Original Product
Our original product relies upon Florida statutory provisions that effectively
protect the principal amount invested by us in each Account. In particular,
Section 718.116, Florida Statutes, makes purchasers and sellers of a unit in
an Association jointly and severally liable for all past due assessments, interest,
late fees, legal fees, and costs payable to the Association. In addition, the
statute grants to Associations a so-called “super lien”, which is
a category of lien that is given a statutorily higher priority than all other
types of liens other than property tax liens. Under the Florida statute, a Florida
Association’s super lien has higher priority than all other lien holders,
except that in the case of property tax liens. The amount of the Association’s
priority over a first mortgage holder that takes title to a property through
foreclosure (or deed in lieu), referred to as the Super Lien Amount, is limited
to twelve months’ past due assessments or, if less, one percent (1.0%)
of the original mortgage amount. Under our contracts with Associations for our
original product, we pay Associations an amount up to the Super Lien Amount
for the right to receive all collected interest and late fees on Accounts purchased
from the Associations. In the past, to protect any amount invested by us in
excess of the Super Lien Amount, we purchased insurance from an affiliate of
AmTrust North America, or AmTrust, covering all assessments lost during the
term of coverage due to a first mortgage foreclosure. As of January 28th, 2016
AmTrust has advised us that they will not continue to offer the insurance coverage
we have purchased from them in the past. They represented to us that the nonrenewal
is due solely to the fact that they have not generated the premium volume they
anticipated.
New Neighbor Guaranty
In 2012, we began development of a new product, the New Neighbor Guaranty, wherein
an Association assigns substantially all of its outstanding indebtedness and
accruals on its delinquent units to us in exchange for payments in an amount
equal to the regular ongoing monthly or quarterly assessments for delinquent
units when those amounts would be due to the Association. We assume both the
payment and collection obligations for these assigned Accounts under this product.
This simultaneously eliminates an Association’s balance sheet bad debts
and assists the Association to meet its budget by receiving guaranteed assessment
payments on its delinquent units and relieving the Association from paying legal
fees and costs to collect its bad debts. We believe that the combined features
of the product enhance the value of the underlying real estate in an Association
and the value of an Association’s delinquent receivables.
Before we implement the New Neighbor Guaranty program, an Association typically
asks us to conduct a review of its accounts receivable. After we have conducted
the review, we inform the Association of which Accounts we are willing to purchase
and the terms of such purchase. Once we implement the New Neighbor Guaranty
program, we begin making scheduled payments to the Association on the Accounts
as if the Association had non-delinquent residents occupying the units underlying
the Accounts. Our New Neighbor Guaranty contracts typically allow us to retain
all collection proceeds on each Account other than special assessments and accelerated
assessment balances. Thus, the Association foregoes the potential benefit of
a larger future collection in exchange for the certainty of a steady stream
of immediate payments on the Account.
In the past, to protect any amount invested by us in excess of the Super Lien
Amount, we purchased insurance from an affiliate of AmTrust North America, or
AmTrust, covering all assessments lost during the term of coverage due to a
first mortgage foreclosure. As of January 28th, 2016 AmTrust has advised us
that they will not continue to offer the insurance coverage we have purchased
from them in the past. They represented to us that the nonrenewal is due solely
to the fact that they have not generated the premium volume they anticipated.
The New Neighbor Guaranty program represented approximately five percent (5%)
of our overall revenue in 2015 in comparison to our original product, which
accounted for approximately ninety-three percent (93%) of our overall revenue
in the same period. The balance of our revenue from the period was from Accounts
that are hybrids of the original product with varying splits and from income
on real estate owned, or REO, units. As we continue to develop our New Neighbor
Guaranty product, we expect it to make up continually larger portions of our
total revenue.
Future Products
We are also developing other variations of our contracts with Associations in
various states that we may introduce to the market in the future. For example,
under one product under development, at the request of an Association lender
we may contract with an Association to provide that the Association will have
revenues equal to or more than 90% of budget or any other percentage the lender
requests. If an Association is at 80% of budget and a lender requires it to
maintain revenues of 90% of budget, this product would provide upfront capital
to bring the Association to the 90% threshold and then make continuing payments
to keep it there through the term of the loan. This minimizes the lender’s
risk of delinquencies adversely affecting the loan’s repayment. Also,
this would enable lenders to do business with more Associations than their previous
underwriting guidelines would permit if Associations contract with us as part
of the loan package. This product, along with other variations on our contracts
with Associations in various states, remains under development, however, and
there is no assurance that we will ultimately launch this product or any other
variation on our contracts with Associations in any state.