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Walter Investment Weighs Reverse Mortgage Opportunities as Losses Widen

Walter Investment Management Corp. (NYSE: WAC) saw its reverse mortgage losses grow during the third quarter of 2016 as the company continues to explore strategic opportunities for this business segment amid recent changes to its leadership and operational structure.

In the reverse mortgage business, Walter reported an adjusted loss of $12.4 million and AEBITDA (adjusted earnings before interest, taxes, depreciation and amortization) loss of $10.9 million for the quarter ended September 30, 2016.

This performance represents a decrease of approximately $13.2 million in each metric as compared to the prior year period, reflecting “lower securitization volumes driving a reduction in net servicing revenue and fees, partially offset by a decrease in salaries and benefits,” Walter stated in a Form 8-K filed with the Securities and Exchange Commission.

“The servicing segment continues to disappoint as we incur elevated expense levels that are offsetting the impacts of our cost reduction initiatives, and the reverse [mortgage] segment continues to incur losses, as expected, as we manage the defaults in the pre-IDL book,” said Walter Chief Financial Officer Gary Tillett during an earnings call Wednesday morning.

At the broader company level, Walter posted a net loss of $101.8 million, or $2.82 per share, for the third quarter of 2016, a greater shortfall compared to a year ago when the company reported a net loss of $76.9 million, or $2.04 per share, for the comparable quarter in 2015.

The financial results reflect non-cash, after-tax charges of $77.6 million, or $2.15 per share, resulting from goodwill and intangible asset impairments, said Walter President and Chief Executive Officer Tony Renzi during an earnings call Wednesday morning.

Specifically, Walter credited the intangible asset impairment to a “shift in strategic direction and reduced profitability expectations” for its reverse mortgage business, according to the Form 8-K.

In previous earnings calls, Walter has repeatedly discussed its plans for evaluating “strategic opportunities” for its reverse mortgage segment, which largely comprises top-10 industry lender Reverse Mortgage Solutions and Security 1 Lending. While the company has not explicitly stated plans to sell off this business line, it has mentioned that it is considering ways to reduce its reverse mortgage balance sheet.

As Walter explores opportunities for its reverse mortgage business, the company aims to mimic certain strategies enacted on the “forward” mortgage side of its business.

This could include selling a “significant portion” of the reverse mortgage balance sheet, Tillet said, where Walter would be selling its position in the loans to a Ginnie Mae issuer and likely retain the subservicing.

“We’re in the early stages,” Tillet said. “We’re talking to some parties about that and we hope to provide more next [sic], but we are proceeding down that path.”

Walter already has made significant changes to its organizational makeup. Last month, the company released several executives across various business channels in an effort to “flatten” the operating team. The goal is to ultimately “simplify” the management structure, according to comments made by Renzi.

“The operating units of Ditech and the reverse mortgage business now report to me directly, and we are working to further collapse legacy infrastructure to support a one team, one company operating approach,” Renzi said during this week’s earnings call.

As part of the management restructuring, Reverse Mortgage Solutions CEO Chris Mullins was replaced by Jeff Baker, a Walter executive.

Other notable additions included the appointments of Alfred Young as Chief Risk and Compliance Officer; Elizabeth Monahan to the role of Chief Human Resources Officer and Timothy Cranny as Senior Vice President of Performing Loan Servicing at Ditech Financial LLC.

“Each of these leaders brings with them over 25 years of mortgage banking, financial services and risk management expertise,” Renzi said. “We will continue to explore organizational adjustment opportunities across the firm to enable us to become more nimble, communicative and effective.”

Total revenue for Walter’s reverse mortgage business was $297.3 million during the third quarter of 2016, an increase of $77.9 million compared to the prior year quarter. Walter credited this performance to $113.4 million higher net servicing revenue and fees partially offset by $34 million lower fair value gains on reverse loans and liabilities.

Meanwhile, the company’s reverse mortgage business grew its serviced portfolio 5% compared to the prior year quarter to $20.8 billion of unpaid principal balance at September 30, 2016.

During the third quarter, the business securitized $246 million of Home Equity Conversion Mortgage loans.

Written by Jason Oliva