WSFS Reverse Mortgage Subsidiary Posts Loss, Earnings Call Details

imageWSFS Financial Corp earnings showed a pre-tax loss of $586,000 during the first quarter of 2009 for its reverse mortgage subsidiary 1st Reverse Financial Services.  The company acquired a majority stake of 1st Reverse in April of 2008 for about $3.4 million.

1st Reverse’s Q1 2009 numbers show an improvement compared to a pre-tax loss of $832,000 for the fourth quarter of 2008.  "1st Reverse has modified its business plan to rely more heavily on retail loan originations, and also during the first quarter implemented many cost reductions to improve expected breakeven origination volumes," the statement said.

During the earnings call, Andy Stapp from B. Riley and Company asked Mark Turner, WSFS’s President CEO, “do you still anticipate 1st Reverse to turn a profit in the second quarter?”  His response below:

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Andy, our primary goal now with 1st Reverse management is to continue to hone the model and cut costs to get them to a breakeven level as soon as possible. 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.

It’s been a difficult market for a start up involved in mortgages, as home values have come down. I’ll say though we still strongly believe in a reverse mortgage product as a great way for seniors and baby boomers to live comfortably in their homes in retirement. And we believe the product has a bright future because of the demographics, and we continue to have great success originating from our local retail branch network.

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  • 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.

  • 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.

  • 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?

  • 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?

  • 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.

  • 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.

  • 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.

  • 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.

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