NOTES PAYABLE

9 Months Ended

Sep. 30, 2011

NOTES PAYABLE

NOTES PAYABLE

NOTE 8—NOTES PAYABLE

To provide financing to borrowers under GSE and HUD programs, the Company has arranged for warehouse lines of credit in the amount of $300 million with certain national banks. In support of each of these credit facilities, the Company has pledged substantially all of its loans held for sale under the Company’s approved programs.  At September 30, 2011, warehouse borrowings aggregated $90.1 million under the bank facilities. The borrowing rates under these warehouse facilities continue to be computed based on the average 30-day LIBOR plus 1.15% to 2.50%. For the three months ended September 30, 2011 and 2010, the Company incurred interest expense on its warehouse facilities of $1.6 million and $1.5 million; and for the nine months ended September 30, 2011 and 2010, the Company incurred interest expense on its warehouse facilities of $3.9 million and $3.4 million, respectively. Included in interest expense were loan fees of $0.3 million and $0.1 million for the three months ended September 30, 2011 and 2010; and fees of $0.8 million and $0.3 million for the nine months ended September 30, 2011 and 2010, respectively. The notes payable are subject to various financial covenants and the Company was in compliance with all such covenants at September 30, 2011.

Warehouse Facilities

On March 16, 2011, the Company amended its master purchase and sale agreement which was scheduled to mature June 30, 2011. The amendment extended the maturity date of the purchase and sale agreement from June 30, 2011 to March 16, 2012, and reduced the rate for financing under the agreement to the average 30-day LIBOR plus 250 basis points.

On May 11, 2011, the Company amended its committed warehouse line agreement which matures on November 28, 2011. The amendment reduced the rate for borrowing under the agreement to the average 30-day LIBOR plus 200 basis points and modified certain covenants. Following the amendment, the warehouse line agreement requires compliance with the following financial covenants:

· minimum tangible net worth of $100 million,

· maximum indebtedness to tangible net worth of 2.25 to 1.0,

· minimum unrestricted liquidity of $10 million, and

· aggregate unpaid principal amount of Fannie Mae DUS mortgage loans which are sixty days or more past due or otherwise in default not to exceed 2% of the outstanding principal balance of all Fannie Mae DUS mortgage loans.

On June 29, 2011, the Company amended its committed warehouse line agreement which was scheduled to mature on June 29, 2011. The amendment, among other things, extended the maturity date of the warehouse agreement to June 29, 2012, and modified covenants such that they are now measured at the Company level, rather than the operating subsidiary. A May 12, 2011 amendment to the warehouse line agreement reduced the rate for borrowing under the agreement to the average 30-day LIBOR plus 200 basis points and modified certain covenants. Following the amendments, the warehouse line agreement requires compliance with the following financial covenants:

· minimum tangible net worth of $100 million,

· maximum indebtedness to tangible net worth of 2.25 to 1.0,

· minimum unrestricted liquidity of $10 million,

· minimum EBITDA of $12 million (on an annualized basis),

· minimum EBITDA to total debt service ratio of 3.00 to 1.0,

· aggregate unpaid principal amount of Fannie Mae DUS mortgage loans which are sixty days or more past due or otherwise in default not to exceed 2% of the outstanding principal balance of all Fannie Mae DUS mortgage loans,

· minimum servicing portfolio unpaid principal balance of $11 billion and Fannie Mae DUS mortgage loan servicing portfolio unpaid principal balance of $7.5 billion, and

· a maximum loan-to-servicing-value ratio of 40%.

On June 24, 2011, the Company entered into a new committed warehouse line agreement to fund a specific loan origination. The rate for borrowings under the agreement was the average 30-day LIBOR plus 200 basis points. The warehouse line matured fifteen days following the funding of the specified loan origination, at which time the Company repaid all outstanding borrowings and accrued interest.

On July 21, 2011, the Company entered into a warehouse agreement to provide for warehousing advances in an aggregate amount outstanding at any time of up to $35 million, which matures on July 21, 2013, subject to one year extensions at the lenders’ discretion. The facility will support the Company’s lending activities under its interim loan program, whereby it will make first mortgage loans on multifamily real estate properties for periods of up to two years, using available cash in combination with advances under the facility. All borrowings accrue interest at the average 30-day LIBOR plus 250 basis points. Repayments under the facility are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the facility. Upon the occurrence of certain credit events, including but not limited to a default under a pledged mortgage or a foreclosure of an underlying property, the sale, disposition or repayment of a pledged mortgage or the failure to meet certain appraisal requirements, earlier repayment of facility advances may be required. Borrowings under the facility are fully recourse to the Company. The loan documents require the Company  to comply with the following financial covenants:

· minimum tangible net worth of $100 million,

· maximum indebtedness to tangible net worth of 2.25 to 1.0,

· minimum cash and cash equivalents of $10 million,

· minimum EBITDA to total debt service ratio of 2.00 to 1.0, and

· aggregate unpaid principal amount of Fannie Mae DUS mortgage loans which are sixty days or more past due or otherwise in default not to exceed 2% of the outstanding principal balance of all Fannie Mae DUS mortgage loans.

Debt Obligations

On May 11, 2011, the Company amended its $42.5 million term note agreement which was originally scheduled to mature on October 31, 2011. The amendment reduced the rate for borrowing under the agreement to the average 30-day LIBOR plus 250 basis points and extended the maturity date to October 31, 2015. Following the amendment, the term note agreement requires compliance with the following financial covenants:

· minimum tangible net worth of $100 million,

· minimum unrestricted liquidity requirement of $10 million,

· minimum EBITDA of $12 million (on an annualized basis),

· minimum EBITDA to total debt service ratio of 3.00 to 1.0,

· aggregate unpaid principal amount of Fannie Mae DUS mortgage loans which are sixty days or more past due or otherwise in default not to exceed 2% of the outstanding principal balance of all Fannie Mae DUS mortgage loans,

· minimum servicing portfolio unpaid principal balance of $11 billion and Fannie Mae DUS mortgage loan servicing portfolio unpaid principal balance of $7.5 billion, and

· a maximum loan-to-servicing-value ratio of 40%.

All of the ownership interests in Walker & Dunlop, LLC, the Company’s wholly owned subsidiary, are pledged as collateral for the note. The loan has annual principal reductions of $3.6 million. As of September 30, 2011, the outstanding term note balance was $24.3 million.