Third quarter earnings double at Walter Investment
MSR hedging more than offsets rising interest rates
Core earnings for the third quarter at Walter Investment Management Corp. (WAC) hit $87.6 million after taxes, on the backed of massive mortgage servicing rights profit. That is up 211% from the same quarter last year.
Total revenue for the third quarter was $489.2 million, compared to $149.1 million in the same quarter last year. The year-over-year increase in revenue reflects a $129.4 million increase in net servicing revenue and fees, according to the company's after-market filing.
"We are extremely pleased with the results produced by our business development efforts over the last quarter, which have generated a number of important opportunities for our business and have strengthened our pipeline, again demonstrating our ability to execute against the significant growth opportunities in the specialty mortgage sector," said Mark O'Brien, CEO of the real estate investment trust.
"These transactions are notable not only for their expected future contributions to earnings and the diversity they bring to our servicing book, but also as confirmation of the on-going importance of an outsourcing trend at depositories with respect to non-core customers, another key driver behind our expectations for continued strong growth as a specialty servicer," he added.
Servicing generated revenue of $208.5 million in the third quarter, more than five times what the reverse mortgage business brought in. Originations generated revenue of $167.4 million in the third quarter, driven primarily by the consumer direct channel.
The company does expect its bottom line to stay strong going into 2014, but does not anticipate earnings to be as robust as this quarter.
It estimates core earnings for the year to reach nearly $600 million, but for 2014 it expects that number to shrink to $388 million. Also, there are some material risks the company faces in 2014, with regulatory uncertainty at the top.
Another risk is changes to HARP that may increase competition and lure borrowers out of Walter pools. Another deals with recent limits to fees for lender-placed insurance.
Following an industry trend of purchasing MSRs to use as a hedge, Walter was able to offset volatility in the interest rate environment. While rising interest rate impact originations, it also increases the value of MSR assets.
"The overall economic environment continues to provide a solid base for the business, and positive catalysts within the mortgage sector continue to drive the movement of non-core, credit-sensitive assets from depositories to specialty servicers, as evidenced by the Company's announced transactions with EverBank," the company said. Those transactions are in reference to $20 billion in Fannie Mae, Freddie Mac and Ginnie Mae MSRs purchased by the Tampa REIT.
The company anticipates it will continue to look for business opportunities.
"The business development pipeline currently exceeds $325 billion and transaction flow continues to accelerate into the fourth quarter," the filing states. "The Company remains highly confident with respect to the significant levels of sub-servicing and MSR purchase opportunities in both its current pipeline and in the overall market opportunity over the next 24 to 36 months."