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WAC > SEC Filings for WAC > Form 10-Q on 9-Nov-2016All Recent SEC Filings

Show all filings for WALTER INVESTMENT MANAGEMENT CORP

Form 10-Q for WALTER INVESTMENT MANAGEMENT CORP


9-Nov-2016

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms "Walter Investment," the "Company," "we," "us," and "our" as used throughout this report refer to Walter Investment Management Corp. and its consolidated subsidiaries. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 29, 2016 and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in that Annual Report on Form 10-K. Historical results and trends discussed herein and therein may not be indicative of future operations, particularly in light of regulatory developments. Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related footnotes, reflect management's evaluation and interpretation of business conditions, changing capital market conditions, and other factors. We use certain acronyms and terms throughout this Quarterly Report on Form 10-Q that are defined in the Glossary of Terms of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Our website can be found at www.walterinvestment.com. We make available free of charge on our website or provide a link on our website to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. To access these filings, go to our website, click on "Investor Relations" and then click on "SEC Filings." We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Ethics, our Corporate Governance Guidelines, and charters for our Audit Committee, Compensation and Human Resources Committee, Nominating and Corporate Governance Committee, Finance Committee, and Compliance Committee. In addition, our website may include disclosure relating to certain non-GAAP financial measures that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at http://investor.walterinvestment.com.
Any information on our website or obtained through our website is not part of this Quarterly Report on Form 10-Q.
Our Investor Relations Department can be contacted at 3000 Bayport Drive, Suite 1100, Tampa, Florida 33607, Attn: Investor Relations, telephone
(813) 421-7694.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Certain statements in this report, including matters discussed under this Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Part II, Item 1. Legal Proceedings, and elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as "believes," "anticipates," "expects," "intends," "plans," "projects," "estimates," "assumes," "may," "should," "will," "seeks," "targets," or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described below and in more detail under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015, our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2016 and June 30, 2016, this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016, and in our other filings with the SEC. In particular (but not by way of limitation), the following important factors, risks and uncertainties could affect our future results, performance and achievements and could cause actual results, performance and achievements to differ materially from those expressed in the forward-looking statements:
our ability to operate our business in compliance with existing and future laws, rules, regulations and contractual commitments affecting our business, including those relating to the origination and servicing of residential loans, the management of third-party assets and the insurance industry (including lender-placed insurance), and changes to, and/or more stringent enforcement of, such laws, rules, regulations and contracts;

increased scrutiny and potential enforcement actions by federal and state authorities;


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the substantial resources (including senior management time and attention) we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory examinations and inquiries, and any consumer redress, fines, penalties or similar payments we make in connection with resolving such matters;

uncertainties relating to interest curtailment obligations and any related financial and litigation exposure (including exposure relating to false claims);

potential costs and uncertainties, including the effect on future revenues, associated with and arising from litigation, regulatory investigations and other legal proceedings;

our dependence on U.S. government-sponsored entities (especially Fannie Mae) and agencies and their residential loan programs and our ability to maintain relationships with, and remain qualified to participate in programs sponsored by, such entities, our ability to satisfy various existing or future GSE, agency and other capital, net worth, liquidity and other financial requirements applicable to our business, and our ability to remain qualified as a GSE approved seller, servicer or component servicer, including the ability to continue to comply with the GSEs' respective residential loan and selling and servicing guides;

uncertainties relating to the status and future role of GSEs, and the effects of any changes to the origination and/or servicing requirements of the GSEs or various regulatory authorities or the servicing compensation structure for mortgage servicers pursuant to programs of GSEs or various regulatory authorities;

our ability to maintain our loan servicing, loan origination, insurance agency or collection agency licenses, or any other licenses necessary to operate our businesses, or changes to, or our ability to comply with, our licensing requirements;

our ability to comply with the terms of the stipulated order resolving allegations arising from an FTC and CFPB investigation of Ditech Financial;

operational risks inherent in the mortgage servicing and mortgage originations businesses, including our ability to comply with the various contracts to which we are a party, and reputational risks;

risks related to the significant amount of senior management turnover recently experienced by the Company;

risks related to our substantial levels of indebtedness, including our ability to comply with covenants contained in our debt agreements or obtain any necessary waivers or amendments, generate sufficient cash to service such indebtedness and refinance such indebtedness on favorable terms, as well as our ability to incur substantially more debt;

our ability to renew advance financing facilities or warehouse facilities and maintain adequate borrowing capacity under such facilities;

our ability to maintain or grow our servicing business and our residential loan originations business;

our ability to achieve our strategic initiatives, particularly our ability to: execute and complete balance sheet management activities; execute and realize planned operational improvements and efficiencies; make arrangements with potential capital partners; complete sales of assets to, and enter into other arrangements with, third parties; increase the mix of our fee-for-service business; reduce our debt; and develop new business, including acquisitions of MSRs or entering into new sub-servicing arrangements;

uncertainties relating to the potential sale of substantially all of our insurance business;

changes in prepayment rates and delinquency rates on the loans we service or sub-service;

the ability of our clients and credit owners to transfer or otherwise terminate our servicing or sub-servicing rights;

a downgrade of, or other adverse change relating to, our servicer ratings or credit ratings;

our ability to collect reimbursements for servicing advances and earn and timely receive incentive payments and ancillary fees on our servicing portfolio;

our ability to collect indemnification payments and enforce repurchase obligations relating to mortgage loans we purchase from our correspondent clients and our ability to collect in a timely manner indemnification payments relating to servicing rights we purchase from prior servicers;

local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends in particular, including the volume and pricing of home sales and uncertainty regarding the levels of mortgage originations and prepayments;


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uncertainty as to the volume of originations activity we will benefit from prior to, and following, the expiration of HARP, which is scheduled to occur on September 30, 2017, including uncertainty as to the number of "in-the-money" accounts we may be able to refinance;

risks associated with the origination, securitization and servicing of reverse mortgages, including changes to reverse mortgage programs operated by FHA, HUD or Ginnie Mae, our ability to accurately estimate interest curtailment liabilities, continued demand for HECM loans and other reverse mortgages, our ability to fund HECM repurchase obligations, our ability to fund principal additions on our HECM loans, and our ability to securitize our HECM loans and tails;

our ability to realize all anticipated benefits of past, pending or potential future acquisitions or joint venture investments;

the effects of competition on our existing and potential future business, including the impact of competitors with greater financial resources and broader scopes of operation;

changes in interest rates and the effectiveness of any hedge we may employ against such changes;

risks and potential costs associated with technology and cybersecurity, including: the risks of technology failures and of cyber-attacks against us or our vendors; our ability to adequately respond to actual or alleged cyber-attacks; and our ability to implement adequate internal security measures and protect confidential borrower information;

risks and potential costs associated with the implementation of new or more current technology, such as MSP, the use of vendors (including offshore vendors) or the transfer of our servers or other infrastructure to new data center facilities;

our ability to comply with evolving and complex accounting rules, many of which involve significant judgment and assumptions;

the risk that we could have an "ownership change" under Section 382 of the Code that could limit our ability to use tax losses to offset future taxable income;

uncertainties regarding impairment charges relating to our goodwill or other intangible assets;

our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures;

our ability to manage conflicts of interest relating to our investment in WCO and maintain our relationship with WCO; and

risks related to our relationship with Walter Energy and uncertainties arising from or relating to its bankruptcy filings, including potential liability for any taxes, interest and/or penalties owed by the Walter Energy consolidated group for the full or partial tax years during which certain of the Company's former subsidiaries were a part of such consolidated group and certain other tax risks allocated to us in connection with our spin-off from Walter Energy.

All of the above factors, risks and uncertainties are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors, risks and uncertainties emerge from time to time, and it is not possible for our management to predict all such factors, risks and uncertainties.
Although we believe that the assumptions underlying the forward-looking statements (including those relating to our outlook) contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.
In addition, this report may contain statements of opinion or belief concerning market conditions and similar matters. In certain instances, those opinions and beliefs could be based upon general observations by members of our management, anecdotal evidence and/or our experience in the conduct of our business, without specific investigation or statistical analyses. Therefore, while such statements reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views and such views may not be shared by all who are involved in those industries or markets.


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Executive Summary
The Company
We are a diversified mortgage banking firm focused primarily on servicing and originating residential loans, including reverse loans. We service a wide array of loans across the credit spectrum for our own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through our consumer and correspondent lending channels, we originate and purchase residential loans that we predominantly sell to GSEs and government entities. In addition, we operate several other complementary businesses that include managing a portfolio of credit-challenged, non-conforming residential mortgage loans; an insurance agency serving borrowers and credit owners of our servicing portfolio; a post charge-off collection agency; and an asset management business through our SEC registered investment advisor. These supplemental businesses allow us to leverage our core servicing capabilities and consumer base to generate complementary revenue streams.
At September 30, 2016, we serviced 2.1 million residential loans with a total unpaid principal balance of $255.8 billion. We have been one of the 10 largest mortgage loan servicers in the U.S. by unpaid principal balance for the past three years according to Inside Mortgage Finance. Our originations business originated $15.0 billion in mortgage loan volume during the first nine months of 2016, ranking it in the top 20 originators nationally by unpaid principal balance according to Inside Mortgage Finance. Our reverse mortgage business is a leading integrated franchise in the reverse mortgage sector and, according to an industry source, was the sixth leading issuer of HMBS during the nine months ended September 30, 2016.
During the nine months ended September 30, 2016, we added to the unpaid principal balance of our third-party mortgage loan servicing portfolio: $5.2 billion relating to acquired servicing rights, $10.8 billion relating to sub-servicing contracts and $10.3 billion relating to servicing rights capitalized upon sales of mortgage loans, while also adding $2.1 billion to our third-party reverse loan servicing portfolio. Our third-party mortgage loan and reverse mortgage servicing portfolio was reduced by $39.3 billion of unpaid principal balance in payoffs and sales, net of recapture activities, during the nine months ended September 30, 2016. In the same period, we originated and purchased $640.6 million in reverse mortgage volume and issued $622.0 million in HMBS.
Our mortgage loan originations business diversifies our revenue base and offers various sources for replenishing our servicing portfolio. During the nine months ended September 30, 2016, we originated $5.0 billion of mortgage loans, the majority of which resulted from retention activities associated with our existing servicing portfolio. Through our retention activities, we assist consumers in refinancing their loans, which reduces the runoff on our existing servicing portfolio. In addition, we purchased $10.0 billion of mortgage loans through our correspondent channel during the nine months ended September 30, 2016. Substantially all of these purchased and originated mortgage loans were added to our servicing portfolio upon loan sale.
We manage our Company in three reportable segments: Servicing, Originations, and Reverse Mortgage. A description of the business conducted by each of these segments is provided below:
Servicing - Our Servicing segment consists of operations that perform servicing for third-party credit owners of mortgage loans for a fee and the Company's own mortgage loan portfolio. The Servicing segment also operates complementary businesses consisting of an insurance agency serving residential loan borrowers and credit owners and a collections agency that performs collections of post charge-off deficiency balances for third parties and the Company. In addition, the Servicing segment holds the assets and mortgage-backed debt of the Residual Trusts.
Originations - Our Originations segment consists of operations that originate and purchase mortgage loans that are intended for sale to third parties. During the nine months ended September 30, 2016, the mix of mortgage loans sold by our Originations segment, based on unpaid principal balance, consisted of (i) 46% Fannie Mae conventional conforming loans, (ii) 40% Ginnie Mae loans, and (iii) 14% Freddie Mac conventional conforming loans.
Reverse Mortgage - Our Reverse Mortgage segment consists of operations that purchase and originate HECMs that are securitized, but remain on the consolidated balance sheet as collateral for secured borrowings. This segment performs servicing for third-party credit owners and the Company and provides other complementary services for the reverse mortgage market, such as real estate owned property management and disposition.
Other - 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 GTIM.


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Overview
Our profitability is dependent on our ability to generate revenue, primarily from our servicing and originations businesses. Our Servicing segment revenue is primarily impacted by the size and mix of our capitalized servicing and sub-servicing portfolios and is generated through servicing of mortgage loans for clients and/or credit owners. Net servicing revenue and fees includes the change in fair value of servicing rights carried at fair value and the amortization of all other servicing rights. Our servicing fee income generation is influenced by the level and timing of entrance into sub-servicing contracts and purchases and sales of servicing rights. The fair value of our servicing rights is largely dependent on the size of the related portfolio, discount rates, and prepayment and default speeds, which are influenced by interest rates. Our Originations segment revenue, which is primarily net gains on sales of loans, is impacted by interest rates and the volume of loans locked as well as the margins earned in our origination channels. Net gains on sales of loans include the cost of additions to the representations and warranties reserve. Our Reverse Mortgage segment is impacted by new origination reverse loan volume, draws on existing reverse loans, sub-servicing contracts and the fair value of reverse loans and HMBS.
Our results of operations are also affected by expenses such as salaries and benefits, information technology, occupancy, legal and professional fees, the provision for uncollectible advances, curtailment, interest expense and other operating expenses. Refer to the Financial Highlights, Results of Operations and Business Segment Results sections below for further information.
Currently, our profitability in the Reverse segment is being negatively impacted by the legacy HECM product and the acceleration of default status driven by new HUD regulations. Regulatory changes to the HECM program in late 2013 reduced the principal available to be drawn initially by borrowers, and further changes effective in April of 2015 introduced certain financial assessment requirements of borrowers and in certain instances, required that a portion of the borrowing capacity be set-aside to pay for insurance and taxes on the related property. We believe that over time, the improved credit risk profile of these products may have a favorable impact on our costs to service reverse mortgages as the legacy HECM product seasons and the newer HECM IDL product becomes a larger portion of our portfolio.
Our principal sources of liquidity are the cash flows generated from our business segments and funds available from our master repurchase agreements, mortgage loan servicing advance facilities, the 2013 Revolver, issuance of HMBS and excess servicing spread financing arrangements. We may generate additional liquidity through sales of MSRs, any portion thereof, or other assets. Financial Highlights
Total revenues for the three months ended September 30, 2016 were $297.3 million, which represented an increase of $77.9 million, or 36%, as compared to the same period of 2015. The increase in revenue reflects an increase of $113.4 million in net servicing revenue and fees, primarily driven by $138.9 million in lower fair value losses on servicing rights.
Total revenues for the nine months ended September 30, 2016 were $551.6 million, which represented a decline of $391.1 million, or 41%, as compared to the same period of 2015. The decline in revenue reflects a decrease of $275.2 million in net servicing revenue and fees, primarily driven by $247.1 million in higher fair value losses on servicing rights; $54.2 million in lower net gains on sales of loans; and $27.2 million in lower interest income on loans.
During the nine months ended September 30, 2016, we recorded fair value losses on our servicing rights carried at fair value primarily as a result of a higher assumed conditional prepayment rate used to value our servicing rights and accelerated realization of expected cash flows driven by declining interest rates, as well as an increase in discount rates. We had lower net gains on sales of loans due primarily to a lower volume of locked loans, offset partially by a shift in mix from the lower margin correspondent channel to the higher margin consumer channel. We had lower interest income on loans primarily due to the sale of our residual interest in seven of the Residual Trusts in the second quarter of 2015.
Total expenses for the three months ended September 30, 2016 were $465.8 million, which represented an increase of $101.7 million as compared to the same period of 2015, which reflects $97.7 million in higher goodwill and intangible assets impairment.
Total expenses for the nine months ended September 30, 2016 were $1.4 billion, which represented an increase of $211.4 million as compared to the same period of 2015. The increase in expenses reflects $256.6 million in higher goodwill and intangible assets impairment, offset in part by $33.0 million in lower salaries and benefits and $16.3 million in lower interest expense for the nine months ended September 30, 2016 as compared to the same period of 2015.


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As a result of goodwill evaluations performed during the second and third quarters of 2016, we recorded $215.4 million and $91.0 million, respectively, in non-cash goodwill impairment charges, which impacted the Servicing and ARM reporting units' goodwill. In addition, we incurred $6.7 million in intangible assets impairment charges to our Reverse Mortgage segment as a result of an evaluation performed in the third quarter of 2016. As a result of goodwill evaluations performed during the second quarter of 2015, we recorded $56.5 million in non-cash goodwill impairment charges to the Reverse Mortgage reporting unit's goodwill. Intangible assets impairment is included in goodwill and intangible assets impairment in the consolidated statements of comprehensive loss. Refer to Note 7 to the Consolidated Financial Statements for additional information on the goodwill and intangible assets impairment charges incurred during 2016.
We had lower salaries and benefits primarily due to a decrease in compensation, benefits and incentives resulting from a lower average headcount, a decrease in commissions due to lower originations volume, and a decrease in share-based compensation due to higher forfeitures, partially offset by an increase in severance. We had lower interest expense driven by a decrease in interest expense related to mortgage-backed debt, primarily as a result of the sale of our residual interest in seven of the Residual Trusts in April 2015. During the second quarter of 2016, Ditech Financial transitioned approximately 1.4 million loans, or greater than 60% of our mortgage loan servicing portfolio, to MSP, the industry-standard loan servicing platform. The conversion resulted in a reduction to servicer payables and related restricted cash balances as a result of changes in the structure and timing of the flow of funds to certain custodial accounts that are not reflected in the consolidated balance sheets. The conversion also had an indirect impact on other balances included in the Servicing segment, which is discussed in further detail under the Business Segment Results section below. . . .

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