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

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  • I believe that the non-cash charges they’ve taken relating to goodwill amortization are likely the result of the company now having a value significantly lower than the value they paid for it. Now that’s done, they can analyze the company’s financial prospects going forward.

    • Hey Lance,

      I was a little more than surprised by this announcement than reflected in your comment. When acquired Walter booked the RMS acquisition with a $130 million amount for goodwill. With S1L it was $8.8 million. The two acquisitions were about six months apart with Walter acquiring RMS first on 11/1/2012.

      One would think that Ernst & Young (E&Y, my old employer) would want something written off due to recent HUD changes but apparently Walter could not justify any of the $138.8 million in goodwill by the end of the second quarter of 2015.

      For acquisitions where the acquirer performs meaningful due diligence and negotiates using all favorable information available to it, this latest write off should have some impact on the purchase price of reverse mortgage related entities for some time to come (at least until we begin to seen endorsements turn around and tails begin really taking off over the next few years). This could be a great time for a perspective acquirer to negotiate a great purchase price for either an originating mortgage backer or a reverse mortgage servicer.

      However, I am a little baffled on how this will help the company analyze its financial prospects going forward. What this actually means is that the company no longer has to justify the amount it books each year for impairment of goodwill for its reverse mortgage operations. If the company had its druther, it would probably have liked to have kept reverse mortgage goodwill at $138.8 million until well into the next decade. Certainly no one at the company will have to waste time in the future looking into goodwill for the Walter reverse mortgage operations and future impairment.

      Have a great end to the week.

      (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

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