Question
From: (redacted)
Sent: Wednesday,March 08, 2006 12:11 PM
To: Verne,B. Michael
Subject: Valuationof Non-Exempt Assets Issue
Mike
I need some guidanceconcerning valuation of non-exempt assets. A client is considering buying allof the stock of a company that is in the business of originating, servicing andselling mortgage loans. The servicing of mortgage loans will continue after themortgage loans have been sold. I understand that the originating of mortgageloans, servicing of those mortgage loans while held by the originating companyand the sale of those mortgage loans (as well as any assets directly relatedthat business) is exempt under 7A(c)(2) and 802.4. I also understand that theservicing of mortgage loans that have been sold is not exempt and must bevalued for purposes of determining whether the size-of-transaction test issatisfied (we believe that this is the only non-exempt asset).
In valuing the business ofservicing mortgage loans that have been sold, I expect that the client wouldmake a fair market valuation based on this business being a going concern. Indoing so, does the client assume that the company vvill continue to originatemortgage loans that will be sold, which will replenish the pool of mortgageloans that it services? We do not believe that the company services loans thatit does not originate. Alternatively, does the client treat the origination ofmortgage loans as completely exempt and, therefore, a business that does not occurfor purposes of the HSR valuation? By doing so, the client would value thebusiness based on the servicing that it does for the existing mortgage loansthat it has sold, but would assume that once these mortgage loans have beenpaid in full, there would be no more servicing (since there would have been nomore originations) -- in essence, a dead end business.
I would appreciate anyguidance that you could provide. Best regards,