Cherry Hill Sells Excess Servicing Rights Back to Freedom

Cherry Hill Mortgage Investment Corp. has agreed to sell a portfolio of excess mortgage servicing rights back to its strategic alliance partner Freedom Mortgage.

An excess MSR is the right to receive the fee above what the servicer normally gets for the performance of those duties.

Cherry Hill expects to record an approximately $16 million net gain through the transaction, the company said in a news release Tuesday. It plans to use a portion of the proceeds from the transaction to repay a term loan with $21 million currently outstanding, while the rest will be temporarily invested in residential mortgage-backed securities until the company identifies an opportunity to deploy the capital in basic MSRs.

The deal was proposed by Freedom, according to Jay Lown, Cherry Hill's president.

"Freedom expressed an interest in reacquiring our excess MSRs and eventually presented a compelling offer," Lown said in a news release. "The excess MSR assets are particularly illiquid, and after careful consideration, we acted opportunistically and accepted the offer."

Lown added that Cherry Hill is "committed to maintaining the balance of our entire portfolio of assets, which has allowed us to take advantage of rate fluctuations in our efforts to create value for shareholders."

The transaction will occur in two stages. The first pool was sold Nov. 15, while the second pool will be sold on or about Dec. 15. The purchase price paid by Freedom equals the product of 60 basis points and the aggregate unpaid principal balance of the pools as of the end of the month prior to the sale.

Freedom will also pay Cherry Hill $750,000 per quarter in 2017 for yield maintenance to mitigate potential earnings deterioration as Cherry Hill works to reinvest into newly originated MSRs.

Additionally, a portion of the second pool's purchase price may include full MSRs on loans backing Ginnie Mae securities, per approval by Cherry Hill's independent directors and Ginnie Mae. Cherry Hill said it hopes to receive Ginnie Mae issuer approval soon. It would then seek Ginnie Mae approval to purchase the MSRs from Freedom.

Cherry Hill Mortgage Investment Corp. is externally managed and advised by Cherry Hill Mortgage Management, an affiliate of Freedom. Freedom closed on Cherry Hill Mortgage Investment Corp.'s initial public offering in October 2013.

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