Walter Investment Management Corp. (WAC) reported GAAP net loss for the first quarter of 2015 of ($31.0) million, or ($0.82) per diluted share, compared to net income of $17.4 million, or $0.45 per share for the first quarter of 2014.
Included in the first quarter 2015 net loss are $44.5 million or $1.18 per share of after tax charges resulting from changes in valuation inputs and other assumptions used in the fair value of assets and liabilities carried at fair value.
Adjusted Earnings for the first quarter of 2015 was $38.3 million after taxes, or $1.02 per share, a decrease of 34% as compared to the prior year quarter. Adjusted EBITDA for the quarter was $162.7 million, a 3% decline when compared to the prior year quarter.
It’s been a rough quarter for nonbank servicers. Nationstar Mortgage Holdings (NSM) reported first-quarter loss of $48.3 million. Ocwen Financial (OCN) posted a much more modest profit after a bitter 2014.
"We continue to execute against the strategic initiatives we laid out for you on our third quarter 2014 call and have completed a significant portion of the sales of our non-core assets we previously described. In April 2015, we sold our residual interest in seven of the Residual Trusts, generating cash proceeds of approximately $190 million and, when coupled with the cash proceeds of approximately $30 million from the sale of our strategic investment in a third party reverse mortgage business, have generated cash of approximately $220 million providing us with additional flexibility to evaluate our capital structure and reinvest in our business," said Mark O'Brien, Walter Investment's Chairman and CEO.
"Our segments' operational performance in the first quarter of 2015 demonstrates the strong execution we anticipate from our Servicing and Originations businesses for 2015, as Servicing continues to perform amongst the top of its FNMA STAR peer group and Originations further develops its Correspondent, Retail and Consumer Direct channels while remaining focused on maximizing Retention opportunities embedded within our Serviced portfolio. Reverse tail draw experience is increasing, driving higher originations volumes and blended cash margins."
Total revenue for the first quarter of 2015 was $310.9 million, a decrease of $59.1 million as compared to the first quarter of 2014, primarily related to an $81.9 million decline in net servicing fees and revenues comprised of an $81.6 million greater fair value charge for mortgage servicing rights.
Total revenue also reflects a $9.3 million decline in insurance revenue due to the loss of commissions earned on GSE lender-placed policies beginning June 1, 2014, offset by a $21.2 million increase in net gains on sales of loans reflecting higher locked volumes due to strong execution gains in a low interest rate environment in the current quarter and a $13.5 million increase in net fair value gains on reverse loans.
Total expense increased 10% from $338.5 million in the first quarter of 2014 to $371.4 million in the first quarter of 2015, primarily reflecting the impact of $16.1 million of additional curtailable charges associated with regulatory developments during the quarter and $11.3 million of higher salaries and benefits driven by higher accruals for incentive pay largely resulting from a higher volume of loans funded.
During the three months ended March 31, 2015, O’Brien said WAC took steps to simplify its business and reorganized its reportable segments to align with the company's changes in the management reporting structure.
“As a result of this reorganization, we modified the Servicing segment by combining the Asset Receivables Management, Insurance, and Loans and Residuals businesses into the Servicing segment,” the company said.
The company also made a change to the composition of indirect costs and depreciation and amortization allocated to the business segments and established an intersegment charge between the Servicing and Originations segments for certain loan originations associated with the company's mortgage loan servicing portfolio.
“We believe the changes in our reportable business segments reflect the way management, under its new reporting structure, monitors performance, aligns strategies and allocates resources in the current environment, while altogether improving efficiencies. We now manage our company in three reportable segments: Servicing, Originations, and Reverse Mortgage. Our Other non-reportable segment primarily consists of the assets and liabilities of the Non-Residual Trusts, corporate debt and our asset management business, which we operate through Green Tree Investment Management,” the company said.
The Servicing segment generated revenue of $143.8 million in the first quarter of 2015, a 41% decline as compared to first quarter 2014 revenue of $245.6 million. The change was primarily comprised of an $81.6 million greater fair value charge for mortgage servicing rights, a $13.6 million decline in incentive and performance fees as modification fees and success fees earned under HAMP decreased $11.9 million as compared to the same period of 2014 due primarily to a lower volume of completed modifications and lower fees for maintenance of modified loans under performing status as the underlying loans are no longer eligible for HAMP incentive fees. Results also reflect a $9.3 million decline in insurance revenue due to the loss of commissions earned on GSE lender-placed policies beginning June 1, 2014, offset by increased servicing fees of $5.8 million resulting from growth in the third-party servicing portfolio. Revenues for the quarter ended March 31, 2015 included $170.7 million of servicing fees, $25.1 million of incentive and performance-based fees, and $23.5 million of ancillary and other fees.
Expense for the Servicing segment was $194.2 million, an increase of 9% as compared to the prior year quarter reflecting an increase of $3.5 million in expenses relating to the provision on advances and compensating interest, $2.6 million due primarily to the reduction in allowance for loan loss requirements taken in the first quarter of 2014 and $3.1 million in additional costs to support efficiency and technology related initiatives. Expenses also included $11.5 million of depreciation and amortization costs and $29.2 million of interest expense.
The segment generated Adjusted Earnings of $40.1 million for the first quarter of 2015 and AEBITDA of $103.1 million, a decline of 64% and 29%, respectively, primarily due to lower revenues which were largely impacted by a decline in incentive and performance fees and insurance revenues and higher expenses, mainly general and administrative and allocated indirect expenses as discussed above. Adjusted Earnings decline is also impacted by higher realization of cash flows, including the effects of accelerated prepayments, of $32.7 million.
The Servicing segment ended the quarter with approximately 2.2 million total accounts serviced with a UPB of approximately $236.4 billion. During the quarter, the Company experienced a net disappearance rate of 13.8% in line with the net disappearance rate in the prior year quarter of 13.5%.
The Originations segment generated revenue of $130.3 million in the first quarter, an increase of 19% as compared to the prior year quarter driven by a higher total volume of locked loans, partially offset by a shift in volume from the higher margin retention channel to the lower margin correspondent channel in the current quarter. Expense for the Originations segment of $88.5 million, which includes $7.8 million of interest expense and $3.2 million of depreciation and amortization, declined 7% as compared to the prior year quarter primarily reflecting expense reductions as the business works to align the employee base to match the scope and scale of current operations. Results also reflect the impact of intersegment retention expense related to fees incurred on loan originations that resulted from access to the Servicing segment's servicing portfolio for which there was a related capitalized servicing right recorded by the Servicing segment. As a result of lower funded volumes in the retention channel as compared to the prior year period, intersegment retention expense declined $3.9 million during the three months ended March 31, 2015 as compared to the same period of 2014.
The segment generated Adjusted Earnings of $44.3 million for the first quarter of 2015 and AEBITDA of $46.7 million, a 113% and 99% increase in both metrics, respectively, as compared to the first quarter of 2014 due primarily to higher net gains on sales of loans and lower expenses, mainly a reduction in salaries and benefits and the intersegment retention expense as discussed above.
The total pull-through adjusted locked volume for the first quarter was $6.9 billion, as compared to $3.6 billion for the first quarter of 2014 as volumes in the correspondent lending channel grew 188% as compared to the prior year period. Funded loans in the current quarter totaled $5.5 billion, with 33% of that volume in the consumer lending channel and 67% generated by the correspondent lending channel. Direct margins in the consumer lending channel were 196 bps in the first quarter of 2015, a decrease of 14 bps as compared to the prior year quarter.
The Reverse Mortgage segment generated revenue of $43.9 million for the quarter, a 58% increase as compared to the prior year quarter reflecting higher net fair value gains on reverse loans and related HMBS obligations. Current quarter revenues included a $30.8 million gain from the net impact of HECM loan and related HMBS obligation fair value adjustments, $11.4 million in net servicing revenue and fees and $1.8 million of other revenues. Total expenses for the first quarter were $57.4 million, a 55% increase as compared to the prior year period primarily driven by higher salaries and benefits due to hiring to support the growth in the retail lending channel, additional curtailable charges associated with regulatory events during the quarter and accrual adjustments associated with legal and regulatory matters outside of normal course of business.
The segment reported Adjusted Loss of ($1.3) million and AEBITDA is break-even for the first quarter 2015 as compared to Adjusted Loss of ($2.1) million and AEBITDA of ($0.8) million in the first quarter of 2014 due primarily to the growth in cash generated from origination, purchase and securitization of HECMs and net servicing revenue and fees partially offset by higher expenses.
Funded origination volumes excluding tails in the segment increased 27% as compared to the first quarter of 2014 resulting from an increase in retail sales force and advertising spend as well as increased activity with the company's largest bulk provider. Securitized volumes remained flat as compared to the prior year quarter, but the blended cash margin increased 40 bps primarily as a result of a change in volume from the securitization of lower margin new originations to higher margin tails.
The Other segment generated revenue of $3.3 million for the first quarter of 2015 as compared to revenue of $1.3 million in the prior year quarter. Total expenses in the current quarter of $41.8 million, which included $36.7 million related to corporate debt, remained flat as compared to the first quarter of 2014. Additionally, the Other segment included $14.4 million of income in the first quarter of 2015 related to the sale of an investment accounted for using the equity method, comprised of an $11.8 million gain on sale and $2.6 million related to the settlement of a receivable that was repaid.
The Other segment generated Adjusted Loss of ($21.4) million and AEBITDA of $12.9 million for the first quarter of 2015 as compared to Adjusted Loss of ($34.4) million and AEBITDA of ($0.3) million in the first quarter of 2014.