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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.

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