Program Changes Continue to Drag Walter’s Reverse Mortgage Profits

Program changes from the Federal Housing Administration continued to drag down the profitability of Walter Investment Management Corp.’s (NYSE:WAC) reverse mortgage business in the first quarter.

The company’s reverse mortgage segment reported a revenue of $27.9 million for the quarter ended March 31, 2014, a loss when compared to the same period a year ago when revenue for this business line was $50.9 million.

Additionally, the reverse mortgage segment generated a pre-tax core loss of $3 million for the quarter on a year-over-year basis, a decline driven primarily by lower origination volumes and program changes to the federally-insured Home Equity Conversion Mortgage.

“The reverse mortgage business continues to be impacted by product changes and new guidelines for servicing protocols, which has affected origination volumes and servicing profitability,” said Walter Chief Financial Officer Gary Tillet during an earnings call Thursday.

Funding origination volumes for the segment declined 75% as compared to the first quarter of 2013, and 57% as compared to the fourth quarter of 2013.

Walter, which is the parent company of RMS and Security One Lending and also one of the largest producers by volume in the industry, attributed these declines to “exceptionally high” originations volume recorded in the first quarter of last year.

In the twelve months trailing April 2014, RMS and Security One combined for a total of 6,692 HECM loans, second only to American Advisors Group, which tallied 8,999 loans, according to the most recent data from Reverse Market Insight.

Of the $27.9 million Walter’s reverse mortgage segment generated during the quarter, $17.2 million included a gain from the net impact of HECM loan and related HMBS obligation fair value adjustments, as well as $7.6 million in servicing fees and $3 million of other revenue.

Despite the first quarter drag, Walter remains optimistic overall for its reverse mortgage business as it banks on the future profitability of the new changes.

“We believe the new product profitability is superior to the historical product, but the curve is back-end weighted due to the lower originated balances and future margins on the expected tail issuances,” said Denmar Dixon, vice chairman and chief investment officer at Walter.

Looking forward, Walter says it will continue to emphasize growth in the higher-margin retail channel and remain focused on managing servicing costs as the company updates it platform.

“We believe there will continue to be industry consolidation as a result of compliance and regulatory costs and a change in the loan sale economics,” Dixon said. “As an industry player with size and scale in a leading franchise, we believe we will be well-positioned to capitalize on these changing sector dynamics.”

Written by Jason Oliva

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