owners and Management 32

13. Certain Relationships and Related Transactions 32

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 32

A Warning About Forward Looking Statements

This report may contain "forward-looking statements." Any statement in this report, other than a statement of historical fact, may be a forward-looking statement.

You can generally identify forward-looking statements by looking for words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue." Variations on those or similar words, or the negatives of such words, also may indicate forward-looking statements.

Although the Company believes that the expectations reflected in this report are reasonable, the Company cannot assure you that its expectations will be correct. The Company has included a discussion entitled "Risk Factors" in this report, disclosing important factors that could cause its actual results to differ materially from its expectations. If in the future you hear or read any forward-looking statements concerning the Company, you should refer to these Risk Factors.

The forward-looking statements in this report are accurate only as of its date. If the Company's expectations change, or if new events, conditions or circumstances arise, the Company is not required to, and may not, update or revise any forward-looking statement in this report.

PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

The WMF Group, Ltd. (the "Company") is one of the largest commercial mortgage financial services companies in the United States, as measured by servicing portfolio size, according to a survey published by the Mortgage Bankers Association of America (the "MBA"). As the nation's largest originator of Federal National Mortgage Association ("Fannie Mae") and Federal Housing Authority ("FHA") insured multifamily and health care loans, the Company has originated more than $9 billion in conventional and FHA-insured multifamily and commercial loans since 1993, and has a servicing portfolio of approximately $12.1 billion, at December 31, 1998. The company has 346 employees and operates 19 offices nationwide. The Company has three principal lines of business: (i) mortgage banking, (ii) capital markets and (iii) advisory services.

The WMF Group, Ltd. is a Delaware corporation formed in October 1992 under the name "WMF Holdings, Inc." Originally, the Company was created to hold the operations of WMF Huntoon, Paige Associates Limited ("WMF Huntoon Paige") and WMF Washington Mortgage Corp. ("WMF Washington Mortgage"). WMF Huntoon Paige and WMF Washington Mortgage are wholly-owned subsidiaries of the Company.

WMF Huntoon Paige has originated and serviced multifamily and healthcare mortgages insured by FHA under various owners and under various names since 1979. WMF Washington Mortgage acquired WMF Huntoon Paige in 1991. WMF Washington Mortgage has originated and serviced multifamily and commercial mortgages under various owners and under various names since 1984.

On April 1, 1996, NHP Incorporated ("NHP") purchased the Company and named it "NHP Financial Services, Inc." In early 1997, NHP was acquired by Apartment Investment and Management Co. ("AIMCO"). As a condition of that purchase, AIMCO required NHP to spin-off the Company. On December 8, 1997, the Company became an independent, publicly traded company. The Company's primary shareholders are Demeter Holdings Corporation ("Demeter"), Phemus Corporation ("Phemus") and Capricorn Investors II, L.P. ("Capricorn"). Demeter and Phemus are affiliates of Harvard Private Capital Holdings, Inc. ("Harvard").

INDUSTRY OVERVIEW

The Company believes that the financing of commercial and multifamily real estate offers significant growth opportunities. Commercial and multifamily real estate encompasses a wide spectrum of assets including multifamily, office, industrial, retail and hospitality. These assets are financed by an estimated $1.3 trillion of outstanding commercial real estate debt. During the past ten years, total commercial mortgage originations have averaged approximately $210 billion annually, of which approximately 75 percent to 80 percent consist of non-multifamily assets. The Company anticipates that on a stabilized basis, the commercial real estate market will require debt financing for existing properties of approximately $120 to $140 billion annually, plus additional amounts for new construction.

Mortgage banking involves the origination and servicing of mortgage loans. Commercial mortgage banks have arranged a significant portion of the debt financing for commercial real estate. Historically, commercial mortgage banks originated and serviced loans for life insurance companies in specified geographic regions. In addition to providing loans to life insurance companies, some commercial mortgage banks acted as originators for Government Sponsored Entities ("GSEs") such as Fannie Mae and Federal Home Loan Mortgage Corporation ("Freddie Mac"), and also acted as brokers for other lenders. As a result, a fragmented industry has developed which is comprised of small local and regional firms.

However, since the early 1990s the commercial mortgage banking industry has experienced significant change, in part due to the growth in commercial mortgage securitization, the expanded involvement of GSEs, increased borrower sophistication and advances in information technology. Many of the existing firms lack the capital and financial sophistication to compete effectively in today's rapidly changing market. Accordingly, the Company believes the commercial mortgage industry is going through a period of consolidation similar to that experienced in the residential mortgage industry. Although consolidation provides significant growth opportunities for the Company, certain risks are also involved. See "Risk Factors -- The Company May Be Unable to Complete Acquisitions or Enter into New Business Lines."

STRATEGIC OBJECTIVES

Because of its geographic scope, multiple investor relationships, underwriting expertise, operating systems and product development capabilities, the Company believes that it is well-positioned to compete effectively in the commercial real estate financing industry. Technological demands, large and sophisticated infrastructure for real estate underwriting and risk evaluation, and rapid market changes increasingly characterize this industry. The Company believes that these developments will lead to the creation of large and sophisticated mortgage finance enterprises offering a wide spectrum of commercial finance products. The Company seeks to use its existing infrastructure and market position to increase market share of its established businesses and to expand into related businesses.

The Company seeks to increase reported earnings and cash flow through (i) acquisitions, (ii) internal growth, (iii) design and delivery of new mortgage products, including structured loan products and participating loan products, (iv) expansion into related businesses, such managing commercial mortgage investment funds, and (v) diversification of fee income sources.

Acquisitions. The Company has pursued a strategy of acquiring (1) multifamily and commercial mortgage businesses that either serve key real estate markets in the United States or provide specialized services that enhance its product line, and (2) additional servicing portfolios. In the past, the Company has sought to acquire companies with active and productive loan origination staffs, significant market share and servicing portfolios of $250 million or more and expects to continue to do so in the future, to the extent adequate capital and attractive opportunities are available.

Since 1996, the Company has made six acquisitions (the "Acquistions"):

. During 1996, the Company increased its portfolio of serviced mortgages by

40.9 percent from $4.4 billion to $6.2 billion, primarily as a result of

two acquisitions. On May 13, 1996, WMF Huntoon Paige purchased a portion of

the loan production pipeline and servicing, as well as certain other

assets, of American Capital Resources Investment Corp. ("ACR") for

approximately $4.2 million, plus potential future payments based on

realization of loans closed from the pipeline through August 1997. The

acquired pipeline and loan production offices originated approximately $138

million in multifamily and healthcare loans for WMF Huntoon Paige in 1996.

. On December 31, 1996, WMF Washington Mortgage acquired all of the common

stock of Detroit-based Proctor & Associates of Michigan ("Proctor"), the

37th largest commercial mortgage banking firm in the United States based on

a survey by the MBA. WMF Washington Mortgage paid approximately $3.7

million in cash to acquire Proctor. The acquisition brought to the Company

a $1.1 billion loan servicing portfolio of multifamily, retail and office

building mortgages, as well as 17 active correspondent relationships with

life insurance companies.

. On April 15, 1997, WMF Washington Mortgage purchased substantially all of

the mortgage banking assets and liabilities of Askew Investment Company

("Askew") in Dallas, Texas for $5.6 million, excluding transaction costs

(82 percent of which was paid at closing and the remaining 18 percent of

which will be paid in the form of earnouts upon the attainment of certain

performance objectives over a 36-month period). Askew is a multifamily and

commercial mortgage bank with correspondent relationships with 14 insurance

companies, which originated $375 million of mortgages in 1996. The

acquisition increased the Company's mortgage servicing portfolio by $425

million and gave the Company access to the traditional insurance company

whole-loan buyers in the markets served by Askew. The purchase also

provided the Company with a new source of loans it intended for

securitization through the Company's capital market relationships.

. On November 5, 1997, WMF Washington Mortgage purchased 100 percent of the

outstanding stock of The Robert C. Wilson Company and its Arizona

subsidiary (collectively, "Robert C. Wilson") for a purchase price of

approximately $4.0 million in cash (80 percent of which was paid at closing

and the remaining 20 percent of which will be paid in the form of earnouts

upon the attainment of certain performance objectives over a 42-month

period). In addition to its mortgage and equity origination and servicing

activities, Robert C. Wilson provides commercial office leasing and real

estate sales. Robert C. Wilson has correspondent relationships with 24

insurance companies and originated approximately $475 million of mortgages

in 1997. The acquisition increased the Company's servicing portfolio by

$554 million.

. On December 23, 1997, WMF Washington Mortgage purchased substantially all

of the mortgage banking assets of New York Urban West, Inc. ("New York

Urban") for a purchase price of approximately $4.9 million in cash (84

percent of which was paid at closing and the remaining 16 percent of which

will be paid in the form of earnouts upon the attainment of certain

performance objectives over a 42-month period). An approved HUD mortgagee,

New York Urban originated $225 million of mortgages in 1997 and had

correspondent relationships with several life insurance companies. The

acquisition increased the Company's servicing portfolio by $1.3 billion.

. On March 27, 1998, the Company created WMF Carbon Mesa Advisors, Inc. ("WMF

Carbon Mesa"), which purchased all of the assets of Carbon Mesa Advisors,

Inc. and Strategic Real Estate Partners for a combination of cash and

common stock. WMF Carbon Mesa develops new loan products, manages

commercial mortgage investment funds, provides special asset management

services and originates commercial mortgages.

The Company also grows its servicing portfolio through the acquisition of servicing rights. Since 1992, the Company has acquired servicing rights on approximately $1.3 billion of mortgages in over 44 transactions.

The Company routinely reviews and conducts investigations of potential acquisitions of multifamily and commercial mortgage businesses. As of March 30, 1999, the Company does not have any agreements or letters of intent with respect to pending acquisitions. However, if the Company has access to sufficient capital, the Company may enter into discussions with one or more potential acquisition targets in the commercial mortgage financial services business. The Company cannot assure you that such discussions will result in future acquisitions, or that if those acquisitions are completed, they will be successful.

Internal Growth. The Company has grown through internal expansion. This growth has occurred though a combination of opening of new offices, hiring new loan officers, implementing loan officer training programs, and creating a national sales force capable of originating loans for multiple of investor sources. Prospectively, the Company seeks to grow via continued expansion of its national origination system, further streamlining of its servicing operations, and the realization of other operating efficiencies.

- In addition to expanding its origination system through acquisitions, the

Company opened four new loan origination offices and hired 16 new loan

officers in 1998. Through training and other management initiatives, the

Company has developed a national sales force, capable of selling all loan

products offered by the Company.

- The Company implemented a cost-reduction program, which is expected to

result in savings of at least $7.5 million annually

from previously anticipated levels. See "Major Developments in 1998 - Cost-

Saving Measures".

As a result of acquisitions and internal growth, the Company has increased loan originations by approximately 62 percent annually, from approximately $240 million in 1992 to approximately $4.3 billion in 1998. The Company's servicing portfolio has increased by approximately 26 percent annually, from approximately $3.0 billion in 1992 to $12.1 billion as of December 31, 1998.

Design and delivery of new mortgage products. Since 1992, the Company has been involved in developing more than eight new products, including one of the first whole-loan conduits (Common Sense/SM/), a revolving credit facility for real estate investment trusts, a bridge loan program for mark-to-market properties and a forward commitment program for tax-credit new construction. Using these products, the Company has originated loans totaling over $1.7 billion from 1992 to 1998.

The Company has also enhanced its interim financing product, has added a number of loan products to sell to life insurance companies, has created a small loan program, and has developed a securitized loan product with a major Wall Street conduit for commercial lending. The Company intends to enhance its ability to develop new financing products in response to changing market conditions, including continued development of bridge loan products, as well as the addition of high-yield, mezzanine and participating loan products. The Company cannot assure you that it will be successful in developing any particular new product or, if a product is developed, that it will be profitable for the Company.

Expansion into related businesses. The Company seeks to build upon its experience in evaluating real estate to expand its services and develop related products. The Company has used its expertise to provide due diligence services for institutional clients, to enter the advisory services/funds management business and to expand its presence in the commercial mortgage-backed securities market. Other possible businesses may include asset management, commercial leasing and management and the purchase and retention of commercial mortgage- backed securities. Expansion may occur through a combination of acquisitions, strategic alliances and internal business development. There can be no assurance that the Company will seek to undertake any specific line of business, or that, if it undertakes a particular line of business, that the business will be successful.

Fee Diversification. The Company intends to manage the risks of the commercial real estate financing industry by (i) focusing its activities on earning service and origination fees rather than earning interest on retained mortgage assets, (ii) developing strategic relationships with multiple investors, (iii) lending to a variety of commercial asset classes and (iv) operating on a national basis.

. Fee-based Earnings. In 1998, approximately 96.8% of the Company's revenue was

generated from origination, servicing and other related fees. Of this amount, fees and other revenue related to servicing and funds management agreements accounted for approximately 44% of Company fee revenue. In addition to providing a stable source of earnings, this approach requires significantly less capital than the retention of mortgage assets. While it may make minority investments in funds it manages, the Company does not intend to take significant principal risk positions.

. Multiple Investors. In the past, changes in the financial markets and

investor requirements have contributed to the volatility of the commercial mortgage financial markets. The Company seeks to manage this risk by developing strategic relationships with a variety of investor sources, including commercial banks, GSEs, investment banks and insurance companies. The Company believes this strategy enabled it to originate $1.1 billion of multifamily and commercial mortgages in the fourth quarter of 1998 despite the limited liquidity in the conduit market.

. Multiple Asset Classes. The Company has lent to a wide variety of commercial

asset classes, including multifamily, retail, office and hospitality. The Company believes that business and financing cycles vary among asset classes. By lending to multiple asset classes, the Company can reduce risk and improve operating efficiency by redeploying its origination activities as market conditions change.

. National Presence. The Company has 19 loan origination offices located

throughout the country and has originated loans in every state and the District of Columbia. This national presence provides another source of diversification, helping to mitigate the risk posed by changes in regional business conditions.

See "Risk Factors" for a detailed discussion of the risks that may affect the Company.

MAJOR DEVELOPMENTS IN 1998

1998 Losses. During the year ended December 31, 1998, the Company incurred a net loss of $33.3 million, or $6.38 per share. Almost all of these losses were incurred at the Company's wholly owned subsidiary WMF Capital Corp. ("Capital Corp.") and resulted from volatility in commercial mortgage-backed securities markets and interest rates on U.S. Treasury securities. Despite the losses, the Company's mortgage banking segment remained profitable during the year, and the Company as a whole experienced increased revenue during 1998.

Losses and Restructuring at Capital Corp. Most of the Company's losses during 1998 resulted from short-sale transaction losses related to Capital Corp.'s inventory of mortgage loans. During the first three quarters of 1998, Capital Corp. originated $969 million in mortgage loans. To protect itself against interest rate fluctuations prior to the sale or securitization of its loans, Capital Corp. entered into arrangements for the short sale of U.S. Treasury securities. Because of interest rate volatility during that period, the Company was required to fund losses related to changes in the value of its short-sale positions. To reduce its exposure to margin calls, Capital Corp. sold $691 million in loans and closed the related U.S. Treasury short positions at a loss in the third quarter of 1998.

During December of 1998, Capital Corp. sold the remainder of its loan inventory and closed the related short-sale positions without incurring additional losses. As part of these sales, the Company and Commercial Mortgage Investment Trust, Inc. ("COMIT") purchased $2.4 million and $7.6 million, respectively, of subordinated interests in a pool of $63.5 million of these loans. COMIT is a real estate investment trust ("REIT") that is owned by Harvard, Capricorn and the Company. WMF Carbon Mesa manages COMIT. See "The Company's Lines of Business - Advisory Services (WMF Carbon Mesa)" for more information on WMF Carbon Mesa.

As a result of the losses incurred, Capital Corp. was unable to satisfy certain loan commitments. Capital Corp. has settled one claim related to these obligations but Capital Corp. may not be able to settle similar claims in the future. See "Risk Factors -- Unsatisfied Loan Obligations May Cause Additional Losses." The Company does not intend to contribute additional capital to Capital Corp. or to take principal risk positions at Capital Corp.

Cost-Saving Measures. In response to its 1998 losses, the Company implemented a cost-reduction program, reducing its workforce by 15 percent and decreasing general and administrative expenses. The Company expects that the cost- reduction program will result in annual savings of at least $7.5 million from previously anticipated levels, beginning in 1999.

Issuance and Repayment of Subordinated Notes. On September 4, 1998, the Company entered into a Credit Agreement with COMIT. Under the Credit Agreement, Harvard and Capricorn contributed a total of $20 million to COMIT, and the Company then sold $20 million of its subordinated notes to COMIT. The Company also issued warrants to COMIT entitling it to purchase 1,200,000 shares of common stock at $11.25 per share. COMIT later assigned 960,000 of the warrants to Harvard and 240,000 of the warrants to Capricorn. As part of the Recapitalization Plan, described below, Harvard and Capricorn surrendered those warrants. The Company repaid $16.6 million of the subordinated notes on December 31, 1998. On March 12, 1999, the Company repaid the remaining principal and interest due under the subordinated notes, and the notes were canceled.

Recapitalization Plan. To provide for its working and other capital needs after the losses at Capital Corp., the Company entered into the Recapitalization Plan. The Recapitalization Plan had two parts and raised a total of approximately $27.5 million of new equity:

. Sale of $16.6 Million of Capital Stock to Demeter, Phemus and Capricorn

On December 31, 1998, Demeter, Phemus and Capricorn acquired 3,635,972 shares of the Company's Class A Non-Voting Convertible Preferred Stock (the "Class A Stock") for total cash proceeds of approximately $16.6 million. On January 14, 1999, each share of Class A Stock was converted into one share of common stock. As a result of these transactions, Demeter acquired 2,757,633 shares of the Company's common stock, Phemus acquired 151,145 shares of common stock, and Capricorn acquired 727,194 shares of common stock.

As part of the Class A Stock transaction, Harvard and Capricorn canceled the warrants to purchase 1,200,000 shares of common stock issued to COMIT in connection with the subordinated notes. In addition, Demeter, Phemus and Capricorn entered into a Standby Purchase Agreement to purchase up to 664,028 shares of common stock not otherwise purchased in the rights offering described below, for a total purchase price of $3,320,140. The Company applied the proceeds of the sale of Class A Stock to repay part of the subordinated notes held by COMIT.

Because of their participation in this transaction, Demeter, Phemus and Capricorn agreed not to exercise, transfer or acquire any rights during the rights offering.

. $10.9 Million Public Rights Offering/Private Placement

The Company issued all of its shareholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them on that date. Each right entitled its holder to purchase one share of common stock for $5.00. The rights expired on March 8, 1999.

Through the rights offering, the Company sold a total of 1,482,271 shares of common stock for total proceeds of approximately $7.4 million. On March 19, 1999, Demeter, Phemus and Capricorn completed the purchase of a total of 664,028 shares of the Company's common stock pursuant to the Standby Purchase Agreement, for total proceeds to the Company of approximately $3.3 million. Also, Capricorn has agreed to purchase an additional 34,520 shares at $5.375 per share, for proceeds to the Company of $185,545. The Company expects that this sale to Capricorn will close shortly.

The Company applied the proceeds from the rights offering first to repay the remaining subordinated notes held by COMIT. The Recapitalization Plan resulted in the effective conversion of the Company's $20 million of subordinated notes into common stock and raised approximately $7.5 million of additional common equity, which was used to repay borrowings under the Company's revolving line of credit and for working capital.

Expansion into Funds Management. Though the acquisition of Carbon Mesa Advisors, Inc. and Strategic Real Estate Partners in March 1998, the Company started its advisory services segment, which manages commercial mortgage investment funds, provides special asset management services and develops new loan products. In June, the Company, with Harvard and Capricorn, formed a commercial mortgage REIT to invest in bridge, mezzanine, and structured loans originated by the Company. The REIT is managed by WMF Carbon Mesa and is expected to fund up to $345 million of commercial and multifamily mortgages through June 1999.

THE COMPANY'S LINES OF BUSINESS

MORTGAGE ORIGINATION

Mortgage origination involves the making of loans to borrowers who use real estate property as collateral. The Company's staff of 59 loan originators targets a wide variety of borrowers, including developers, local entrepreneurial owners, large portfolio owners and public companies such as REITs.

Currently, the Company originates mortgages through two channels -- retail and correspondent. For the retail operation, the Company has loan originators in 19 offices located throughout the country. Those individuals directly solicit owners of real estate, as well as local multifamily and commercial mortgage brokers. The Company believes that having a local presence within a market significantly adds to its understanding of the local economic, demographic and real estate trends, thus allowing it to serve borrowers and investors better. A local presence also helps develop borrower relationships and identify new customers.

In those markets where the Company does not have a retail presence, it acts through "correspondent relationships" with local mortgage brokers. In this relationship, a local commercial mortgage broker identifies potential borrowers and refers them to the Company for their loans. Currently, the Company originates loans through correspondents throughout the United States. In 1998, the Company obtained 25.9 percent of its $4.3 billion of loan originations through correspondents.

The Company's relationship with correspondents differs between multifamily and commercial lending and FHA lending. For multifamily and commercial lending, the Company enters into an agreement with each correspondent which generally provides that (1) the borrower will pay the correspondent, usually based on a percentage of the loan, (2) in some instances, the Company will have a right of first refusal to finance properties meeting the criteria of its loan programs and investors and (3) the correspondent will be eligible for incentive fees based on the servicing fees received by the Company from the originated loans. Generally either party to a multifamily and commercial correspondent agreement may terminate the relationship without cause upon prior written notice. The multifamily and commercial correspondent agreements usually do not place geographic restrictions on either the Company or the correspondent.

With respect to FHA lending, correspondents generally enter into agreements with the Company for each individual

transaction and the terms of the agreements vary from transaction to transaction. These agreements define the compensation, roles, representations and warranties for the correspondent and the Company.

After it identifies a potential borrower, the Company determines which of its mortgage products best meets the borrower's needs. Then the Company works with the borrower and a mortgage investor to prepare a loan application. When the borrower completes the application, the Company's underwriters conduct due diligence. In the case of FHA loans, the FHA conducts due diligence. See "-- Mortgage Underwriting" below. The loan is evaluated, and if appropriate, submitted to a loan committee consisting of senior officers of the Company.

If the Company or the FHA approves the loan, the Company issues a commitment to the borrower. Normally, the Company simultaneously commits to sell the loan to an appropriate investor. This simultaneous commitment from both a borrower and a mortgage investor enables the Company to eliminate its exposure to interest rate changes for each transaction. Typical investors include insurance companies, banks, credit corporations, GSEs (such as Fannie Mae) and other institutional investors. Typically the Company funds a loan 15 to 30 days after the loan commitment. At that time, the Company funds the loan using its warehouse lines of credit and the borrower pays the Company an origination fee, typically one percent of the principal amount of the loan.

Within 10 to 45 days after funding the loan, the Company completes the sale of the loan to an investor. In connection with such sales, the Company sometimes retains certain liabilities. See "Risk Factors -- The Company is Liable for Certain Representation and Warranties Concerning Mortgage Loans" and "Risk Factors -- The Company May Incur Losses on Mortgage Loans Under the DUS Program." After selling a mortgage loan, the Company typically retains the right to service the loan. See "-- Mortgage Servicing" below.