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American Equities investors get glum news

It’s been about two months since investors at the Vancouver financial firm American Equities were notified that 15 of its mortgage investment funds had become insolvent and placed into receivership under the direction of Portland-based Hamstreet and Associates.

Investors got their first major progress update last week in a letter from Hamstreet, outlining some of the details the financial consultant has learned about the history and management of the mortgage pools, and the prospects for recovering some of their value.

“For an investor, it’s read it and weep,” said one investor who emailed the Columbian.

The letter, which was also posted on Hamstreet’s website for the receivership process, describes a massive, hard-to-follow, at times error-ridden and likely incomplete set of financial transaction records covering more than a decade of the funds’ operation.

The funds’ managers routinely overestimated the value of the underlying assets, Hamstreet wrote, and all of the funds have been insolvent since at least 2012.

“Despite the insolvency, (the fund managers) continued to solicit investors,” Hamstreet wrote, “and it appears that newly invested funds were used to make interest and principal payments to other investors rather than to purchase contracts.”

The funds collectively had about 250 investors, a majority of whom appeared to be from the Portland area or Southwest Washington — and several investors who spoke to The Columbian said the investments represented a significant portion of their retirement savings. A preliminary estimate showed the funds’ collective assets were about $34 million, against about $77 million in liabilities.

Management

The 15 mortgage pools — whose names were all some variant of American Eagle, e.g. American Eagle Mortgage 100 LLC, American Eagle Mortgage 200 LLC, American Eagle Mortgage Mexico 100 LLC — were essentially operated as a single enterprise, according to Hamstreet, with cash and property frequently moved between pools with no formal documentation.

“If Pool A didn’t have the cash to make investor payments, it would borrow from Pool B, or transfer its investors into Pool B to be paid,” Hamstreet wrote. “Funds newly invested in a pool to purchase contracts were instead used to pay existing investors in other pools. These kinds of transactions ignored the legal separateness of the entities, which essentially became a fiction.”

The pools’ managers sold contracts to the pools at prices above their fair market value, Hamstreet wrote, “potentially indicating self-dealing on the part of the management companies,” and the managers also charged brokers’ fees for contracts purchased from third parties.

The pools also loaned money to “affiliated parties,” Hamstreet wrote, referring to additional investment vehicles that were operated by American Equities founder Ross Miles and other employees, but are not part of the receivership. Those loans have a total outstanding balance of $9.54 million, and many of them do not appear to be receiving regular payments, Hamstreet wrote.

Accounting

The pools’ financial records did not follow standard accounting practices and instead used methodology that routinely overestimated the value of the assets, Hamstreet wrote, often by recording costs and fees as additions to an asset’s listed value.

In a specific example, the letter describes a mortgage contract on a piece of property in Roseburg, Ore., which one of the American Eagle pools purchased in 2011.

The contract was transferred to a different pool in 2014, and that pool foreclosed on the property in 2016 after the contract holder became delinquent. But the managers apparently added the foreclosure process costs — plus taxes, insurance and maintenance costs once the pool took control of the property — into the property’s listed value.

After all that, the property’s book value was listed as $82,815, Hamstreet wrote — compared with an initial purchase price of $51,191 for the mortgage contract. The property was placed on the market in 2018 priced at $49,000, and remained there for several months before it received an offer for $33,500.

Hamstreet said it concluded that the offer was fair based on current market values in the area and accepted it in June. The cash proceeds were $27,795 — just 34 percent of the book value that had been recorded for the property, Hamstreet wrote.

“This transaction is representative of dozens of others that, taken together, overstate the estate’s asset values by millions of dollars,” Hamstreet wrote.

Asset value

As the court-appointed receiver, Hamstreet and Associates’ mission is to develop a full accounting of all the pools’ assets and liquidate them with the goal of recapturing as much value as possible, allowing the money to be distributed to investors in an equitable manner approved by the court.

But the letter outlines some of the difficulties that the receiver will face in trying to liquidate all the assets, and makes it appear doubtful that the assets’ collective value will be anywhere near enough to make up for the money investors stand to lose.

The pools collectively own 215 contracts, Hamstreet wrote, but only 95 of them — representing just 21 percent of the collective value — are making regular payments. Another 94 contracts — representing 72 percent of the value — have not made a payment in the past two months, and the remainder have habitually made late or partial payments, Hamstreet wrote.

The majority of the pools’ foreclosed properties are of poor quality and will be difficult to sell, Hamstreet wrote. And several of the pools’ properties — including some of the ones that appear to be valuable — are located in Mexico, primarily on the Baja California peninsula.

“Foreclosing on these properties … will be a complex and lengthy process,” Hamstreet wrote, “in part because Mexican foreclosure law is complicated and slow, but also because we will have to establish a real estate trust to own the properties, since foreigners are not allowed to own property in restricted zones, typically within 50 kilometers of any ocean.”

Next steps

The letter states that investors are unlikely to receive any payments for at least the remainder of 2019, due to the length of time needed to analyze all of the documents, liquidate the assets and develop an equitable and court-approved distribution plan.

Hamstreet said it has received 532 proofs of claim from 254 investors across all 15 pools, and the aggregate asserted value of those claims was approximately $77.2 million.

The letter states that the total listed book value of the pools’ assets is approximately $30 million, but due to the managers’ tendency to exaggerate asset values, Hamstreet expects the actual amount recovered by the assets to be “substantially less” than $30 million.

The company also stated that it has notified the federal Securities and Exchange Commission, the Washington Department of Financial Institutions and the Oregon Department of Consumer and Business Services about the receivership process.

The letter states that Hamstreet will cooperate with law enforcement agencies in connection with their investigations into the management and activities of the pools, although it does not definitively state whether any such investigations are taking place, saying only that Hamstreet “has participated in calls with the Washington DFI.”


Source: https://www.columbian.com

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