WSFS Expects Wind Down of Reverse Mortgage Subsidiary by Year End

WSFS Financial, the parent company of Wilmington Savings Fund Society, FSB reported a breakeven net income for the third quarter and a loss per common share of $0.10.

“We have made fundamental progress at improving our core franchise and earnings power, and while our results have stabilized in the third quarter, we continue to be challenged by high credit costs,”  said Mark A. Turner, President and CEO.

The company recognized a $746,000 positive adjustment on a $12.4 million par value BBB+ rated mortgage-backed security (MBS) issued in connection with a 2002 reverse mortgage securitization as a result of market improvement in credit spreads.


During the third quarter of 2009, 1st Reverse reported a pre-tax loss of $166,000 as it moved towards completing the wind-down said WSFS.  The reverse mortgage subsidy recorded $626,000 in fee income and expenses of $792,000 during the quarter.

Earlier this year, WSFS announced it would be winding down 1st Reverse despite the fact it was close to breaking even.  WSFS anticipates it will complete the wind-down during the fourth quarter of 2009.

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  • 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.

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