Will Walter Investment go the way of Ocwen?

Company reveals new investigations into servicing practices

Buried deep within its third quarter earnings statement, Walter Investment Management (WAC) revealed that the company is now the focus of several investigations into the business and servicing practices of Walter’s subsidiary, Green Tree Servicing.

On page 44 of the company’s earnings filing with the Securities and Exchange Commission, the company disclosed that during the second quarter, it met with a working group representing the attorneys general and regulators of several states as well as representatives of the Office of the United States Trustee to “discuss the business practices of Green Tree Servicing.”

During that meeting, Walter said that is was informed of concerns about the company’s loan servicing practices, including “certain bankruptcy-related matters.”

The company goes on to say that several states in the group have subsequently initiated investigations into Green Tree’s servicing practices. 

“The company received a list of questions and a request for documents from the working group on October 16, 2014, and an investigative subpoena and investigative interrogatories from the California Attorney General, a participant in the group, on September 11, 2014,” Walter said in the SEC filing.

“The outcome of all of the company's legal proceedings is uncertain, and it is possible that adverse results in such proceedings (which could include penalties, punitive damages and injunctive relief affecting the company's business practices) and the terms of any settlements of such proceedings could have a material adverse effect on the company's reputation, business, prospects, results of operations, liquidity or financial condition.

To that end, the company booked a $37.2 million charge for legal and regulatory matters in the third quarter, which was an increase of $24 million from the legal and regulatory charge it booked in the second quarter.

“The company estimates the aggregate range of reasonably possible losses, in excess of reserves established, for its litigation and regulatory matters is from $0 to approximately $40.0 million at September 30, 2014,” Walter said in its earnings statement. “The company is unable to estimate reasonably possible losses for certain of its litigation and regulatory matters described above.”

The company also disclosed that it is facing “increased scrutiny and potential enforcement actions by federal and state agencies,” including a pending investigation by the Consumer Financial Protection Bureau and the Federal Trade Commission, an investigation by the Department of Justice and Department of Housing and Urban Development, in addition to the investigations by the state attorneys general working group and the Office of the United States Trustee.

The revelations are more bad news for the company, which also reported a loss of $70.8 million in the third quarter.

Walter’s Green Tree was already under the microscope of the Office of Mortgage Settlement Oversight, which reported in May that Green Tree failed eight of the settlement’s 29 metrics for mortgage servicing.

After the servicing failures were revealed, analysts from Moody’s Investors Service said that Green Tree needed to make changes to its servicing practices quickly or Green Tree’s business will suffer.

“The test results could hamper Green Tree’s ability to grow its business through mortgage servicing rights purchases in the short term and could also give the government-sponsored enterprises pause when approving future transfers of servicing to Green Tree, depending on the success of its corrective action plan,” Moody’s analysts said.

Now the Office of Mortgage Settlement Oversight is just one of the concerns that Green Tree and Walter must cope with.

Walter’s fellow nonbank, Ocwen Financial (OCN) has also run afoul of various state and federal regulators in 2014.

The company announced last week in its own earnings statement that it booked a $100 million charge for a potential settlement with the New York Department of Financial Services over allegations that it was backdating letters to borrowers.

After the allegations were released by the NYDFS on Oct. 21, Ocwen responded with an open letter of apology, stating the errors were software related and that it would take steps to rectify the situation.

Ocwen has been in the NYDFS’s crosshairs since February, when it put a $2.7 billion mortgage servicing rights deal between Ocwen and Wells Fargo (WFC) on an indefinite hold.

In the aftermath of the NYDFS accusations, ratings agencies, advisory firms and other agencies all took turns whacking at the Ocwen piñata.

Moody's Investors Service, Bank of America (BAC) and Evercore Partners all issued downgrades to Ocwen’s ratings after NYDFS Superintendent Benjamin Lawsky sent a letter to the company which alleged that the company had been backdating potentially hundreds of thousands of letters to borrowers “likely causing them significant harm.”

Compass Point also downgraded Ocwen affiliate Home Loan Servicing Solutions from Buy to Neutral with a price target of $18 and Standard & Poor's Ratings Services lowered its long-term issuer credit rating to 'B' from 'B+' on Ocwen and said that the outlook for Ocwen is negative.

Barclays also warned its clients that investors in non-agency residential mortgage-backed securitizations “should be more wary of a worst-case scenario,” when it comes to Ocwen.

Fitch Ratings also sounded the alarm on Ocwen, also announcing that it was placing all the U.S. residential mortgage servicer ratings for Ocwen Loan Servicing on “Rating Watch Negative.”

Whether the ratings agencies will issue a chorus of downgrades for Walter is yet to be seen, but if the past is in any way a predictor of the future, Walter is in for a few more rounds of bad news before it’s all said and done.

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