Interpreting financial reporting in analyzing the decisions of a strategic plan is a very tricky matter at best. The WSFS management decision to shut down 1st Reverse appears prudent in light of persistent losses. Its shutdown is no cause for joy or celebration. In the current environment, it seems as if the curtailment and termination of other reverse mortgage operations will likely follow.

To keep 1st Reverser operational, some questions needed to be answered including: Why were the losses so significant? Was there too much 1st Reverse overhead? Could effective cutbacks be made? Were the group administrative expenses being over allocated to 1st Reverse? Etc. It would be interesting to know what was the determining factor(s) in the decision to shut it down.

No doubt a significant portion of the loans that 1st Reverse was originating were fixed rate. If the bank was selling those loans to Ginnie Mae, there are potential losses that will no doubt be incurred in the future as a result. The question is, did 1st Reverse adequately provide for these anticipated losses in its reported net losses or was it able to postpone recognition because of not knowing their magnitude?

In his October 19th RMD article, Neil Morse pointed out areas where selling a loan to Fannie Mae were preferable to selling to Ginnie Mae. Residual contingent liabilities are the main difference. In that article several of these potential liabilities are presented by Ryan LaRose.

So far the promise of 1st Reverse profits is just that, a reasonable likelihood. Continuing to operate a unit that only has the promise of profit and an expanding exposure to risk of future loss on loans sold to Ginnie Mae does not make much sense.

Here is hoping all the staff at 1st Reverse is able to land on their feet and find comparable employment quickly.

Well its a good thing that Wilmington didn’t finalize their deal with Senior Lending Network. It would have been 2 down in the same year for them.