Critic-

I'm sorry for the spelling errors. You can most likely find grammar errors as well...

But as far as 1st Reverse and WSFS, only time will tell what will happen with them in the future. I personally hope that they do well and continue with their reverse mortgage business.

Dennis,

Great response, except you stated in your fourth comment: "I agree with you that most companies take losses before they turn a profit." I never made that statement nor implied it. That is simply what you inferred.

I thought referring to SLN made my implication clear. You have taught me I cannot assume that.

SLN went after major celebrities to promote not just reverse mortgages but even more importantly their firm. They could have stopped this cash drain at any time to start snatching profits and while hoping to find profits, that was not their primary goal. Their goal was to grow their base until they would be competitive to firms like Wells and IndyMac as to the reverse mortgage industry. Mr. Peskin did just that and by foregoing immediate profits increased the value of the stock immensely due to the place SLN positioned itself in the marketplace. This strategy while not new, to many of us was not just brilliant but was also brilliantly executed.

There are a myriad of reasons why a parent entity will hold onto a subsidiary beyond the simple SLN illustration. One of them is that a significant portion of the losses incurred at the subsidiary level may be little more than mere allocations of administrative and other costs that the parent entity or other affiliates would have incurred anyway. Sometimes, management is clearing out costs that were previously capitalized due to concerns for future bonuses. At times, the value of losing subsidiaries is their defensive value in hanging on to customers and clients. At others, the losses continue for tax planning reasons. Or the combination of items may make such entities extremely valuable.

You seem to believe that the magnitude of losses at the rate of approximately $2,000,000 per year is somehow meaningful to the survivability of a subsidiary within any affiliated group. It might be in some cases, but in others, “paper” losses might be a very insignificant consideration. Unless management is fool-hearty, their public statements are hardly grounds for reaching any profound conclusions of the continuance of a subsidiary unless other evidence provides substantiation for those conclusions. I for one just did not find such evidence in anything you presented. Twenty-four months from now we should know one way or the other.

I am aware of one very diversified consolidated group that had two major subsidiaries. One was very profitable and one incurred losses almost half that size. Without the loser, the money maker would never have obtained the contracts it did. So simply dumping the loser would have meant huge reductions to the overall profits of that Fortune 100 entity far exceeding the monies saved by getting rid of those losses. Management was always talking about how ridiculous the losses of the one subsidiary were. Many of us knew, however, that was talk to satisfy the concerns of a minority of the corporate directors.

By the way since you misspelled it several times, the word is not “loosing” but rather “losing.” For example, you wrote: “Based on their comments, they are not sure how long they want to continue with a company loosing money.”

Critic,

I thought I was pretty clear, but I will slow it down for you....

When you purchase a company, often times you expect to take a loss for a SHORT while. But you can not continue to loose 500k plus per quarter. Based on their comments, they are not sure how long they want to continue with a company loosing money.

THESE ARE THEIR STATEMENTS: "At the same time, we are also working with 1st Reverse management on our strategic alternatives for that business, which could include partnering, a sale of part or all of the business, or an orderly wind down if we cannot get sufficient traction."

YOU STATED: "Then in your fourth comment you seem to take that statement back and declare: “I don’t know.”

As far as the "I don't know" statement, Can you or I be sure if it is a good idea for them to continue to loose money without knowing their strategic plan and balance sheet?

YOU STATED: "Many businesses take a lot more losses than that and survive. The question is whether these are needless book losses or is 1st Reverse positioning itself for something in the future?"

MY RESPONSE: Based on what you stated,(that you are now saying you didn't say) I am agreeing that they could be positioning themselves for the future.

...I just don't think so. I think they are feeling like they made a mistake with the purchase of 1st Reverse, based on the economy, FHA insurance shortage, FNMA not wanting to purchase so many reverse mortgages and raising the margins through the roof and higher interest rates coming, among other reasons.

YOU STATED: I for one have no idea what your point is. Can you explain it? It is all right to be wrong but when you keep making these contradictory and incorrect claims and statements, few of us know what you mean.

MY RESPONSE: I guess I do not know what statements were wrong, contradictory or incorrect.

Dennis,

In your first comment you state: "You can not keep loosing 500K+ a quarter and stay in business." Then in your fourth comment you seem to take that statement back and declare: "I don't know." Then again in your fourth comment, you claim that you agree with me when I never said what you claim I did.

I for one have no idea what your point is. Can you explain it? It is all right to be wrong but when you keep making these contradictory and incorrect claims and statements, few of us know what you mean.

The Critic,

I am not saying it is right or wrong for them to continue with reverse mortgages. I don't know... But it would be a strategic decision for WSFS to continue to invest in 1st Reverse knowing the pressures on the reverse mortgage industry at this time.

I agree with you that most companies take losses before they turn a profit. I'm just saying that in today's environment, it is going to be a tough call. No one can take the losses forever.... we'll unless you are the US government.

Dennis,

Many businesses take a lot more losses than that and survive. The question is whether these are needless book losses or is 1st Reverse positioning itself for something in the future? SLN took a lot more losses than that. The question is whether senior management will allow this to continue.

It's my understanding that for most of the two decades that the HECM program has been in effect, MIP fees collected were more than claims (deficiency)received by FHA. Why does FHA need additional funds? I wonder if the prior year(s) funds went into that black hole kown as "The General Fund" at Treasury vs.a reserve for loan loss type fund.

Gene,
FHA isn't retroactively raising MIP on borrowers. Dennis is referring to the subsidy request by HUD for loans anticipated in FY 2010. Check out links below for more info.

http://reversemortgagedaily.com/2009/05/07/obam...

and

http://rminsight.net/blog/2009/05/hud-signals-h...

The FHA Insurance is GREAT for the borrower, but in a declining price market, it is awful for FHA.

No. What I was saying is that the FHA insurance reserves were being deminished because of the reverse mortgages. The borrower is insured if the loan amount exceeds the value. With the property values declining and the reverse mortgage increasing, when the borrowers move out or pass away, FHA insurance pays the shortage. Example: Home worth $250,000, Reverse Mortgage Lien $300,000 FHA Insurance pays the lender $50,000.

Does this make sense?

Dennis (or anyone),
Re: "FHA going back for more money to insure reverse mortgages." Are you saying that FHA can increase insurance premium after closing?

You can not keep loosing 500K+ a quarter and stay in business. With margins increasing,FHA going back for more money to insure reverse mortgages, FNMA not wanting to be a major investor in reverse mortgages (90+%), home prices and equity still dropping and interest rates going up sooner than later, What is the incentive to stay at it? I don't think they see any light at the end of the tunnel.

IMHO the writing is on the wall. A number of "wholesalers" will become strictly "retailers" in the near future. Do the math. On retail they pay out a percentage of the origination and keep all of the back end. Hellooooo!

Additionally they can control compliance.

Are they going to cut the losses and move everything over to WSFS? Seems like they are setting the stage for a disappearing act.