Walter Sees Future Profitability in Reverse Mortgages

Despite reporting a $38.1 million net loss in the second quarter, Walter Investment Management Corp. (NYSE), the parent company of top-10 reverse mortgage lender RMS, is highly optimistic for the future profitability of its reverse mortgage business.

The net loss Walter reported for the second quarter ended June 30, 2015, translates into a loss of $1.01 per diluted share, as compared to a net loss of $12.9 million, or $0.34 per diluted share, for the second quarter of 2014.

Contributing to this loss was a $56.5 million goodwill impairment charge related to the company’s reverse mortgage segment. As a result of this charge, which was $25.7 million lower than the charge taken in the prior year period, Walter’s reverse mortgage segment no longer has goodwill.

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“While the reverse business has seen a significant amount of change and experienced some operating issues, we have completed a thorough review of the business and firmly believe in its future prospects and its ability to build upon our existing strong franchise,” said Denmar Dixon, Walter’s vice chairman, executive vice president and chief investment officer, during a quarterly earnings call Monday morning.

The reverse mortgage channel ran into some challenges during the quarter, including generating 48% lower revenue ($20.2 million) compared to the same quarter last year. This reflects lower net fair value gains on reverse loans and related Home Equity Conversion Mortgage-backed securities (HMBS) obligations of $20.1 million.

Despite the loss, Walter’s reverse mortgage segment delivered adjusted earnings of $2.5 million and $3.7 million of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)—two areas of performance lauded by Walter executives during Monday’s earnings call.

“The reverse mortgage business delivered positive adjusted EBITDA and adjusted earnings, demonstrating the strength of our REO management and servicing functions,” said Walter Chairman and CEO Mark O’Brien.

During the quarter, O’Brien and others on Walter’s executive management team stated that the company has completed a “comprehensive review” of its reverse mortgage business and has taken steps to drive process improvements that will result in improved future profitability for the segment.

“We believe a number of process improvement initiatives, such as the reduction of physical locations, new leadership over key activities in the retail distribution area, and continued investment in training and technology will lead to improved operational performance and profitability for the segment in the future,” said Walter Executive Vice President and Chief Financial Officer Gary Tillett during the call.

In conjunction with its review, and as a result of a number of operational and market driven factors, Walter indicated that RMS revised its multi-year forecast which led to the impairment of the remaining goodwill associated with Walter’s reverse mortgage business.

“We continue to believe in the value of the RMS franchise and we remain committed to ensure it maintains its position as a top franchise in the reverse mortgage industry,” Tillett said.

RMS/Security One Lending saw a 13.4% bump in HECM endorsements in July, reporting 389 loans. This brings the company’s 12-month trailing volume to 4,712—the third largest reverse lender by volume as of July 2015, according to recent industry data tracked by Reverse Market Insight. Security One Lending was acquired by Walter in 2013.

In another highlight for the second quarter, RMS securitized approximately $855.2 million of reverse mortgages in the first half of 2015, ranking as the second-largest issuer of HMBS in the U.S. behind American Advisors Group, which issued nearly $907.3 million.

Walter’s securitized volumes in the reverse segment increased 23% year-over-year, while funded origination volumes, excluding tails, grew 22% during the quarter, resulting from an increase in volumes related to loans originated in the first quarter, prior to the Financial Assessment (FA) implementation.

“For the reverse mortgage segment, we had solid funding volumes in the second quarter, but believe that volumes could be impacted by lower retail volumes and implementation of FA,” said Dixon.

As a result, the company has narrowed the range of its targeted 2015 funded origination volume to $1.0 to $1.3 billion, excluding tails.

Looking ahead, Walter is confident that the improvements it has put into place will help its reverse mortgage segment as the rest of the year unfolds.

“The reverse business has faced some meaningful challenges, though we expect it should begin to see benefits from the process improvements in the second half of this year,” O’Brien said.

Written by Jason Oliva