This excerpt taken from the PMI 10-K filed Mar 11, 2005.
Investigations by regulatory agencies into Select Portfolio Servicings activities and private litigation involving Select Portfolio Servicing could harm its business and adversely affect our investment in SPS.
Select Portfolio Servicings servicing practices have been the subject of investigations by the FTC, HUD, and the Department of Justice, as well as putative state and national class actions. In October 2003, the United States District Court for the District of Massachusetts approved a settlement that resolves the investigations by the FTC and HUD. In May 2004, the District Court approved a nationwide settlement that resolves claims raised in approximately 40 putative class action lawsuits. The FTC and HUD settlement provides for the implementation of a $40.0 million redress fund and certain changes to Select Portfolio Servicings servicing practices. In addition, SPS has entered into consent orders with eight states under which it has agreed to change certain of its practices and refund certain amounts to borrowers in those states. Other states could also seek to require such refunds or consent orders. SPS continues to be subject to a number of civil lawsuits relating to its servicing practices. Several of these suits also seek relief from PMI.
In June 2003, Fannie Mae found certain business practices at Select Portfolio Servicing to be out of compliance with a servicing agreement between the parties. Select Portfolio Servicing and Fannie Mae have agreed that Select Portfolio Servicing will not service any new Fannie Mae-owned loans without the approval of Fannie Mae. However, since June 2003, Fannie Mae has continually renewed Select Portfolio Servicings right to service new Fannie Mae-owned loans, initially on a month to month basis and, more recently, in two-month intervals.
Our investment in SPS, and consequently our consolidated financial results, could be negatively impacted by the ultimate resolution of the state regulatory actions and the outstanding litigation. If Select Portfolio Servicing is required as a result of state regulatory proceedings or litigation to make significant payments or changes to its business practices so that it becomes materially more expensive to operate, SPSs financial condition and results of operations could be adversely affected. Furthermore, regulatory actions and putative class actions have generated negative publicity for Select Portfolio Servicing which has caused and may continue to cause Select Portfolio Servicing to suffer losses in its customer base. These losses could also harm our investment in SPS.
On January 19, 2005, we entered into a Summary of Terms with Credit Suisse First Boston (USA), Inc. (CSFB) that provides that CSFB shall have the option, exercisable on or before July 31, 2005 to acquire 100% of the outstanding capital stock of SPS from PMI and the other shareholders of SPS. Based on the transactions contemplated by the Summary of Terms, PMI recorded a realized capital loss relating to its investment in SPS of $20.4 million on a pre-tax basis, or $13.3 million on an after-tax basis, for the fourth quarter of 2004. As of December 31, 2004, our total investment balance in SPS was $126.2 million, consisting of $109.5 million book value of equity investment and $16.7 million in subordinated participation interests and advances to SPS which are current. Our total investment could become further impaired or uncollectible as a result of the risks involving SPS, which would harm our consolidated financial condition and results of operations.
Pursuant to the Summary of Terms, the parties are currently negotiating a definitive option agreement with respect to CSFBs option to acquire the outstanding SPS common stock. While we expect this definitive agreement to be executed by all parties, we cannot estimate the impact to our financial condition of a failure to consummate such agreement.