Walter Reveals HUD Subpoenas Amid Gloomy Earnings Call

On the same day that a quarterly earnings call revealed substantial losses, Walter Investment Management Corp. (NYSE: WAC) acknowledged the existence of two Department of Housing and Urban Development subpoenas Tuesday, both related to its former reverse mortgage origination arm, Reverse Mortgage Solutions.

Walter received the first subpoena from HUD’s Office of the Inspector General in July 2016, which requested documents regarding RMS’s reverse mortgage origination, underwriting, and appraisal practices dating back to January 1, 2005, according to the company’s 10-K filing. The second subpoena came in January; Walter said this action requested similar documents about “certain specified loans.”

The Tampa, Fla.-based Walter warned that the ongoing investigation — which also involves the Department of Justice’s Civil Division — could lead to penalties under the False Claims Act, but offered no other details about the substance of the probe. Under this statute, mortgage firms can be fined up to three times the size of the loan for any errors associated with Federal Housing Administration products.

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RMS ceased all origination operations in January, but continues to service loans and will fulfill any extant Home Equity Conversion Mortgages in its pipeline, the company said in its earnings call.

“We recently exited our reverse mortgage origination business so we could focus on improving our reverse mortgage servicing operation,” Walter CEO Anthony Renzi said.

Elaborating further, chief financial officer Gary Tillett said later in the call that Walter’s management left the space “after careful consideration of the probabilities of turning the reverse originations business profitable in the foreseeable future.”

“The continued investment in reverse originations was not justified given our recent experience, the size of the market, our limited market share, and the extended time required for cash profits to emerge with tail funding,” Tillett said.

He continued by saying that Walter is exploring all possible options for its reverse mortgage business in the future, including its complete or partial sale to another firm.

Last December, RMS paid a $325,000 penalty after the Consumer Financial Protection Bureau investigated its reverse mortgage marketing practices and found that it had understated the possibility of tax and insurance defaults, “created a false sense of urgency” by implying that reverse mortgages were only available for a limited time, and stated that HECMs could “eliminate debt.” RMS neither admitted nor denied the allegations against it as part of that agreement.

The subpoenas represented just a few of the rain clouds gathering over Walter Tuesday morning: The company reported an adjusted loss of $81.4 million after taxes for 2016 and an adjusted loss of $40.1 million for the fourth quarter. Management cited the significant drops on declines in servicing fees and an increase in delinquencies, among other reasons. The reverse mortgage segment turned in an adjusted loss of $15.2 million for the fourth quarter of 2016 with $8.5 million in revenues, down $9.6 million from the fourth quarter of 2015; Walter pointed to increasing interest rates as a reason for the revenue drop.

At the midpoint of trading on Tuesday, Walter’s stock price had tumbled 41%; at the end of the day, it was down almost 39%, or $1.05, to close at $1.65 per share.

Walter’s slow but steady exit from the reverse mortgage space represents a major shift from September 2012, when the firm acquired Reverse Mortgage Solutions for $120 million and had high hopes for the business.

“The sector has very attractive long-term growth prospects and is currently undergoing significant structural change, providing us with an opportunity to capitalize on those dynamics,” said Mark J. O’Brien, Walter’s former CEO, in a statement at the time. “We believe RMS is uniquely positioned to capitalize on this opportunity and to continue capturing greater market share in both its origination and servicing business.”

The following year, Walter closed on the purchase of Security One Lending for $31 million.

“RMS’s investment in the company and its industry resources will enable S1L to maintain its position as a dominant originator in the reverse mortgage space,” Security One president Torrey Larsen said at the time.

Written by Alex Spanko

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  • This should serve as a warning: “…RMS paid a $325,000 penalty after the Consumer Financial Protection Bureau investigated its reverse mortgage marketing practices and found that it had … stated that HECMs could ‘eliminate debt.'”

    The other day not did only the author but so did a long-time industry acquaintance write complaining about my comment attacking the phrase “enjoying the debt free life” used in a post advertising that the author was a reverse mortgage originator. It was as if neither could see how false and misleading those kinds of statements are.

  • Why is Walter still in the industry?

    In 2014 and 2015, the auditors of Walter Investment mandated the total and complete write off of all of the goodwill related to both its acquisition of S1L (about $9 million in goodwill) and its acquistion of RMS (about $130 million in goodwill). The write off was a declaration that the turnkey operations value of these two very significant reverse mortgage players had zero value to Walter in running them as profitable companies under the RMS banner. This runs to the heart of the aptitude and ability of Walter to be engaged in the reverse mortgage industry.

    Then on 9/4/2015, HousingWire ran an article headlined: “Walter Investment fined $29.6 million for False Claims Act violations” (sic). That article describes how RMS prior to acquisition and thereafter claimed reimbursement on costs that were created by RMS through straw companies. Somehow Walter Investment due diligence missed this pre-acquisition alleged fraud before it acquired RMS, dismissed it as immaterial, or it was somehow credited against the price of acquisition.

    NOW subpoenas for RMS documents going back to 2005 related to questionable activities other than those already fined in 2015. It seems there are significant holes now exposed in the good reputation that was once RMS’s. This is not surprising considering the lack of background in managing reverse mortgage servicing and origination operations that existed at RMS when it was founded. What is somewhat odd is an industry that widely accepted the expertise of RMS in servicing reverse mortgage debt.

    Then there is a CFPB fine for improper advertising which shows a lack of compliance.

    So without reverse mortgage origination has Walter turned around its reverse mortgage servicing net income? No, once again we read that the reverse mortgage division has pre-tax loss but this time of almost $90 million.

    So after no net income in any year from its reverse mortgage operations since it had RMS acquire S1L, what is it that Tillett tells us Walter is going to do about it? “…Walter is exploring all possible options for its reverse mortgage business in the future, including its complete or partial sale to another firm.”

    In a 11/9/2016 RMD article, Jason wrote: “In previous earnings calls, Walter has repeatedly discussed its plans for evaluating ‘strategic opportunities’ for its reverse mortgage segment. While the company has not explicitly stated plans to sell off this business line….” So finally in a year when Walter lost over a half billion dollars, its management is considering throwing in the towel related to its reverse mortgage operations but only through a sale.

    Yet the question remains, how much will any new alleged charges against activities that the RMS management developed cost Walter? The entry of Walter into the reverse mortgage industry shows Walter’s weakness in fully vetting its RMS acquistion.

  • So rather than some outsider soiling the reputation of our industry, one of the industry stalwarts ends up soiling the reputation of the outsider that acquired it as well as the industry. All Walter has experienced since entering the industry is significant loss year after year.

    No doubt Walter made poor management changes at some very crucial times which resulted in even deeper losses but the fines and new charges do not seem to stem from their management decisions but the management that preceded the acquisition.

    For its own good, Walter needs to find a way out of the industry while mitigating further losses. The one thing they do not need to do is to delay that exit by indecision.

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