Walter Sees Short-Term Challenge, Long-Term Profit in Reverse Mortgages

Walter Investment Management Corp. (NYSE: WAC) is seeing significant challenges to its reverse mortgage segment profitability in the near term, but is still seeing an upside to the business channel.

“The reverse mortgage sector and our business have experienced significant changes over the previous 12 months,” Walter Investment said upon announcing second quarter earnings this week. “New regulations, including those relating to product and process changes, have significantly impacted the near-term profitability of the business.”

Walter, parent company of Reverse Mortgage Solutions and Security One Lending, noted that while the near term presents challenges, it is still committed to the long term profitability of the reverse mortgage market. Walter acquired Security One Lending for up to $31 million and Reverse Mortgage Solutions for $122 million within the last two years.

“We believe that the changes will prove to be beneficial to the sector over time and that the outlook for the sector in the mid-term is positive based on the strong economic and demographic trends,” the company said.

Funded origination volumes in the reverse mortgage segment declined 57% during the quarter as compared to the second quarter of 2013, resulting from continued lower volumes and originated unpaid principal balance due to regulatory changes targeting product offerings and underwriting guidelines.

Walter generated revenue of $38.7 million in the second quarter of 2014, including a $26.9 million gain from the net impact of home equity conversion mortgage (HECM) loan and other related adjustments. Net losses from the reverse originations business totaled about $4 million, the company said, noting a change in strategy to focus on the company’s origination’s strengths.

“In the reverse mortgage business we have revised our strategy and operating model to fit the new market environment,” said CEO Denmar Dixon. “We are investing in the business to grow our retail footprint and to bring efficiencies to our servicing operations. There continues to be margin pressure in the wholesale channel, which we believe will abate over time as the market sorts out post the product changes and retail margins remain attractive. In the near-term we have more work to do to achieve our desired results and expect continued softness in the business.”

Further, Dixon noted anticipated consolidation ahead.

“We believe there will continue to be industry consolidation as a result of the increased compliance and regulatory costs and changes in loan sale economics,” he said. “As an industry player with size and scale and a leading franchise, we believe we will be well positioned to capitalize on these changing sector dynamics. We will be opportunistic in growing this business in both the servicing and origination segments in the future.”

Based on Walter Investment’s overall performance, which showed adjusted net income of $45 million or $1.19 per diluted share down from $88.6 million or $2.36 per diluted share in the same period last year, and a softening of its reverse business, the company’s outlook for the remainder of the year has fallen.

Results for the year are likely to be in the low-to-mid point of its previously provided outlook for 2014, which included an adjusted EBITDA range of $650 million to $725 million.

In May, Walter’s Green Tree Servicing subsidiary failed eight compliance metrics, according to the Office of the Mortgage Settlement Oversight.

Despite recent scrutiny, overall second quarter 2014 results reflect improved results from the first quarter of this year in the originations segment and receipt of performance-related fees in the company’s investment management business.

Written by Cassandra Dowell

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