As many reverse mortgage industry players felt the sting of the shifting regulatory environment in 2015, last year was a particularly “disappointing year” for market participants like Walter Investment Management Corp. (NYSE: WAC).
For the reverse sector as a whole, 2015 was a challenging year for several reasons. Not only did the long-awaited arrival of the Financial Assessment take its toll on industry volume, but it also revamped the traditional way of doing business, to the point where the “new normal” has become a benchmarking reference.
For Walter, 2015 was a demanding year, said CEO Denmar Dixon during an earnings call Monday morning.
During the year ended December 31, 2015, Walter reported a net income loss of $263.2 million, or $7 per share; and a net loss of $117.1 million, or $3.16 per diluted share, for the fourth quarter of 2015.
While some of the company’s challenges were market-related and not within its control, such as rising cost pressure driven by compliance and interest rate volatility, Dixon noted much of the shortfall was related to operating items within Walter’s control, including curtailment expenses associated with its reverse mortgage business.
Overall, Walter’s reverse mortgage business—which largely comprises top-10 industry lender Reverse Mortgage Solutions, Inc. (RMS)—reported an adjusted loss of $10.2 million for the fourth quarter of 2015, compared to adjusted earnings of $400,000 in the fourth quarter of 2014.
“These metrics reflect the impacts of lower levels of earnings from the origination purchase and securitization of HECM loans and higher expenses primarily driven by normal course of business curtailment charges,” said Walter Chief Financial Officer Gary Tillett during Monday’s call.
Securitized and funded origination volumes also decreased from the prior year quarter as volumes were negatively impacted by the Financial Assessment rules, along with operational disruption in the Walter’s retail channel and a decision to reduce participation in the correspondent market based on current pricing levels.
Despite the losses, Walter did report several highlights for its reverse mortgage business in 2015, including an 11% year-over-year gain in the segment’s serviced portfolio to $20.1 billion of unpaid principal balance (UPB) at December 31, 2015.
Also during the year, RMS securitized $1.5 billion of Home Equity Conversion mortgage loans, ranking as the third-largest issuer of Ginnie Mae HECM mortgage-backed securities (HMBS) in the nation by UPB.
“The reverse mortgage business was within range for average servicing UPB and funded UPB target, but turned in a disappointing operating year, principally driven by curtailments,” Dixon said.
These curtailments included $151 million incurred by the company’s servicing segment during the fourth quarter and a charge of $56.6 million related to its reverse mortgage business during the second quarter ended June 30, 2015.
The 2015 curtailment expenses can be broken down into two separate categories, said Tillett, who noted curtailment charges associated with “historical practices at RMS that have led to increasing exposure as regulatory requirements are clarified,” along with “normal course of business” curtailment charges for operating challenges during each reporting period.
Looking ahead, Walter said it will continue to invest in the development of its reverse mortgage origination channels.
“We anticipate improved retail loan volumes and unit profitability through continued process improvement, enhanced sales training, and an augmented marketing effort designed to increase the RMS brand’s digital marketing presence,” Tillett said.
Walter expects its ongoing efforts to improve operational efficiencies will contribute to its future reverse mortgage profitability, as well as its efforts in the HMBS market.
As of December 31, 2015, Walter has approximately $376 million available to withdraw from its undrawn tail volumes, with an additional $476 million that will become eligible for draw over the next 12 months. These undrawn tail positions could contribute significantly to the future profits of the company’s reverse mortgage business, according to Tillett.
“Profitability in the segment is expected to improve the enhancement of our processes and the increased securitization of additional borrower draws as an increased number of IDL loans reach their 13th month, allowing borrowers to gain access to their outstanding draw credit line amounts,” Tillett said.
During the earnings call, Walter also noted that the company further enhanced the liquidity in its reverse mortgage business by entering into a new $100 million Ginnie Mae buyout facility with a new lender, who was not named.
With two months of 2016 in the books, Walter said it has already taken definitive actions to remedy issues related to the company’s 2015 financial performance, including a company-wide project to transform processes and deploy technology solutions to drive improvements in costs, revenues and compliance.
“Based on the preliminary results of this project, we have a significant opportunity with regard to improving our cost structure through process improvements and technology, and we are optimistic that if we are successful, the improvements will drive results and shareholder value in a very meaningful way,” said Dixon. “Bottom line: we can, and will be, better.”
Written by Jason Oliva
