Walter Investment Management (WAC) reported a GAAP net loss for the third quarter of 2014 of $70.8 million, or a loss of $1.88 per diluted share.
The company had revenue of $386 million, down 21.1% year-over-year and missing Wall Street expectations by $4.84 million.
The revenue loss was primarily related to a $55.3 million decline in net servicing fees and revenues primarily comprised of a $76.1 million decrease in the fair value of mortgage servicing rights offset by $22.9 million increase in servicing revenue and fees due to growth in the third-party servicing portfolio in the company's servicing business, a $26.2 million decline in net gains on sales of loans reflecting lower locked volumes and a shift in mix to the lower margin correspondent channel in the current quarter in the originations business and a $14.3 million decline in insurance revenue due to the loss of commissions earned on GSE lender placed policies beginning June 1, 2014.
Income before taxes was $12.7 million and tax expense was $83.5 million which reflects the impact of the company's elevated tax rate resulting from the non-deductibility of the Goodwill impairment charge taken by the Reverse Mortgage business in the second quarter of 2014.
Adjusted Earnings for the third quarter of 2014 was $36.2 million after taxes, or $0.96 per diluted share, which came in below expectations by $0.07
"Walter Investment is committed to providing the highest level of assistance and service to our consumers as we support them during some of the most trying periods of home ownership. We have continued our strong track record of assisting consumers by modifying more than 15,000 accounts and originating nearly 17,000 HARP loans during the quarter, driving positive outcomes for both consumers and investors,” said Mark J. O'Brien,Walter Investment's Chairman and CEO.
"We are equally committed to enhancing value for our shareholders through the execution of our strategic initiatives, as we navigate the evolving operating environment for our sector," O'Brien said. "We have continued to support the growth of our Servicing business as we have boarded approximately $60 billion of UPB through acquisitions and additions from our originations segment during 2014, and during October have entered into agreements which are subject to customary closing conditions such as investor and regulatory approval to acquire servicing rights associated with loans totaling approximately $9 billion in UPB and are in the process of negotiating additional servicing agreements associated with loans totaling approximately $5 billion in UPB.
“Our Originations segment continues to maximize the retention opportunity embedded in our portfolio as demonstrated by its strong HARP performance and our Reverse business has made progress toward returning to profitability. We are considering monetizing certain non-core assets in conjunction with a review of our balance sheet and capital structure and we are also reviewing our cost structure and opportunities to achieve substantial operating efficiencies," he said.
Revenue declined $27.7 million quarter-over-quarter driven by the $34.2 million performance fee earned by the Investment Management business in the second quarter. Total expenses declined $77.6 million compared to the second quarter of 2014 reflecting the impact of the $82.3 million goodwill impairment charge recorded by the Reverse business during the prior quarter. During the third quarter, the Company recorded a $37.2 million charge related to legal and regulatory matters, a $24 million increase as compared to the prior quarter's charge which was offset by a 20% decline in servicing related expenses in the current quarter.
The servicing segment generated revenue of $152.5 million in the third quarter of 2014, a 27% decline as compared to third quarter 2013 revenue of $208.5 million primarily comprised of a $76.1 million decrease in the fair value of mortgage servicing rights offset by increased servicing fees and revenues of $23.1 million resulting from growth in the third-party servicing portfolio. Revenues for the quarter ended September 30, 2014 included $170.6 million of gross servicing fees, $21.4 million of incentive and performance-based fees, and $22.2 million of ancillary and other fees.
Expense for the servicing segment was $184.5 million, an increase of 32% as compared to the prior year quarter reflecting a $30.8 million increase in charges related to legal and regulatory matters, $6.1 million higher salaries and benefits expenses due to hiring to support the growth of our business and included $8.7 million of depreciation and amortization costs and $10.9 million of interest expense.
Compared to the second quarter of 2014, Servicing segment revenues increased 19% reflecting a reduction in fair value losses and expenses increased 3% impacted by higher legal and regulatory charges offset by lower levels of servicing related expenses. The segment generated Adjusted Earnings of $18.1 million and AEBITDA of $73.7 million for the quarter ended September 30, 2014, as compared to Adjusted Earnings of $21.0 million and AEBITDA of $67.4 million in the second quarter of 2014.
The servicing segment ended the quarter with approximately 2.2 million total accounts serviced, with a UPB of approximately $229.6 billion. During the quarter, the Company experienced a net disappearance rate of 14.1%, in line with the net disappearance rate in the second quarter.
The originations segment generated revenue of $132.8 million in the third quarter, a decline of 21% as compared to the prior year quarter driven by lower locked volumes and a shift in funded volume mix from the consumer lending channel to the lower margin correspondent lending channel.
Expense for the originations segment of $84.4 million, which includes $8.4 million of interest expense and $4.7 million of depreciation and amortization, declined 27% as compared to the prior year quarter reflecting expense reductions as the business works to align the employee base to match the scope and scale of current operations.
Revenues declined 12% as compared to the prior quarter driven by lower locked volumes and a shift in funded volume mix from the consumer lending channel to the lower margin correspondent lending channel and expenses declined 2% as compared to the prior quarter as the business continues to focus on its initiatives to align the employee base to match the scope and scale of current operations.
The Reverse Mortgage segment generated revenue of $37.4 million for the quarter, a 10% decline as compared to the prior year quarter reflecting lower net fair value gains on reverse loans and related HMBS obligations. Third quarter revenues included a $25.3 million gain from the net impact of HECM loan and related HMBS obligation fair value adjustments, $9.2 million in servicing fees and $2.9 million of other revenue.
Total expenses for the third quarter were $41.7 million, a 5% increase as compared to the prior year period primarily driven by higher levels of legal and professional fees, partially offset by a lower provision on advances.
Funded origination volumes in the segment declined 20% as compared to the second quarter of 2014 resulting from a shift in product focus by the business from the higher volume correspondent channel, which continues to experience pricing irrationality, to the lower volume, higher margin retail channel. Securitized volumes declined 19% as compared to the second quarter of 2014 driven by a 34% decline in correspondent originations.