Aames Adopts New Business Strategies, Accounting Method
In a move that will reduce its earnings, Aames Financial Corp. on Wednesday announced that it has adopted a new method of accounting as part of a change in business strategy that might include sponsoring a real estate investment trust.
“This new business strategy represents a fundamental change in the way we do business,” Aames Chief Executive Cary H. Thomas said in a statement.
Los Angeles-based Aames, which has grown rapidly by making home loans to customers with credit problems, said the change is designed to reduce the risks linked to its “gain on sale” method of accounting. The method permits the company to report as current earnings a portion of future payments on the home loans it has packaged into securities and sold to investors.
However, some securities analysts and industry observers have pointed out that some of those earnings may never be realized if there is an unexpected increase in loan defaults or mortgage prepayments.
A combination of new accounting methods and business strategies will eliminate the uncertainty of the company’s earnings as well as boost cash flow. Now, the company will focus on selling its loans outright and booking the profit it earns from the sale. However, the move will also reduce earnings overall.
“Initially, earnings would be lower . . . but the earnings would be cash,” said Neil Kornswiet, president and co-chairman of Aames. He declined to estimate the change in earnings.
Aames announced the changes after financial markets had closed for the day. On Wednesday, Aames shares rose 56 cents to close at $12 on the New York Stock Exchange.
The company also reported its fourth-quarter financial results. Net income fell by about 27% from the same period a year ago, to $13.3 million.
As part of its new business strategy, Aames said it is exploring the creation of a real estate investment trust that would be partially owned by Aames. The company might also form alliances with other mortgage REITS. In both cases, Aames would sell its home loans to the REITS for cash while keeping the right to service the loans.
