UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-13417
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter)
Maryland | 13-3950486 | |
(State or other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
|
3000 Bayport Drive, Suite 1100 Tampa, FL |
33607 | |
(Address of principal executive offices) | (Zip Code) |
(813) 421-7600
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class |
Name of Exchange on Which Registered |
|
Common Stock, $0.01 Par Value per Share | NYSE |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The registrant had 36,887,287 shares of common stock outstanding as of April 30, 2013.
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
FORM 10-Q
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 624,725 | $ | 442,054 | ||||
Restricted cash and cash equivalents |
731,996 | 653,338 | ||||||
Residential loans (includes $8,012,847 and $6,710,211 at fair value at March 31, 2013 and December 31, 2012, respectively) |
9,501,724 | 8,220,967 | ||||||
Allowance for loan losses |
(19,932 | ) | (20,435 | ) | ||||
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Residential loans, net |
9,481,792 | 8,200,532 | ||||||
Receivables, net (includes $53,671 and $53,975 at fair value at March 31, 2013 and December 31, 2012, respectively) |
260,450 | 259,009 | ||||||
Servicer and protective advances, net |
364,192 | 173,047 | ||||||
Servicing rights and related intangible assets, net (includes $347,254 and $0 at fair value at March 31, 2013 and December 31, 2012, respectively) |
964,726 | 238,791 | ||||||
Goodwill |
644,645 | 580,378 | ||||||
Intangible assets, net |
145,789 | 148,413 | ||||||
Premises and equipment, net |
153,073 | 137,785 | ||||||
Other assets (includes $59,700 and $949 at fair value at March 31, 2013 and December 31, 2012, respectively) |
199,714 | 144,830 | ||||||
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Total assets |
$ | 13,571,102 | $ | 10,978,177 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Payables and accrued liabilities (includes $32,636 and $25,348 at fair value at March 31, 2013 and December 31, 2012, respectively) |
$ | 574,673 | $ | 260,610 | ||||
Servicer payables |
665,990 | 587,929 | ||||||
Servicing advance liabilities |
242,943 | 100,164 | ||||||
Debt |
2,224,185 | 1,146,249 | ||||||
Mortgage-backed debt (includes $738,434 and $757,286 at fair value at March 31, 2013 and December 31, 2012, respectively) |
2,026,291 | 2,072,728 | ||||||
HMBS related obligations at fair value |
6,887,583 | 5,874,552 | ||||||
Deferred tax liability, net |
23,750 | 41,017 | ||||||
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Total liabilities |
12,645,415 | 10,083,249 | ||||||
Commitments and contingencies (Note 21) |
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Stockholders equity: |
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Preferred stock, $0.01 par value per share: |
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Authorized - 10,000,000 shares Issued and outstanding - 0 shares at March 31, 2013 and December 31, 2012 |
| | ||||||
Common stock, $0.01 par value per share: |
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Authorized - 90,000,000 shares Issued and outstanding - 36,887,287 and 36,687,785 shares at March 31, 2013 and December 31, 2012, respectively |
369 | 367 | ||||||
Additional paid-in capital |
564,973 | 561,963 | ||||||
Retained earnings |
359,854 | 332,105 | ||||||
Accumulated other comprehensive income |
491 | 493 | ||||||
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Total stockholders equity |
925,687 | 894,928 | ||||||
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Total liabilities and stockholders equity |
$ | 13,571,102 | $ | 10,978,177 | ||||
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3
The following table presents the assets and liabilities of the Companys consolidated variable interest entities, which are included in the consolidated balance sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities. The liabilities in the table below include third-party liabilities of the consolidated variable interest entities only, and for which creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.
The accompanying notes are an integral part of the consolidated financial statements.
4
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)
For the Three Months Ended
March 31, |
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2013 | 2012 | |||||||
REVENUES |
||||||||
Net servicing revenue and fees |
$ | 151,080 | $ | 89,733 | ||||
Net gains on sales of loans |
78,445 | | ||||||
Interest income on loans |
36,898 | 39,280 | ||||||
Insurance revenue |
17,534 | 19,962 | ||||||
Other revenues |
7,855 | 3,866 | ||||||
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Total revenues |
291,812 | 152,841 | ||||||
EXPENSES |
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Salaries and benefits |
106,733 | 57,403 | ||||||
General and administrative |
87,440 | 29,029 | ||||||
Interest expense |
54,142 | 45,838 | ||||||
Depreciation and amortization |
30,404 | 12,019 | ||||||
Provision for loan losses |
1,726 | 1,569 | ||||||
Other expenses, net |
370 | 3,486 | ||||||
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Total expenses |
280,815 | 149,344 | ||||||
OTHER GAINS (LOSSES) |
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Net fair value gains on reverse loans and related HMBS obligations |
36,788 | | ||||||
Other net fair value gains (losses) |
(1,261 | ) | 4,763 | |||||
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Total other gains (losses) |
35,527 | 4,763 | ||||||
Income before income taxes |
46,524 | 8,260 | ||||||
Income tax expense |
18,775 | 3,125 | ||||||
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Net income |
$ | 27,749 | $ | 5,135 | ||||
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Comprehensive income |
$ | 27,747 | $ | 5,193 | ||||
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Net income |
$ | 27,749 | $ | 5,135 | ||||
Basic earnings per common and common equivalent share |
$ | 0.74 | $ | 0.17 | ||||
Diluted earnings per common and common equivalent share |
0.73 | 0.17 | ||||||
Weighted-average common and common equivalent shares outstanding basic |
36,877 | 28,798 | ||||||
Weighted-average common and common equivalent shares outstanding diluted |
37,634 | 29,034 |
The accompanying notes are an integral part of the consolidated financial statements.
5
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(in thousands, except share data)
Common Stock |
Additional
Paid-In Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Income |
Total | ||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance at January 1, 2013 |
36,687,785 | $ | 367 | $ | 561,963 | $ | 332,105 | $ | 493 | $ | 894,928 | |||||||||||||
Net income |
27,749 | 27,749 | ||||||||||||||||||||||
Other comprehensive loss, net of tax |
(2 | ) | (2 | ) | ||||||||||||||||||||
Share-based compensation |
2,690 | 2,690 | ||||||||||||||||||||||
Excess tax benefit on share-based compensation |
322 | 322 | ||||||||||||||||||||||
Issuance of shares under incentive plans |
199,502 | 2 | (2 | ) | | |||||||||||||||||||
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Balance at March 31, 2013 |
36,887,287 | $ | 369 | $ | 564,973 | $ | 359,854 | $ | 491 | $ | 925,687 | |||||||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
6
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Operating activities |
||||||||
Net income |
$ | 27,749 | $ | 5,135 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
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Net fair value gains on reverse loans and related HMBS obligations |
(36,788 | ) | | |||||
Amortization of servicing rights |
11,324 | 12,915 | ||||||
Change in fair value of servicing rights |
7,004 | | ||||||
Other net fair value (gains) losses |
4,847 | (699 | ) | |||||
Accretion of residential loan discounts |
(3,999 | ) | (3,485 | ) | ||||
Accretion of discounts on debt and amortization of deferred debt issuance costs |
5,329 | 2,847 | ||||||
Provision for loan losses |
1,726 | 1,569 | ||||||
Depreciation and amortization of premises and equipment and intangible assets |
30,404 | 12,019 | ||||||
Losses (gains) on real estate owned, net |
(1,394 | ) | 821 | |||||
Provision (benefit) for deferred income taxes |
(11,447 | ) | 28 | |||||
Share-based compensation |
2,690 | 4,749 | ||||||
Originations and acquisitions of residential loans held for sale |
(433,017 | ) | | |||||
Proceeds from sales of residential loans held for sale |
227,701 | | ||||||
Net gains on sales of loans |
(78,445 | ) | | |||||
Other |
969 | (543 | ) | |||||
Decrease (increase) in assets |
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Receivables |
(9,092 | ) | 179 | |||||
Servicer and protective advances |
(4,326 | ) | 14,196 | |||||
Other |
(4,440 | ) | 415 | |||||
Increase (decrease) in liabilities |
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Payables and accrued liabilities |
54,505 | (11,843 | ) | |||||
Servicer payables |
(897 | ) | 4,179 | |||||
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Cash flows provided by (used in) operating activities |
(209,597 | ) | 42,482 | |||||
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Investing activities |
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Purchases and originations of residential loans held for investment |
(1,065,356 | ) | (1,145 | ) | ||||
Principal payments received on residential loans held for investment |
93,556 | 40,444 | ||||||
Payments on receivables related to Non-Residual Trusts |
4,141 | 4,441 | ||||||
Cash proceeds from sales of real estate owned, net |
6,056 | 3,762 | ||||||
Purchases of premises and equipment |
(5,240 | ) | (1,247 | ) | ||||
Decrease (increase) in restricted cash and cash equivalents |
570 | 5,772 | ||||||
Payment for acquisitions of businesses, net of cash acquired |
(478,084 | ) | | |||||
Acquisitions of servicing rights and intangible assets |
(304,990 | ) | | |||||
Other |
904 | (182 | ) | |||||
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Cash flows provided by (used in) investing activities |
(1,748,443 | ) | 51,845 | |||||
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Financing activities |
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Issuance of debt |
820,875 | | ||||||
Payments on debt |
(19,620 | ) | (21,535 | ) | ||||
Debt issuance costs paid |
(11,266 | ) | | |||||
Proceeds from securitizations of reverse mortgage loans |
1,041,754 | | ||||||
Payments on HMBS related obligations |
(57,730 | ) | | |||||
Payments on servicing advance liabilities |
(261,774 | ) | (77,150 | ) | ||||
Issuances of servicing advance liabilities |
404,553 | 74,729 | ||||||
Net change in master repurchase agreements |
273,865 | | ||||||
Payments on mortgage-backed debt |
(49,465 | ) | (49,460 | ) | ||||
Excess tax benefits on share-based compensation |
322 | 21 | ||||||
Proceeds from the exercise of stock options |
| 186 | ||||||
Repurchase and cancellation of common stock |
| (423 | ) | |||||
Other |
(803 | ) | | |||||
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Cash flows provided by (used in) financing activities |
2,140,711 | (73,632 | ) | |||||
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Net increase in cash and cash equivalents |
182,671 | 20,695 | ||||||
Cash and cash equivalents at the beginning of the period |
442,054 | 18,739 | ||||||
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Cash and cash equivalents at the end of the period |
$ | 624,725 | $ | 39,434 | ||||
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The accompanying notes are an integral part of the consolidated financial statements.
7
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Walter Investment Management Corp., or the Company or Walter Investment, is a fee-based business services provider to the residential mortgage industry focused on providing specialty servicing for credit-sensitive residential mortgages and reverse mortgages. The Company also originates, purchases and sells mortgage loans into the secondary market. In addition, the Company is a mortgage portfolio owner of credit-challenged, non-conforming residential loans and reverse mortgage loans and operates an insurance agency serving residential loan customers. The Company operates throughout the United States, or U.S. At March 31, 2013, the Company serviced approximately 2.0 million accounts compared to 1.0 million accounts at December 31, 2012.
Throughout this Quarterly Report on Form 10-Q, references to residential loans refer to residential mortgage loans, including forward mortgage loans, reverse mortgage loans and participations, and residential retail installment agreements, which include manufactured housing loans, and references to borrowers refer to borrowers under residential mortgage loans and installment obligors under residential retail installment agreements.
Acquisition of Reverse Mortgage Solutions, Inc.
On November 1, 2012, the Company acquired 100% of the outstanding shares of Reverse Mortgage Solutions, Inc., or RMS. Based in Spring, Texas, RMS provides a full suite of services to the reverse mortgage sector, including servicing, sub-servicing, loan origination and securitization, and related technology. The acquisition of RMS positions the Company as a full service provider in the reverse mortgage servicing sector with new growth opportunities and represents an extension of the Companys fee-for-service business model.
Acquisition of Security One Lending
On December 31, 2012, in connection with the execution of a stock purchase agreement, the Company agreed to acquire all of the outstanding shares of Security One Lending, or S1L. Based in San Diego, California, S1L is a retail and wholesale reverse mortgage loan originator. S1L has a long-standing relationship with RMS, as S1L has been delivering loans using RMSs technology and RMS has acquired a significant amount of S1Ls reverse origination production during recent years. The acquisition of S1L will enhance RMSs position as an issuer of reverse mortgage product, while also significantly increasing RMSs retail origination presence. The Company obtained effective control over S1L through an economic closing on December 31, 2012. A legal closing subsequently occurred on April 30, 2013. The economic closing required acquisition method accounting in accordance with the authoritative accounting guidance for business combinations. Accordingly, the financial results for S1L have been included in the Companys consolidated financial statements beginning on December 31, 2012.
Acquisition of Certain Net Assets of Residential Capital LLC
The Company previously announced its joint bid with Ocwen Loan Servicing LLC to acquire certain mortgage-related net assets held by Residential Capital LLC, or ResCap, in an auction sponsored by the U.S. Bankruptcy Court. Pursuant to this agreement, the Company agreed to acquire the rights and assume the liabilities relating to ResCaps entire Federal National Mortgage Association, or Fannie Mae, mortgage servicing rights, or MSRs, and related servicer advances, and ResCaps mortgage originations and capital markets platforms, or the ResCap net assets. The Company closed on its acquisition of the ResCap net assets on January 31, 2013. The acquisition of the ResCap net assets provides the Company with a fully integrated loan originations platform to complement and enhance its servicing business. Refer to Note 3 for further information regarding the acquisition of the ResCap net assets.
Acquisition of Certain Net Assets of Ally Bank
On March 1, 2013, the Company acquired the correspondent lending and wholesale broker businesses of Ally Bank, or the Ally Bank net assets. The acquisition of the Ally Bank net assets allows the Company to pursue correspondent lending opportunities using the capabilities resident in the ResCap originations platform. Refer to Note 3 for further information regarding the acquisition of the Ally Bank net assets.
Acquisition of Certain Net Assets of MetLife Bank
On March 1, 2013, the Company purchased the residential mortgage servicing platform, including certain servicing related technology assets, of MetLife Bank, N.A. located in Irving, Texas, or the MetLife Bank net assets. The acquisition of the residential mortgage servicing platform will serve to support the Companys development of a robust dual-track residential mortgage servicing platform. Refer to Note 3 for further information regarding the acquisition of the MetLife Bank net assets.
Bank of America Asset Purchase
On January 31, 2013, the Company purchased Fannie Mae MSRs, including related servicer advances, from Bank of America, N.A, or the BOA asset purchase. This acquisition was accounted for as an asset purchase. Refer to Note 3 for further information regarding the BOA asset purchase.
8
Interim Financial Reporting
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S., or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. These unaudited interim consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements and related notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Companys material estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility, prepayment volatility, credit exposure and borrower mortality rates and include, but are not limited to, the allowance for loan losses as well as the valuation of residential loans, receivables, servicing rights, goodwill and intangibles, real estate owned, derivatives, mortgage-backed debt and the HMBS related obligations. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, actual results may differ from these estimates.
Reclassifications and Error Corrections
During the second and fourth quarters of 2012, the Company made immaterial corrections of errors in certain amounts in its consolidated balance sheet at December 31, 2011 as well as to acquisition date fair values at July 1, 2011 of the assets acquired and liabilities assumed resulting from the acquisition of GTCS Holdings, LLC, or Green Tree. Amounts received by the Company and required to be legally segregated in separate bank accounts have been corrected by reclassifying balances from cash and cash equivalents to restricted cash and cash equivalents. In addition, amounts for which the Company does not meet the right of offset criteria have been corrected by reclassifying balances from servicer and protective advances to servicer payables. Lastly, cash balances that were overdrawn at period end have been corrected by reclassifying balances from payables and accrued liabilities to cash and cash equivalents as the legal right of offset exists within the same banking institution. These revisions had no impact on the Companys net income. The impact of correcting these errors was a decrease of $5.1 million to cash flows from operating activities and an increase of $1.3 million to cash flows used in investing activities for the three months ended March 31, 2012 to $42.5 million and $51.8 million, respectively.
Changes in Presentation
During the three months ended March 31, 2013, the Company renamed servicing revenues and fees within the consolidated statements of comprehensive income to net servicing revenues and fees and reclassified amortization of servicing rights that were previously included as part of depreciation and amortization to net servicing revenue and fees. Given the growth in the Companys third party servicing portfolio resulting from recent acquisitions, this change in presentation was made to better reflect the economics of servicing activities. This change in presentation resulted in a reduction of $12.9 million to historical servicing revenue and fees and depreciation and amortization for the three months ended March 31, 2012.
The Company also renamed net fair value gains (losses) to other net fair value gains (losses) and separated net fair value gains on reverse loans and related HMBS obligations that were previously included in historical net fair value gains (losses) to its own line item on the consolidated statements of comprehensive income.
Servicing Rights Fair Value Election
Prior to January 1, 2013, all servicing rights were initially recorded at fair value and subsequently accounted for at amortized cost. In addition the Company classified its servicing rights as either a forward loan class or a reverse loan class. Given recent acquisitions and based upon anticipated risk management strategies, effective January 1, 2013 the Company began classifying its servicing rights as a risk-managed forward loan class, a forward loan class or a reverse loan class. The forward loan class and the reverse loan class continue to be accounted for at amortized cost. The Company has elected to account for the new risk-managed forward loan class at fair value effective as of January 1, 2013. The risk-managed forward loan class consists of servicing rights acquired in 2013 as well as servicing rights acquired as part of an MSR pool on December 31, 2012. The servicing rights acquired as part of an MSR pool were previously accounted for at amortized cost, however are now accounted for at fair value retrospective to January 1, 2013. This election on January 1, 2013 had no impact on retained earnings. Refer to further information on servicing rights at Notes 2 and 11.
Recent Accounting Guidance
In December 2011, the Financial Accounting Standards Board, or FASB, issued an accounting standards update to require disclosure of information about the effect of rights of setoff with certain financial instruments on an entitys financial position. In January 2013, the FASB issued an accounting standards update that clarifies the aforementioned offsetting disclosure requirements. The disclosure requirements are only applicable to rights of setoff of certain derivative instruments, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with standards set forth by the FASB Codification or master netting arrangements or similar agreements. The Company has adopted the amendments in these standards effective in the first quarter of 2013. Adoption of this standard had no impact on the Companys consolidated financial statements. Additional required disclosures are included in Note 7.
In February 2013, the FASB issued an accounting standards update that requires presentation for reclassification adjustments from accumulated other comprehensive income into net income in a single note or on the face of the financial statements. The Company has adopted the amendments in this standard effective in the first quarter of 2013. The adoption of this standard had an immaterial effect on the Companys consolidated financial statements and as such, the required presentation is not included herein.
9
2. Significant Accounting Policies
Included in Note 2 of the Companys Annual Report on Form 10-K for the year ended December 31, 2012 is a summary of the Companys significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the financial results of the Company as a result of the recent business combinations and asset acquisitions.
Residential Loans Held For Sale
Residential loans held for sale represent loans originated or acquired by the Company with the intent to sell. These loans are originated or acquired primarily for purposes of transferring to government sponsored entities, or GSEs, or other third party investors in the secondary market with servicing rights either retained or sold. The Company has elected to carry residential loans held for sale at fair value. The yield on the loans and any changes in fair value are recorded in net gains on sales of loans in the consolidated statements of comprehensive income. The yield on the loans includes recognition of interest income based on the stated interest rates of the loans that are expected to be collected, as well as any fair value adjustments. Gains or losses recognized upon sale of residential loans held for sale are also included in net gains on sales of loans in the consolidated statements of comprehensive income. Loan origination fees are recorded in other revenues within the consolidated statements of comprehensive income when earned and related costs are recognized in general and administrative expenses when incurred.
The Companys agreements with GSEs and other third parties include representations and warranties related to the loans the Company sells. The representations and warranties require adherence to GSE origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law. In the event of a breach of its representations and warranties which are generally enforceable at any time over the life of the loan, the Company may be required to either repurchase the residential loans at par with the identified defects or indemnify the investor or insurer for applicable incurred losses. In such cases, the Company bears any subsequent credit loss on the residential loans. The Companys credit loss may be reduced by any recourse it has to correspondent lenders that, in turn, had sold such mortgage loans to the Company and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from that correspondent lender. The Company actively contests claims to the extent that the Company does not consider the claims to be valid. The Company seeks to manage the risk of repurchase and associated credit exposure through the Companys underwriting and quality assurance practices and by servicing residential loans to meet investor standards.
The Company records a provision for losses relating to such representations and warranties as part of its loan sale transactions at the time the loan is sold in accordance with the accounting guidance for guarantees. The provision is a reduction in the of net gains on sales of loans in the consolidated statements of comprehensive income. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, historical defect rates, repurchase rates, resale rates and the probability of reimbursement by the correspondent loan seller. The liability established at the time loans are sold, which is recorded in payables and accrued liabilities, is continually updated based on changes in estimates, with those changes recorded as a component of general and administrative expenses included in the consolidated statements of comprehensive income.
The level of the liability for representations and warranties requires considerable management judgment. The level of residential loan repurchase losses is dependent on economic factors and external conditions that may change over the lives of the underlying loans. Refer to Note 21 for further discussion.
Derivatives
The Company uses derivative financial instruments to manage exposure to interest rate risk and changes in the fair value of forward loans held for sale. Derivative transactions are measured in terms of the notional amount. The notional amount is generally not exchanged and is used only as a basis on which interest and other payments are determined. The Company has elected to record derivative assets and liabilities and related collateral on a gross basis, even when a legally enforceable master netting agreement exists between the Company and the derivative counterparty.
The Company enters into commitments to purchase and originate forward loans at interest rates that are determined prior to funding. Interest rate lock commitments, or IRLCs, are considered freestanding derivatives, as these instruments are not designated as hedging instruments under GAAP, and are recorded at fair value at inception. Changes in value subsequent to inception are based on changes in the fair value of the underlying loan and for commitments to originate loans, changes in the probability that the loan will fund within the terms of the commitment, affected primarily by changes in interest rates and the passage of time. The aggregate fair value of IRLCs on the consolidated balance sheet is recorded in other assets or payables and accrued liabilities. The interest exposure on the Companys IRLCs is economically hedged with forward sales commitments whose fair value is also recorded in other assets or payables and accrued liabilities. Management has elected not to designate the freestanding derivative forward sales commitments as hedges under GAAP. Changes in the fair value of the IRLCs and related forward sales commitments are recognized as gain or loss on sale of forward loans held for sale included in net gains on sales of loans in the consolidated statements of comprehensive income. Cash flows related to IRLCs and forward sales commitments are included in operating activities in the consolidated statements of cash flows to match the cash flows of the hedged item.
Servicing Rights
Servicing rights are an intangible asset representing the right to service a portfolio of loans. Capitalized servicing rights historically related to servicing and sub-servicing contracts acquired in connection with business combinations. Additionally, the Company has recently acquired the rights to service loans through the purchase of such rights from third parties or through the transfer of purchased or originated loans with servicing rights retained. All newly acquired servicing rights and servicing rights recognized as a result of the transfer of loans with servicing retained are initially measured at fair value. Subsequent to acquisition or origination, the Company accounts for servicing rights using the amortization method or the fair value measurement method, based on the Companys strategy for managing the risks of the underlying portfolios. Refer to information surrounding the accounting for servicing rights at Note 2.
10
The Company identifies classes of servicing rights based upon the availability of market inputs used in determining their fair values and its planned risk management strategy associated with the servicing rights. Based upon these criteria, the Company has identified three classes of servicing rights: a risk-managed forward loan class, or the risk-managed loan class, a forward loan class and a reverse loan class. The risk-managed loan class includes loan portfolios for which the Company could apply a hedging strategy in the future. Servicing assets associated with the forward loan class and the reverse loan class are amortized based on expected cash flows in proportion to and over the life of net servicing income. Amortization is recorded as a reduction to servicing revenue and fees in the consolidated statements of comprehensive income. Servicing assets are stratified by product type and compared to the estimated fair value on a quarterly basis. To the extent that the carrying value for a stratum exceeds its estimated fair value, a valuation allowance is established with an impairment loss recognized in other expenses, net in the consolidated statements of comprehensive income. If the fair value of the impaired servicing asset increases, the Company adjusts the carrying value of the servicing asset as a reduction in the valuation allowance. The Company recognizes a direct impairment to the servicing asset when the recoverability of the valuation allowance is determined to be unrecoverable.
For servicing assets associated with the risk-managed loan class, which are accounted for at fair value, the Company measures the fair value at each reporting date and records changes in fair value in servicing revenue and fees in the consolidated statements of comprehensive income.
3. Acquisitions
ResCap Net Assets
On January 31, 2013, the Company acquired the assets and assumed the liabilities relating to all of ResCaps Fannie Mae MSRs and related servicer advances, and ResCaps mortgage originations and capital markets platforms, or the ResCap net assets, for an adjusted purchase price of $487.2 million. At closing, the ResCap Fannie Mae MSRs were associated with loans totaling $42.3 billion in unpaid principal balance. The Company made cash payments of $15.0 million in the fourth quarter of 2012 and $477.0 million on January 31, 2013, which were partially funded with net proceeds from an October 2012 common stock offering and borrowings from the Companys incremental secured credit facility. The total cash paid of $492.0 million is subject to purchase price adjustments during the 120-day period subsequent to the closing date. The total cash paid in excess of the adjusted purchase price is refundable to the Company at the end of the adjustment period. The Company has accounted for this transaction as a business combination in accordance with authoritative accounting guidance.
The purchase consideration of $487.2 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities based on managements estimates. The table below presents the preliminary purchase price allocation of the estimated acquisition date fair values of the assets acquired and the liabilities assumed (in thousands):
Amount | ||||
Assets |
||||
Servicer and protective advances |
$ | 186,241 | ||
Servicing rights |
90,431 | |||
Goodwill |
52,548 | |||
Intangible assets |
160,173 | |||
Premises and equipment |
18,102 | |||
|
|
|||
Total assets acquired |
507,495 | |||
|
|
|||
Liabilities |
||||
Payables and accrued liabilities |
20,270 | |||
|
|
|||
Total liabilities assumed |
20,270 | |||
|
|
|||
Fair value of net assets acquired |
$ | 487,225 | ||
|
|
The following table presents the estimate of identifiable intangible assets and capitalized software recognized at acquisition of the ResCap net assets with the corresponding weighted-average amortization periods (in years) at the acquisition date (in thousands):
Weighted- | ||||||||
Average | ||||||||
Estimated | Amortization | |||||||
Fair Value | Period | |||||||
Intangible assets: |
||||||||
Customer relationships |
$ | 152,173 | 2.9 | |||||
Trade name |
8,000 | 8.0 | ||||||
|
|
|||||||
Total intangible assets |
160,173 | 3.2 | ||||||
Capitalized software (1) |
17,100 | 3.0 | ||||||
|
|
|||||||
Total intangible assets and capitalized software |
$ | 177,273 | 3.1 | |||||
|
|
(1) |
Capitalized software is included in premises and equipment in the consolidated balance sheet. |
11
Servicer and protective advances acquired in connection with the acquisition of the ResCap net assets have a fair value of $186.2 million and gross contractual amounts receivable of $195.9 million, of which $9.7 million is not expected to be collected. The ResCap net assets have been allocated to the Servicing, Insurance and Originations segments. The originations segment was previously included in Other. Refer to Note 20 for further information regarding segments. Goodwill is calculated as the excess of the purchase consideration transferred over the fair value of the identifiable assets acquired less the liabilities assumed. The primary factors that contributed to the recognition of goodwill are the expected future earnings and projections of growth. The goodwill related to the acquisition of the ResCap net assets was allocated to the Originations segment, of which $49.3 million is expected to be tax deductible.
The amount of revenues and net income related to the ResCap net assets and Ally Bank net assets included in the Companys consolidated statement of comprehensive income for the period from the date of acquisition through March 31, 2013 were $84.8 million and $13.7 million, respectively. During the three months ended March 31, 2013, the Company incurred $6.0 million in transaction-related expenses to acquire the ResCap net assets, which are included in general and administrative expenses in the consolidated statement of comprehensive income.
Ally Bank Net Assets
On March 1, 2013, the Company acquired the correspondent lending and wholesale broker businesses of Ally Bank for a cash payment of $0.1 million. The Company has accounted for this transaction as a business combination in accordance with authoritative accounting guidance.
The purchase consideration of $0.1 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities based on managements estimates. The table below presents the preliminary purchase price allocation of the estimated acquisition date fair values of the assets acquired and the liabilities assumed (in thousands):
Amount | ||||
Assets |
||||
Goodwill |
$ | 99 | ||
Intangible assets |
1,200 | |||
Premises and equipment |
201 | |||
|
|
|||
Total assets acquired |
1,500 | |||
|
|
|||
Liabilities |
||||
Payables and accrued liabilities |
1,437 | |||
|
|
|||
Total liabilities assumed |
1,437 | |||
|
|
|||
Fair value of net assets acquired |
$ | 63 | ||
|
|
Intangible assets relate to institutional relationships and have a weighted-average amortization period of 1 year. The Ally Bank net assets, including goodwill, have been allocated to the Originations segment. None of the goodwill recorded is expected to be tax deductible.
MetLife Bank Net Assets
On March 1, 2013, the Company purchased the residential mortgage servicing platform, including certain servicing related technology assets, and related work force of MetLife Bank, N.A. located in Irving, Texas. The purchase price of $1.0 million was paid in cash. The Company has accounted for this transaction as a business combination in accordance with authoritative accounting guidance.
The Company allocated $0.8 million to goodwill, $0.4 million to premises and equipment, and $0.2 million to payables and accrued liabilities based on preliminary fair values as of the acquisition date. The MetLife Bank net assets, including goodwill, have been allocated to the Servicing segment. All of the goodwill recorded is expected to be tax deductible. During the three months ended March 31, 2013, the Company incurred $0.1 million in transaction-related expenses to acquire the MetLife Bank net assets, which are included in general and administrative expenses in the consolidated statement of comprehensive income.
Bank of America Asset Purchase
On January 31, 2013, the Company purchased Fannie Mae MSRs, including related servicer advances, from Bank of America, N.A. for total consideration of $495.7 million, of which $269.2 million was paid as of March 31, 2013 and $226.5 million is included in payables and accrued liabilities in the consolidated balance sheet. At closing, the Fannie Mae MSRs were associated with loans totaling $84.4 billion in unpaid principal balance. In connection with the BOA asset purchase, the Company recorded servicing rights of $242.2 million and intangible assets of $253.5 million at January 31, 2013. Intangible assets consist of customer relationships with a weighted-average amortization period of 3.3 years. Refer to Note 11 for further information regarding the servicing rights and Note 12 for further information regarding intangibles.
12
Reverse Mortgage Solutions, Inc.
On November 1, 2012, the Company acquired all of the outstanding shares of RMS. The purchase consideration of $136.3 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. An allocation of the purchase price was made to major categories of assets and liabilities based on managements estimates. The table below summarizes the originally reported estimated acquisition date fair values, measurement period adjustments recorded, and the preliminary purchase price allocation of assets acquired and liabilities assumed (in thousands):
Originally | Measurement | |||||||||||
Reported | Period Adjustments | Preliminary | ||||||||||
Assets |
||||||||||||
Cash |
$ | 19,683 | $ | | $ | 19,683 | ||||||
Restricted cash |
1,401 | | 1,401 | |||||||||
Residential loans |
5,331,989 | | 5,331,989 | |||||||||
Receivables |
11,832 | | 11,832 | |||||||||
Servicer and protective advances |
17,615 | | 17,615 | |||||||||
Servicing rights |
15,916 | | 15,916 | |||||||||
Goodwill |
101,199 | 10,809 | 112,008 | |||||||||
Intangible assets |
20,800 | | 20,800 | |||||||||
Premises and equipment |
15,633 | | 15,633 | |||||||||
Deferred tax asset, net |
19,052 | 6,441 | 25,493 | |||||||||
Other assets |
13,245 | | 13,245 | |||||||||
|
|
|
|
|
|
|||||||
Total assets acquired |
5,568,365 | 17,250 | 5,585,615 | |||||||||
|
|
|
|
|
|
|||||||
Liabilities |
||||||||||||
Payables and accrued liabilities |
29,357 | 17,250 | 46,607 | |||||||||
Debt |
148,431 | | 148,431 | |||||||||
HMBS related obligations |
5,254,231 | | 5,254,231 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities assumed |
5,432,019 | 17,250 | 5,449,269 | |||||||||
|
|
|
|
|
|
|||||||
Fair value of net assets acquired |
$ | 136,346 | $ | | $ | 136,346 | ||||||
|
|
|
|
|
|
The measurement period adjustments recorded during the three months ended March 31, 2013 include provisional adjustments to certain liabilities existing at the acquisition date.
Security One Lending
The purchase price of the S1L acquisition in the fourth quarter of 2012 included contingent earn-out payments to be paid in cash of up to $11.0 million dependent on the achievement of certain designated performance targets over the twelve months following the acquisition. The Company recorded a liability for the contingent earn-out payments of $6.1 million on December 31, 2012. This liability was based on the Companys estimate of the fair value of the contingent earn-out payments at that time. At March 31, 2013, the Company revised its estimate of the fair value of contingent earn-out payments to $9.8 million based on S1Ls performance during the first quarter of 2013. The Company recorded a loss related to the adjustment of the fair value of $3.7 million during the three months ended March 31, 2013, which is included in other net fair value gains (losses) in the consolidated statement of comprehensive income.
Pro Forma Financial Information
The following table presents the pro forma combined revenues and net income as if the ResCap net assets and the Ally Bank net assets had been acquired on January 1, 2012 and RMS and S1L on January 1, 2011 (in thousands, except per share data):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2013 | 2012 | |||||||
Revenues |
$ | 334,212 | $ | 283,224 | ||||
Net income |
37,076 | 34,767 | ||||||
Net income per share - basic |
1.01 | 0.95 | ||||||
Net income per share - diluted |
0.99 | 0.94 |
The pro forma financial information is not indicative of the results of operations that would have been achieved if the acquisitions of RMS, S1L, the ResCap net assets and Ally Bank net assets, or the Acquisitions, had taken place on the dates indicated above. The amounts have been calculated to reflect additional fair value adjustments, depreciation and amortization that would have been incurred assuming the Acquisitions had occurred on the dates indicated above together with the consequential tax effects. The pro forma adjustments also include interest expense on debt issued to consummate the acquisition of the ResCap net assets. The pro forma financial information excludes costs incurred which were directly attributable to the Acquisitions and which do not have a continuing impact on the combined operating results.
13
Costs Associated with Exit Activities
As a result of the acquisition of GTCS Holdings, LLC, or Green Tree, on July 1, 2011, the Company took steps in 2011 to manage and optimize the combined operations of the consolidated company. The major costs incurred as a result of these actions are severance and other-related costs, which are recorded in salaries and benefits in the consolidated statements of comprehensive income. Charges associated with these exit activities have not been allocated to business segments and are included in Other in Note 20. The Company completed these exit activities at the end of October 2012; final payments or other settlements are expected to be completed by the fourth quarter of 2013.
The following table summarizes the accrued liability, which is included in payables and accrued liabilities in the consolidated balance sheets, and the related charges and cash payments and other settlements associated with these activities (in thousands):
Severance
and
Other-Related Costs |
Other | Total | ||||||||||
Balance at January 1, 2013 |
$ | 1,397 | $ | 261 | $ | 1,658 | ||||||
Cash payments or other settlements |
(706 | ) | (42 | ) | (748 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance at March 31, 2013 |
$ | 691 | $ | 219 | $ | 910 | ||||||
|
|
|
|
|
|
|||||||
Total incurred and expected charges |
$ | 5,377 | $ | 400 | $ | 5,777 | ||||||
|
|
|
|
|
|
4. Variable Interest Entities
Consolidated Variable Interest Entities
Securitization trusts that the Company consolidates and in which it holds residual interests are referred to as the Residual Trusts. Securitization trusts that have been consolidated and in which the Company does not hold residual interests are referred to as the Non-Residual Trusts.
Residual Trusts
The Company has historically funded its residential loan portfolio through securitizations and evaluates each securitization trust to determine if it meets the definition of a variable interest entity, or VIE, and whether or not the Company is required to consolidate the trust. The Company determined that it is the primary beneficiary of twelve securitization trusts for which it owns residual interests, and as a result, has consolidated these VIEs. As a holder of the residual securities issued by the trusts, the Company has both the obligation to absorb losses to the extent of its investment and the right to receive benefits from the trusts, both of which could potentially be significant. In addition, as the servicer for these trusts, the Company concluded it has the power to direct the activities that most significantly impact the economic performance of the trusts through its ability to manage the delinquent assets of the trusts. Specifically, the Company has discretion, subject to applicable contractual provisions and consistent with prudent mortgage-servicing practices, to decide whether to sell or work out any loans that become troubled.
The Company is not contractually required to provide any financial support to the Residual Trusts. The Company may, from time to time at its sole discretion, purchase certain assets from the trusts to cure delinquency or loss triggers for the sole purpose of releasing excess overcollateralization to the Company. Based on current performance trends, the Company does not expect to provide financial support to the Residual Trusts.
Non-Residual Trusts
The Company determined that it is the primary beneficiary of ten securitization trusts for which it does not own any residual interests. The Company does not receive economic benefit from the residential loans while the loans are held by the Non-Residual Trusts other than the servicing fees paid to the Company to service the loans. However, as part of a prior agreement to acquire the rights to service the loans in these securitization trusts, the Company has certain obligations to exercise mandatory clean-up calls for each of these trusts at their earliest exercisable dates, which is the date each loan pool falls to 10% of the original principal amount. The Company will take control of the remaining collateral in the trusts when these calls are exercised, thus the clean-up call is deemed a variable interest, as the Company will be required under this obligation to absorb any losses of the VIEs subsequent to these calls, which could potentially be significant to each VIE. Additionally, as servicer of the VIEs, the Company has concluded that it has the power to direct the activities that most significantly impact the economic performance of the VIEs.
The Company is not contractually required to provide any financial support to the Non-Residual Trusts. However, as described above, the Company is obligated to exercise the mandatory clean-up call obligations it assumed as part of the agreement to acquire the rights to service the loans in these trusts. The Company expects to call these securitizations beginning in 2016 and continuing through 2019. The total outstanding balance of the residential loans expected to be called at the various respective call dates is $418.1 million.
14
For seven of the ten Non-Residual Trusts and four securitization trusts that have not been consolidated, the Company, as part of an agreement to service the loans in all eleven trusts, also has an obligation to reimburse a third party for the final $165.0 million in letters of credit, or LOCs, if drawn, which were issued to the eleven trusts by a third party as credit enhancements to these trusts. As the LOCs were provided as credit enhancements to these securitizations, the trusts will draw on these LOCs if there are insufficient cash flows from the underlying collateral to pay the debt holders. The total amount available on these LOCs for all eleven securitization trusts was $283.0 million and $285.4 million at March 31, 2013 and December 31, 2012, respectively. Based on the Companys estimates of the underlying performance of the collateral in these securitizations, the Company does not expect that the final $165.0 million will be drawn, and therefore, no liability for the fair value of this obligation has been recorded on the Companys consolidated balance sheets; however, actual performance may differ from this estimate in the future. For further information on the four securitization trusts that have not been consolidated by the Company, refer to the Unconsolidated VIEs section of this Note.
Servicer and Protective Advance Financing Facility
A wholly-owned subsidiary of the Company, or the Subsidiary, engages in operating activities that are restricted to the purchase of servicer and protective advances from certain of the Companys affiliates and assignment of those advance receivables to various lenders under a financing agreement with a third-party agent, or the Agent. Due to these restrictions, the Subsidiary is deemed to be a VIE as the Company is deemed both to have the power to direct the activities most significant to the economic performance of the Subsidiary, as well as the obligation to absorb losses or receive residual returns which could be potentially significant.
The assets and liabilities of the Subsidiary represent servicer and protective advances purchased from affiliates and obligations to lenders under a financing agreement, or Receivables Loan Agreement. The amount of purchased advances under the Receivables Loan Agreement are classified as servicer and protective advances, net in the consolidated balance sheets, while the amount of obligations to lenders under the Receivables Loan Agreement are recorded in the consolidated balance sheets in servicing advance liabilities. The assets of the Subsidiary are pledged as collateral to satisfy the obligations of lenders under the Receivables Loan Agreement, and those obligations are not cross-collateralized and the lenders do not have recourse to the Company.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
Carrying Amount of Assets and Liabilities of Consolidated VIEs | ||||||||||||||||
March 31, 2013 | ||||||||||||||||
Residual Trusts |
Non-Residual
Trusts |
Servicer and
Protective Advance Financing |
Total | |||||||||||||
Assets |
||||||||||||||||
Restricted cash and cash equivalents |
$ | 44,303 | $ | 14,964 | $ | | $ | 59,267 | ||||||||
Residential loans |
1,473,054 | 627,430 | | 2,100,484 | ||||||||||||
Allowance for loan losses |
(19,623 | ) | | | (19,623 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential loans, net |
1,453,431 | 627,430 | | 2,080,861 | ||||||||||||
Receivables, net |
| 53,671 | | 53,671 | ||||||||||||
Servicer and protective advances, net |
| | 77,179 | 77,179 | ||||||||||||
Other assets |
55,186 | 2,127 | | 57,313 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 1,552,920 | $ | 698,192 | $ | 77,179 | $ | 2,328,291 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Payables and accrued liabilities |
$ | 8,941 | $ | | | $ | 8,941 | |||||||||
Servicing advance liabilities |
| | 64,622 | 64,622 | ||||||||||||
Mortgage-backed debt |
1,287,857 | 738,434 | | 2,026,291 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,296,798 | $ | 738,434 | $ | 64,622 | $ | 2,099,854 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Carrying Amount of Assets and Liabilities of Consolidated VIEs | ||||||||||||||||
December 31, 2012 | ||||||||||||||||
Residual Trusts |
Non-Residual
Trusts |
Servicer and
Protective Advance Financing |
Total | |||||||||||||
Assets |
||||||||||||||||
Restricted cash and cash equivalents |
$ | 43,856 | $ | 14,397 | $ | | $ | 58,253 | ||||||||
Residential loans |
1,495,920 | 646,498 | | 2,142,418 | ||||||||||||
Allowance for loan losses |
(20,138 | ) | | | (20,138 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Residential loans, net |
1,475,782 | 646,498 | | 2,122,280 | ||||||||||||
Receivables, net |
| 53,975 | | 53,975 | ||||||||||||
Servicer and protective advances, net |
| | 77,082 | 77,082 | ||||||||||||
Other assets |
60,669 | 2,014 | | 62,683 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 1,580,307 | $ | 716,884 | $ | 77,082 | $ | 2,374,273 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Payables and accrued liabilities |
$ | 9,007 | $ | | $ | | $ | 9,007 | ||||||||
Servicing advance liabilities |
| | 64,552 | 64,552 | ||||||||||||
Mortgage-backed debt |
1,315,442 | 757,286 | | 2,072,728 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 1,324,449 | $ | 757,286 | $ | 64,552 | $ | 2,146,287 | ||||||||
|
|
|
|
|
|
|
|
15
The assets of the consolidated VIEs are pledged as collateral to the servicing advance liabilities and mortgage-backed debt and are not available to satisfy claims of general creditors of the Company. The mortgage-backed debt issued by each consolidated securitization trust is to be satisfied solely from the proceeds of the residential loans and other collateral held in the trusts while the servicing advance liabilities are to be satisfied from the recoveries or repayments from the underlying advances. The consolidated VIEs are not cross-collateralized and the holders of the mortgage-backed debt issued by the trusts and lenders under the Receivables Loan Agreement do not have recourse to the general credit of the Company.
For the Residual Trusts, interest income earned on the residential loans and interest expense incurred on the mortgage-backed debt, both of which are carried at amortized cost, are recorded in the consolidated statements of comprehensive income in interest income on loans and interest expense, respectively. Additionally, the Company records its estimate of probable incurred credit losses associated with the residential loans in provision for loan losses in the consolidated statements of comprehensive income. Interest receipts on residential loans and interest payments on mortgage-backed debt are included in operating activities, while principal payments on residential loans are included in investing activities, and issuances of and payments on mortgage-backed debt are included in financing activities in the consolidated statements of cash flows.
For the Non-Residual Trusts, the change in fair value of residential loans, receivables, net and mortgage-backed debt, all of which are carried at fair value, are included in other net fair value gains (losses) in the consolidated statements of comprehensive income. Included in other net fair value gains (losses) is the interest income that is expected to be collected on the residential loans and the interest expense that is expected to be paid on the mortgage-backed debt as well as the accretion of the fair value adjustments. Accordingly, the servicing fee that the Company earns for servicing the assets of the Non-Residual Trusts is recognized in other net fair value gains (losses) as a component of the recognition of the interest income on the loans. The non-cash component of other net fair value gains (losses) is recognized as an adjustment in reconciling net income to the net cash provided by or used in operating activities in the consolidated statements of cash flows. Principal payments on residential loans and draws on receivables, net are included in investing activities while payments on mortgage-backed debt are included in financing activities in the consolidated statements of cash flows.
Interest expense associated with the Receivables Loan Agreement is included in interest expense in the consolidated statements of comprehensive income. Changes in servicer and protective advances are included in operating activities while the issuances of and payments on servicing advance liabilities are included in financing activities in the consolidated statements of cash flows.
Unconsolidated VIEs
The Company has variable interests in VIEs that it does not consolidate as it has determined that it is not the primary beneficiary of the VIEs.
Servicing Arrangements with Letter of Credit Reimbursement Obligation
As described in the Consolidated VIEs section above, as part of an agreement to service the loans in eleven securitization trusts, the Company has an obligation to reimburse a third party for the final $165.0 million in LOCs if drawn. The LOCs were issued by a third party as credit enhancements to these eleven securitizations and, accordingly, the securitization trusts will draw on these LOCs if there are insufficient cash flows from the underlying collateral to pay the debt holders.
As noted above, the Company has determined that for seven of these securitization trusts, the Company is the primary beneficiary due to a mandatory clean-up call obligation related to these trusts and, accordingly, the Company has consolidated the seven trusts on the consolidated balance sheets. However, for the four remaining securitization trusts for which the Company does not have a mandatory clean-up call obligation, the Companys involvement consists only of servicer and the LOC reimbursement obligation. As explained in the Consolidated VIEs section above, the Company does not expect that the final $165.0 million in LOCs will be drawn. As the Companys only involvement is that of servicer and the LOC reimbursement obligation, which is not expected to be drawn, the Company has concluded that it is not the primary beneficiary of the trusts as it does not have a variable interest that could potentially be significant to the VIEs. Accordingly, the four securitization trusts have not been consolidated on the Companys consolidated balance sheets. The Company serviced $216.7 million and $223.3 million of loans related to the four unconsolidated securitization trusts at March 31, 2013 and December 31, 2012, respectively.
The following table presents the carrying amounts of the Companys assets that relate to its variable interests in the VIEs associated with letter of credit reimbursement obligations that are not consolidated, as well as its maximum exposure to loss and the unpaid principal balance of the total assets of these unconsolidated VIEs (in thousands):
Carrying Value of
Assets
Recorded on the Consolidated Balance Sheets |
Unpaid
Principal Balance of Total |
|||||||||||||||||||
Type of Involvement |
Servicing
Rights, Net |
Servicer and
Protective Advances, Net |
Total |
Maximum
Exposure to Loss (1) |
Assets of
Unconsolidated VIEs |
|||||||||||||||
Servicing arrangements with letter of credit reimbursement obligation |
||||||||||||||||||||
March 31, 2013 |
$ | 2,195 | $ | 2,577 | $ | 4,772 | $ | 169,772 | $ | 216,654 | ||||||||||
December 31, 2012 |
2,319 | 2,691 | 5,010 | 170,010 | 223,251 |
(1) | The Companys maximum exposure to loss related to these unconsolidated VIEs equals the carrying value of servicing rights, net and servicing and protective advances, net recognized on the Companys consolidated balance sheets plus an obligation to reimburse a third party for the final $165.0 million drawn on LOCs discussed above. |
16
5. Transfers of Residential Loans
Transfers of Reverse Loans
In connection with the acquisition of RMS, the Company is an approved issuer of the Government National Mortgage Association, or GNMA, Home Equity Conversion Mortgage-Backed Securities, or HMBS, securities that are guaranteed by GNMA and collateralized by participation interests in Home Equity Conversion Mortgages, or HECMs, insured by the Federal Housing Administration, or FHA. The Company both originates and acquires HECM reverse mortgage loans. The loans are then pooled into HMBS securities which are sold into the secondary market with servicing rights retained. Based upon the structure of the GNMA securitization program, the Company has determined that it has not met all of the requirements for sale accounting and therefore accounts for these transfers as secured borrowings. Under this accounting treatment, the HECM reverse mortgage loans remain on the consolidated balance sheet as residential loans. The proceeds from the transfer of assets are recorded as HMBS related obligations with no gain or loss recognized on the transfer. The holders of the HMBS beneficial interests have recourse to the Company to the extent of their participation in the HECM loans, but do not have recourse to the general assets of the Company.
The Company elected to measure reverse mortgage loans and HMBS related obligations at fair value. The change in fair value of the reverse loans and HMBS related obligations are included in net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. Included in net fair value gains on reverse loans and related HMBS obligations is the interest income that is expected to be collected on the reverse loans and the interest expense that is expected to be paid on the HMBS related obligations as well as fair value adjustments. Net fair value gains on reverse loans and related HMBS obligations is recognized as an adjustment in reconciling net income to the net cash provided by or used in operating activities in the consolidated statements of cash flows. Acquisitions and originations of and payments on reverse loans are included in investing activities in the consolidated statements of cash flows. Proceeds from securitizations of reverse mortgage loans and payments on HMBS related obligations are included in financing activities in the consolidated statements of cash flows.
The Companys HMBS related obligations were $6.9 billion and $5.9 billion at March 31, 2013 and December 31, 2012, respectively. The Company had $6.1 billion in residential loans and real estate owned pledged as collateral to the pools at March 31, 2013.
Transfers of Forward Loans
In connection with the acquisition of the ResCap net assets, the Company has grown its originations business. As part of origination activities, the Company sells or securitizes forward loans it originates or purchases from third parties, generally in the form of mortgage-backed securities guaranteed by Fannie Mae. Securitization usually occurs within 30 days of loan closing or purchase. The Company may retain servicing rights associated with the transferred loans and receives a servicing fee for services provided. The Company acts only as a fiduciary and therefore does not have a variable interest in the securitization trusts and, as a result, these loans are accounted for as sales upon transfer.
The Company elected to measure residential loans held for sale at fair value. The gain or loss on transfer of the loans held for sale are included in net gains on sales of loans in the consolidated statements of comprehensive income. Also included in net gains on sales of loans is interest income earned during the period the loans were held, changes in fair value of loans and the gain or loss on the related derivatives. Refer to Note 7 for information on these derivative financial instruments. All residential loans held for sale and related derivative balances are included in operating activities in the consolidated statements of cash flows.
The following table presents a summary of cash flows related to transfers accounted for as sales (in thousands):
For the Three Months Ended | ||||
March 31, 2013 | ||||
Proceeds received from securitizations |
$ | 17,387 | ||
Proceeds received from third-party sales |
106,954 | |||
Servicing fees collected |
21 |
In connection with these transfers, the Company recorded servicing assets in the amount of $1.3 million for the three months ended March 31, 2013. All servicing assets are initially recorded at fair value using a Level 3 measurement technique based on the present value of projected cash flows over the estimated period of net servicing income. Refer to Note 11 for information relating to servicing of residential loans.
17
Certain guarantees arise from agreements associated with the sale of the Companys residential loans. Under these agreements, the Company may be obligated to repurchase, or otherwise indemnify or reimburse the investor or insurer for losses incurred, due to material breach of contractual representations and warranties. Refer to Note 21 for further information.
The following table presents the carrying amounts of the Companys assets that relate to its continued involvement with forward loans that have been transferred with servicing rights retained as well as its maximum exposure to loss and the unpaid principal balance of the transferred loans (in thousands):
Carrying Value of
Assets
Recorded on the Consolidated Balance Sheet |
Maximum
Exposure to Loss (1) |
Unpaid
Principal Balance of Transferred Loans |
||||||||||||||||||
Type of Involvement |
Servicing
Rights, Net |
Servicer and
Protective Advances, Net |
Total | |||||||||||||||||
Servicing arrangements associated with transfers of forward loans |
||||||||||||||||||||
March 31, 2013 |
$ | 1,290 | $ | | $ | 1,290 | $ | 133,915 | $ | 132,625 |
(1) | The Companys maximum exposure to loss related to these transferred loans equals the carrying value of servicing rights, net and servicer and protective advances, net as well as the unpaid principal balance of the transferred loans. |
At March 31, 2013, there were no transferred residential loans that were 60 days or more past due and serviced by the Company. During the three months ended March 31, 2013, there were no charge-offs, net of recoveries associated with these transferred loans.
6. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Basis or Measurement
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. The Company has elected to measure all reverse mortgage assets and liabilities and residential loans held for sale as well as servicing rights related to the risk-managed loan class at fair value. For all other assets and liabilities, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as they are acquired or incurred. The Company elected to measure at fair value residential loans, receivables and mortgage-backed debt associated with the Non-Residual Trusts. In addition, with the acquisitions of Green Tree and S1L, the Company recognized contingent liabilities for a mandatory repurchase obligation, a professional fees liability related to certain securitizations, and contingent earn-out payments that it measures at fair value on a recurring basis in accordance with the accounting guidance for business combinations.
Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. There were no transfers into or out of Level 3, and there were also no transfers between Level 1 and Level 2 during the three months ended March 31, 2013 and 2012.
18
Items Measured at Fair Value on a Recurring Basis
The following tables summarize the assets and liabilities in each level of the fair value hierarchy (in thousands):
Recurring Fair Value Measurements at March 31, 2013 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Residential loans related to Non-Residual |
||||||||||||||||
Trusts |
$ | | $ | | $ | 627,430 | $ | 627,430 | ||||||||
Reverse mortgage loans |
| | 7,106,943 | 7,106,943 | ||||||||||||
Residential loans held for sale |
| 278,474 | | 278,474 | ||||||||||||
Receivables related to Non-Residual Trusts |
| | 53,671 | 53,671 | ||||||||||||
Servicing rights carried at fair value |
| | 347,254 | 347,254 | ||||||||||||
Forward sale commitments |
| 127 | | 127 | ||||||||||||
Interest rate lock commitments |
| | 59,573 | 59,573 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | | $ | 278,601 | $ | 8,194,871 | $ | 8,473,472 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Mandatory repurchase obligation |
$ | | $ | | $ | 9,695 | $ | 9,695 | ||||||||
Professional fees liability related to certain securitizations |
| | 7,739 | 7,739 | ||||||||||||
Contingent earn-out payments |
| | 9,794 | 9,794 | ||||||||||||
Forward sale commitments |
| 5,408 | | 5,408 | ||||||||||||
Mortgage-backed debt related to Non-Residual Trusts |
| | 738,434 | 738,434 | ||||||||||||
HMBS related obligations |
| | 6,887,583 | 6,887,583 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | | $ | 5,408 | $ | 7,653,245 | $ | 7,658,653 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Recurring Fair Value Measurements at December 31, 2012 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Residential loans related to Non-Residual |
||||||||||||||||
Trusts |
$ | | $ | | $ | 646,498 | $ | 646,498 | ||||||||
Reverse mortgage loans (1) |
| | 6,047,108 | 6,047,108 | ||||||||||||
Residential loans held for sale |
| 16,605 | | 16,605 | ||||||||||||
Receivables related to Non-Residual Trusts |
| | 53,975 | 53,975 | ||||||||||||
Interest rate lock commitments |
| | 949 | 949 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | | $ | 16,605 | $ | 6,748,530 | $ | 6,765,135 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Mandatory repurchase obligation |
$ | | $ | | $ | 9,999 | $ | 9,999 | ||||||||
Professional fees liability related to certain securitizations |
| | 8,147 | 8,147 | ||||||||||||
Contingent earn-out payments |
| | 6,100 | 6,100 | ||||||||||||
Forward sale commitments |
| 1,102 | | 1,102 | ||||||||||||
Mortgage-backed debt related to Non-Residual Trusts |
| | 757,286 | 757,286 | ||||||||||||
HMBS related obligations |
| | 5,874,552 | 5,874,552 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | | $ | 1,102 | $ | 6,656,084 | $ | 6,657,186 | ||||||||
|
|
|
|
|
|
|
|
(1) | Includes $28.5 million in reverse loans held for sale at December 31, 2012. |
19
The following assets and liabilities are measured in the consolidated financial statements at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following table provides a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):
For the Three Months Ended March 31, 2013 | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Fair Value | ResCap | Gains (Losses) | Fair Value | |||||||||||||||||||||||||||||
January 1, |
Net Assets |
Included in Net | March 31, | |||||||||||||||||||||||||||||
2013 | Acquisition | Income (Loss) | Purchases | Sales | Issuances | Settlements | 2013 | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Residential loans related to Non-Residual Trusts |
$ | 646,498 | $ | | $ | 13,019 | $ | | $ | | $ | | $ | (32,087 | ) | $ | 627,430 | |||||||||||||||
Reverse mortgage loans (1) |
6,047,108 | | 83,277 | 794,397 | (76,169 | ) | 308,191 | (49,861 | ) | 7,106,943 | ||||||||||||||||||||||
Receivables related to Non-Residual Trusts |
53,975 | | 3,837 | | | | (4,141 | ) | 53,671 | |||||||||||||||||||||||
Servicing rights carried at fair value |
8,949 | 90,431 | (7,004 | ) | 253,588 | | 1,290 | | 347,254 | |||||||||||||||||||||||
Interest rate lock commitments |
949 | | 58,624 | | | | | 59,573 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total assets |
$ | 6,757,479 | $ | 90,431 | $ | 151,753 | $ | 1,047,985 | $ | (76,169 | ) | $ | 309,481 | $ | (86,089 | ) | $ | 8,194,871 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||
Mandatory repurchase obligation |
$ | (9,999 | ) | $ | | $ | (162 | ) | $ | | $ | | $ | | $ | 466 | $ | (9,695 | ) | |||||||||||||
Professional fees liability related to certain securitizations |
(8,147 | ) | | (220 | ) | | | | 628 | (7,739 | ) | |||||||||||||||||||||
Contingent earn-out payments |
(6,100 | ) | | (3,694 | ) | | | | | (9,794 | ) | |||||||||||||||||||||
Mortgage-backed debt related to Non-Residual Trusts |
(757,286 | ) | | (14,005 | ) | | | | 32,857 | (738,434 | ) | |||||||||||||||||||||
HMBS related obligations |
(5,874,552 | ) | | (42,017 | ) | | | (1,028,744 | ) | 57,730 | (6,887,583 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total liabilities |
$ | (6,656,084 | ) | $ | | $ | (60,098 | ) | $ | | $ | | $ | (1,028,744 | ) | $ | 91,681 | $ | (7,653,245 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes $28.5 million in reverse loans held for sale at January 1, 2013. There were no reverse loans held for sale at March 31, 2013. |
For the Three Months Ended March 31, 2012 | ||||||||||||||||
Total | ||||||||||||||||
Fair Value | Gains (Losses) | Fair Value | ||||||||||||||
January 1, | Included in | March 31, | ||||||||||||||
2012 | Net Income | Settlements | 2012 | |||||||||||||
Assets |
||||||||||||||||
Residential loans related to Non-Residual Trusts |
$ | 672,714 | $ | 49,812 | $ | (34,678 | ) | $ | 687,848 | |||||||
Receivables related to Non-Residual Trusts |
81,782 | 559 | (4,441 | ) | 77,900 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 754,496 | $ | 50,371 | $ | (39,119 | ) | $ | 765,748 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Mandatory repurchase obligation |
$ | (11,849 | ) | $ | (295 | ) | $ | 571 | $ | (11,573 | ) | |||||
Professional fees liability related to certain securitizations |
(9,666 | ) | (286 | ) | 687 | (9,265 | ) | |||||||||
Mortgage-backed debt related to Non-Residual Trusts |
(811,245 | ) | (44,578 | ) | 36,478 | (819,345 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | (832,760 | ) | $ | (45,159 | ) | $ | 37,736 | $ | (840,183 | ) | |||||
|
|
|
|
|
|
|
|
All gains and losses of assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy, with the exception of gains and losses on IRLCs and servicing rights carried at fair value, are recognized in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. Gains and losses relating to IRLCs are recorded in net gains on sales of loans in the consolidated statements of comprehensive income and changes in fair value of servicing rights carried at fair value are recorded in net servicing revenue and fees in the consolidated statements of comprehensive income. Total gains and losses included in net income include interest income and expense at the stated rate for interest bearing assets and liabilities, respectively, accretion and amortization, as well as the impact of changes in valuation inputs and assumptions.
A valuation committee determines and approves all valuation policies and unobservable inputs used to estimate the fair value of all items measured at fair value on a recurring basis, except for IRLCs and the contingent earn-out payments. The valuation committee consists of certain members of the management team responsible for accounting, treasury, servicing operations and credit risk. The valuation committee meets on a quarterly basis to review the assets and liabilities that require fair value measurement, including how each asset and liability has actually performed in comparison to the unobservable inputs and the projected performance provided by the Companys credit risk group. The valuation committee also reviews discount rate assumptions and related available market data. Similar procedures are followed by the Companys asset liability committee responsible for IRLCs and a sub-set of management responsible for the contingent earn-out payments. These fair values are approved by senior management.
20
The following is a description of the methods and assumptions used to estimate the fair values of the Companys assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy.
Residential loans
Residential loans related to Non-Residual Trusts These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The Companys valuation considers assumptions that it believes a market participant would consider in valuing the loans including, but not limited to, assumptions for prepayment, default, loss severity and discount rates. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Companys assessment of current and future economic conditions. The discount rate assumption for these assets is primarily based on the collateral and credit risk characteristics of these loans, combined with an assessment of market interest rates.
Reverse mortgage loans These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The Companys valuation considers assumptions that it believes a market participant would consider in valuing the loans including, but not limited to, assumptions for prepayment, default, mortality, and discount rates. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Companys assessment of current and future economic conditions. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated HECM loans, expected duration of the asset, and current market interest rates.
Residential loans held for sale These loans are valued using a market approach by utilizing published forward agency prices. The Company classifies these loans as Level 2 within the fair value hierarchy.
Receivables related to Non-Residual Trusts The Company estimates the fair value of these receivables using Level 3 unobservable market inputs at the net present value of expected cash flows from the LOCs to be used to pay debt holders over the remaining life of the securitization trusts. The estimate of the cash to be collected from the LOCs is based on expected shortfalls of cash flows from the loans in the securitization trusts, compared to the required debt payments of the securitization trusts. The cash flows from the loans and thus the cash to be provided by the LOCs is determined by analyzing the credit assumptions for the underlying collateral in each of the securitizations. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. The discount rate assumption for these assets is based on the risk-free market rate given the credit risk characteristics of the collateral supporting the LOCs. Receivables related to Non-Residual Trusts are recorded in receivables, net in the consolidated balance sheets.
Servicing rights carried at fair value The Company accounts for servicing rights associated with the risk-managed loan class at fair value. The Company estimates the fair value of these servicing rights using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, default rates and discount rates. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the determination of the servicing rights fair value.
Derivative instruments Fair values of IRLCs are derived by using valuation models incorporating current market information or by obtaining market or dealer quotes for instruments with similar characteristics, and are adjusted for anticipated loan funding probability or fallout; therefore, these contracts are classified as Level 3. The fair value of forward sales commitments is determined based upon the difference between the settlement values of the commitments and the quoted market values of the securities; therefore, these contracts are classified as Level 2. Counterparty credit risk is taken into account when determining fair value. See Note 7 for additional information on derivative financial instruments.
Mandatory repurchase obligation This contingent liability relates to a mandatory obligation in which the Company is required to repurchase loans from an investor when the loans become 90 days delinquent. The Company estimates the fair value of this obligation based on the expected net present value of expected future cash flows using Level 3 assumptions that it believes a market participant would consider in valuing these liabilities including, but not limited to, assumptions for prepayment, default and loss severity rates applicable to the historical and projected performance of the underlying loans. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Companys assessment of current and future economic conditions. The discount rate assumption for this liability is primarily based on collateral characteristics combined with an assessment of market interest rates. The mandatory repurchase obligation is included in payables and accrued liabilities in the consolidated balance sheets.
21
Professional fees liability related to certain securitizations This contingent liability primarily relates to payments for surety and auction agent fees that the Company will be required to make over the remaining life of certain consolidated and unconsolidated securitization trusts. The Company estimates the fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of the expected cash flows of the professional fees required to be paid related to the securitization trusts. The Companys valuation considers assumptions that it believes a market participant would consider in valuing these liabilities including, but not limited to, estimates of collateral repayment, default and discount rates. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Companys assessment of current and future economic conditions. The discount rate assumption for this liability is primarily based on collateral characteristics combined with an assessment of market interest rates. Professional fees liability related to certain securitizations are included in payables and accrued liabilities in the consolidated balance sheets.
Contingent earn-out payments The estimated fair value of this contingent liability is based on the average earn-out payment under multiple outcomes as determined by a Monte-Carlo simulation, discounted to present value using credit-adjusted discount rates. The average payment outcomes calculated by the Monte-Carlo simulation were derived utilizing Level 3 unobservable inputs, the most significant of which include the assumptions for forecasted financial performance of S1L and financial performance volatility. The contingent earn-out payments are included in payables and accrued liabilities in the consolidated balance sheets.
Mortgage-backed debt related to Non-Residual Trusts This debt is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates the fair value using Level 3 unobservable market inputs. The estimated fair value of the debt is based on the net present value of the projected principal and interest payments owed for the remaining life of the securitization trusts. The Companys valuation considers assumptions and estimates for principal and interest payments on the debt. An analysis of the credit assumptions for the underlying collateral in each of the securitization trusts is performed to determine the required payments to debt holders. The assumptions that it believes a market participant would consider in valuing debt include, but are not limited to, prepayment, default, loss severity and discount rates, as well as the balance of LOCs provided as credit enhancement. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Credit performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Companys assessment of current and future economic conditions. The discount rate assumption for this liability is primarily based on credit characteristics combined with an assessment of market interest rates. Mortgage-backed debt related to Non-Residual Trusts is recorded in mortgage-backed debt in the consolidated balance sheets.
HMBS related obligations The Company recognizes the proceeds from the sale of HMBS as a secured borrowing, which is accounted for at fair value. This liability is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The Companys valuation considers assumptions that it believes a market participant would consider in valuing the liability including, but not limited to, assumptions for prepayments, discount rate and borrower mortality rates for reverse mortgages. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued HMBS, expected duration, and current market interest rates. The yield on seasoned HMBS is adjusted based on the duration of each HMBS and assuming a constant spread to the swap curve.
22
The Company utilizes a discounted cash flow method in the fair value measurement of all Level 3 assets and liabilities included in the consolidated financial statements at fair value on a recurring basis with the exception of IRLCs for which the Company utilizes a market approach. The following table presents the significant unobservable inputs used in the fair value measurement of these assets and liabilities at March 31, 2013. Significant increases or decreases in any of these inputs in isolation would result in a significantly lower or higher fair value measurement.
Significant | Weighted | |||||||
Unobservable Input |
Range |
Average | ||||||
Assets |
||||||||
Residential loans related to Non-Residual Trusts |
Conditional prepayment rate | 3.81% - 6.44% | 5.59 | % | ||||
Loss severity | 82.62% - 93.76% | 87.50 | % | |||||
Reverse mortgage loans |
Weighted-average remaining life in years | 1.4 - 12.6 | 4.6 | |||||
Conditional repayment rate | 7.5% - 39.3% | 18.30 | % | |||||
Discount rate | 1.89% - 3.99% | 2.41 | % | |||||
Receivables related to Non-Residual Trusts |
Conditional prepayment rate | 3.88% - 6.39% | 5.60 | % | ||||
Loss severity | 79.94% - 91.48% | 84.96 | % | |||||
Servicing rights carried at fair value |
Weighted-average remaining life in years | 4.4 - 6.1 | 5.6 | |||||
Discount rate | 10.20% - 19.93% | 16.38 | % | |||||
Conditional prepayment rate | 8.10% - 15.47% | 10.59 | % | |||||
Conditional default rate | 0.50% - 4.90% | 4.37 | % | |||||
Interest rate lock commitments |
Loan funding probability | 32.72% - 100% | 68.81 | % | ||||
Liabilities | ||||||||
Mandatory repurchase obligation |
Conditional prepayment rate | 5.98% | 5.98 | % | ||||
Loss severity | 71.51% | 71.51 | % | |||||
Professional fees liability related to certain securitizations |
Conditional prepayment rate | 3.88% - 6.39% | 5.61 | % | ||||
Contingent earn-out payments |
Financial performance volatility | 47.00% | 47.00 | % | ||||
Mortgage-backed debt related to Non-Residual Trusts |
Conditional prepayment rate | 3.88% - 6.39% | 5.60 | % | ||||
Loss severity | 79.94% - 91.48% | 84.96 | % | |||||
HMBS related obligations |
Weighted-average remaining life in years | 2.2 - 10.6 | 4.4 | |||||
Conditional repayment rate | 10.1% - 34.1% | 19.14 | % | |||||
Discount rate | 1.41% - 3.23% | 1.85 | % |
Items Measured at Fair Value on a Non-Recurring Basis
The following assets are measured in the consolidated financial statements at fair value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Real estate owned, net |
$ | 63,919 | $ | 64,959 |
The following table presents the significant unobservable inputs used in the fair value measurement of Level 3 assets at March 31, 2013 measured in the consolidated financial statements at fair value on a non-recurring basis:
Significant | Weighted | |||||||
Unobservable Input | Range | Average | ||||||
Real estate owned, net |
Loss severity | 0.00% - 87.00% | 11.05 | % |
At the time a residential loan becomes real estate owned, the Company records the property at the lower of its carrying amount or estimated fair value less estimated costs to sell. Upon foreclosure and through liquidation, the Company evaluates the propertys fair value as compared to its carrying amount and records a valuation adjustment when the carrying amount exceeds fair value, which is recorded in other expenses, net in the consolidated statements of comprehensive income. The Company reported $46.0 million, $15.8 million and $2.1 million in real estate owned, net in the Loans and Residuals, Reverse Mortgage and Other segments, respectively at March 31, 2013. The Company reported $49.1 million, $13.9 million and $2.0 million in real estate owned, net in the Loans and Residuals, Reverse Mortgage and Other segments, respectively at December 31, 2012. In determining the fair value, the Companys accounting department either obtains appraisals or performs a review of historical severity rates of real estate owned previously sold by the Company. When utilizing historical severity rates, the properties are stratified by acquisition type and length held. The severity rates are reviewed for reasonableness by comparison to third-party market trends and fair value is determined by applying severity rates to the stratified population. Management approves valuations that have been determined using the historical severity rate method.
23
Real estate owned expenses, net, which are recorded in other expenses, net in the consolidated statements of comprehensive income were less than $0.1 million and $2.8 million for the three months ended March 31, 2013 and 2012, respectively. Included in real estate owned expenses, net are lower of cost or fair value adjustments of less than $0.1 million and $0.9 million for the three months ended March 31, 2013 and 2012, respectively.
Fair Value of Financial Instruments
The following table presents the carrying values and estimated fair values of financial assets and liabilities, and their respective levels within the fair value hierarchy, that are required to be either recorded or disclosed at fair value (in thousands):
March 31, 2013 | December 31, 2012 | |||||||||||||||||
Carrying
Amount |
Estimated Fair
Value |
Fair Value
|
Carrying
Amount |
Estimated Fair
Value |
||||||||||||||
Financial assets |
||||||||||||||||||
Cash and cash equivalents |
$ | 624,725 | $ | 624,725 | Level 1 | $ | 442,054 | $ | 442,054 | |||||||||
Restricted cash and cash equivalents |
731,996 | 731,996 | Level 1 | 653,338 | 653,338 | |||||||||||||
Residential loans, net |
||||||||||||||||||
Forward loans carried at amortized cost |
1,468,945 | 1,413,534 | Level 3 | 1,490,321 | 1,436,592 | |||||||||||||
Forward loans in Non-Residual Trusts carried at fair value |
627,430 | 627,430 | Level 3 | 646,498 | 646,498 | |||||||||||||
Reverse loans carried at fair value (1) |
7,106,943 | 7,106,943 | Level 3 | 6,047,108 | 6,047,108 | |||||||||||||
Forward loans held for sale and carried at fair value |
278,474 | 278,474 | Level 2 | 16,605 | 16,605 | |||||||||||||
Receivables, net |
||||||||||||||||||
Insurance premium receivables |
108,619 | 102,257 | Level 3 | 107,824 | 101,238 | |||||||||||||
Receivables related to Non-Residual Trusts |
53,671 | 53,671 | Level 3 | 53,975 | 53,975 | |||||||||||||
Other |
98,160 | 98,160 | Level 1 | 97,210 | 97,210 | |||||||||||||
Servicer and protective advances, net |
364,192 | 345,108 | Level 3 | 173,047 | 160,632 | |||||||||||||
Interest rate lock commitments |
59,573 | 59,573 | Level 3 | 949 | 949 | |||||||||||||
Cash collateral for forward sale commitments |
3,300 | 3,300 | Level 1 | | | |||||||||||||
Financial liabilities |
||||||||||||||||||
Payables and accrued liabilities |
||||||||||||||||||
Payables to insurance carriers |
59,013 | 58,175 | Level 3 | 51,377 | 50,614 | |||||||||||||
Mandatory repurchase obligation |
9,695 | 9,695 | Level 3 | 9,999 | 9,999 | |||||||||||||
Professional fees liability related to certain securitizations |
7,739 | 7,739 | Level 3 | 8,147 | 8,147 | |||||||||||||
Contingent earn-out payments |
9,794 | 9,794 | Level 3 | 6,100 | 6,100 | |||||||||||||
Forward sale commitments |
5,408 | 5,408 | Level 2 | 1,102 | 1,102 | |||||||||||||
Other |
483,024 | 483,024 | Level 1 | 183,885 | 183,885 | |||||||||||||
Servicer payables |
665,990 | 665,990 | Level 1 | 587,929 | 587,929 | |||||||||||||
Servicing advance liabilities (2) |
242,351 | 241,695 | Level 3 | 99,508 | 99,915 | |||||||||||||
Debt (3) |
2,184,407 | 2,263,157 | Level 2 | 1,115,804 | 1,165,811 | |||||||||||||
Mortgage-backed debt |
||||||||||||||||||
Mortgage-backed debt carried at amortized cost (4) |
1,271,975 | 1,276,252 | Level 3 | 1,298,999 | 1,300,979 | |||||||||||||
Mortgage-backed debt carried at fair value |
738,434 | 738,434 | Level 3 | 757,286 | 757,286 | |||||||||||||
HMBS related obligations |
6,887,583 | 6,887,583 | Level 3 | 5,874,552 | 5,874,552 |
(1) | Includes $28.5 million in reverse loans held for sale at December 31, 2012. There were no reverse loans held for sale at March 31, 2013. |
(2) | The carrying amount of servicing advance liabilities is net of deferred issuance costs of $0.6 million and $0.7 million at March 31, 2013 and December 31, 2012, respectively. |
(3) | The carrying amount of debt is net of deferred issuance costs of $39.8 million and $30.4 million at March 31, 2013 and December 31, 2012, respectively. |
(4) | The carrying amount of mortgage-backed debt carried at amortized cost is net of deferred issuance costs of $15.9 million and $16.4 million at March 31, 2013 and December 31, 2012, respectively. |
The following provides a description of the methods and significant assumptions used in estimating the fair value of the Companys financial instruments that are not measured at fair value on a recurring basis. A description of the methods and significant assumptions used in estimating the fair values of financial assets and liabilities measured on a recurring basis has been provided under the Items Measured at Fair Value on a Recurring Basis section of this note.
Cash and cash equivalents, restricted cash and cash equivalents, other receivables, cash collateral for forward sale commitments, other payables and accrued liabilities and servicer payables The estimated fair value of these financial instruments approximates their carrying amounts due to their highly liquid or short-term nature.
Residential loans carried at amortized cost The methods and assumptions used to estimate the fair value of residential loans carried at amortized cost are the same as those described for residential loans related to Non-Residual Trusts carried at fair value on a recurring basis.
Insurance premium receivables The estimated fair value of these receivables is based on the net present value of the expected cash flows. The determination of fair value includes assumptions related to the underlying collateral serviced by the Company, such as delinquency and default rates, as the insurance premiums are collected as part of the customers loan payments or from the related trusts.
24
Servicer and protective advances, net The estimated fair value of these advances is based on the net present value of expected cash flows. The determination of expected cash flows includes consideration of recoverability clauses in the Companys servicing agreements, as well as assumptions related to the underlying collateral, when proceeds may be used to recover these receivables.
Payables to insurance carriers The estimated fair value of these liabilities is based on the net present value of the expected carrier payments over the life of the payables.
Servicing advance liabilities The estimated fair value of these liabilities is based on the net present value of projected cash flows over the expected life of the liabilities at estimated market rates.
Debt The Companys term loan and convertible debt are not traded in an active, open market with readily observable prices. The estimated fair value of this debt is based on an average of broker quotes. The estimated fair value of the Companys other debt, including master repurchase agreements, approximates their carrying amounts due to their highly liquid or short-term nature.
Mortgage-backed debt carried at amortized cost The methods and assumptions used to estimate the fair value of mortgage-backed debt carried at amortized cost are the same as those described for mortgage-backed debt related to Non-Residual Trusts carried at fair value on a recurring basis.
Fair Value Option
The Company elected the fair value option for certain financial instruments, including residential loans, receivables and mortgage-backed debt, of the Non-Residual Trusts, residential loans held for sale and reverse mortgage loans and the HMBS related obligations. The fair value option was elected for these assets and liabilities as the Company believes fair value best reflects the expected future economic performance of these assets and liabilities. The yields on residential loans of the Non-Residual Trusts and reverse loans along with any changes in fair values are recorded in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. The yield on residential loans held for sale along with any changes in fair value are recorded in net gains on sales of loans in the consolidated statements of comprehensive income. The yield on the loans includes recognition of interest income based on the stated interest rates of the loans that is expected to be collected as well as accretion of fair value adjustments.
Presented in the table below is the fair value and unpaid principal balance of the assets and liabilities for which the Company has elected the fair value option (in thousands):
March 31, 2013 | December 31, 2012 | |||||||||||||||
Estimated | Unpaid Principal | Estimated | Unpaid Principal | |||||||||||||
Fair Value | Balance (1) | Fair Value | Balance (1) | |||||||||||||
Assets at fair value under the fair value option |
||||||||||||||||
Residential loans related to Non-Residual Trusts |
$ | 627,430 | $ | 792,383 | $ | 646,498 | $ | 814,481 | ||||||||
Reverse mortgage loans (2)(3) |
7,106,943 | 6,364,827 | 6,047,108 | 5,400,876 | ||||||||||||
Residential loans held for sale (3) |
278,474 | 263,942 | 16,605 | 16,325 | ||||||||||||
Receivables related to Non-Residual Trusts |
53,671 | 54,290 | 53,975 | 54,604 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 8,066,518 | $ | 7,475,442 | $ | 6,764,186 | $ | 6,286,286 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities at fair value under the fair value option |
||||||||||||||||
Mortgage-backed debt related to Non-Residual Trusts |
$ | 738,434 | $ | 803,092 | $ | 757,286 | $ | 825,200 | ||||||||
HMBS related obligations |
6,887,583 | 6,085,054 | 5,874,552 | 5,169,135 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 7,626,017 | $ | 6,888,146 | $ | 6,631,838 | $ | 5,994,335 | ||||||||
|
|
|
|
|
|
|
|
(1) | For the receivables related to Non-Residual Trusts, the unpaid principal balance represents the notional amount of expected draws under the LOCs. For the HMBS related obligations, the unpaid principal balance represents the balance outstanding. |
(2) | Includes $28.5 million in reverse loans held for sale at December 31, 2012. There were no reverse loans held for sale at March 31, 2013. |
(3) | Includes loans that collateralize master repurchase agreements. See Note 15 for further information. |
25
Included in residential loans accounted for under the fair value option are loans that are 90 days or more past due that have a fair value of $1.8 million and $1.9 million and an unpaid principal balance of $9.3 million and $10.0 million at March 31, 2013 and December 31, 2012, respectively.
Included in other fair value gains (losses) and net fair value gains on reverse loans and related HMBS obligations are fair value gains and losses from instrument-specific credit risk which include changes in fair value due to changes in assumptions related to prepayments, defaults and severity. During the three months ended March 31, 2013, the Company recorded fair value gains (losses) from changes in instrument-specific credit risk of $(4.7) million, $3.6 million and $3.0 million for residential loans related to Non-Residual Trusts, reverse mortgage loans and receivables related to Non-Residual Trusts, respectively. During the three months ended March 31, 2012, the Company recorded fair value gains (losses) from changes in instrument-specific credit risk of $1.7 million and $(0.1) million for residential loans related to Non-Residual Trusts and receivables related to Non-Residual Trusts, respectively. Due to the short amount of time prior to sale of residential loans held for sale, fair value gains and losses from instrument-specific credit risk are immaterial.
Fair Value Gains (Losses)
Provided in the table below is a summary of the components of other net fair value gains (losses) (in thousands):
For the Three Months Ended
March 31, 2013 |
||||||||
2013 | 2012 | |||||||
Other net fair value gains (losses) |
||||||||
Assets of Non-Residual Trusts |
$ | 16,856 | $ | 50,371 | ||||
Liabilities of Non-Residual Trusts |
(14,005 | ) | (44,578 | ) | ||||
Mandatory repurchase obligation |
(162 | ) | (295 | ) | ||||
Professional fees liability related to certain securitizations |
(220 | ) | (286 | ) | ||||
Contingent earn-out payments |
(3,694 | ) | | |||||
Other |
(36 | ) | (449 | ) | ||||
|
|
|
|
|||||
Other net fair value gains (losses) |
$ | (1,261 | ) | $ | 4,763 | |||
|
|
|
|
Provided in the table below is a summary of the components of net fair value gains on reverse loans and related HMBS obligations (in thousands):
For the Three Months Ended
March 31, 2013 |
||||
Net fair value gains (losses) on reverse loans and related HMBS obligations |
||||
Reverse mortgage loans |
$ | 78,805 | ||
HMBS related obligations |
(42,017 | ) | ||
|
|
|||
Net fair value gains on reverse loans and related HMBS obligations |
$ | 36,788 | ||
|
|
Net Gains on Sales of Loans
Provided in the table below is a summary of the components of net gains on sales of loans (in thousands):
For the Three Months Ended
March 31, 2013 |
||||
Gains on sales of loans |
$ | 8,308 | ||
Unrealized gains on loans held for sale |
13,626 | |||
Net fair value gains on derivatives |
54,569 | |||
Capitalized servicing rights |
1,290 | |||
Provision for repurchases |
(171 | ) | ||
Other |
823 | |||
|
|
|||
Net gains on sales of loans |
$ | 78,445 | ||
|
|
26
7. Derivative Financial Instruments
The fair values of derivatives are reported in other assets or payables and accrued liabilities in the consolidated balance sheets. The fair values are derived using the valuation techniques described in Note 6. The total notional or contractual amounts and related fair values as well as cash collateral are as follows (in thousands):
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||
Notional | Asset | Liability | Notional | Asset | Liability | |||||||||||||||||||
Amount | Derivatives | Derivatives | Amount | Derivatives | Derivatives | |||||||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
Interest rate lock commitments |
$ | 1,898,941 | $ | 59,573 | $ | | $ | 35,266 | $ | 949 | $ | | ||||||||||||
Forward sales commitments |
1,573,252 | 127 | 5,408 | 42,078 | | 1,102 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 59,700 | $ | 5,408 | $ | 949 | $ | 1,102 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Cash collateral |
| 3,300 | | | | |
Derivative positions subject to a master netting arrangement include forward sale commitment assets of less than $0.1 million, forward sale commitment liabilities of $1.3 million and collateral paid of $0.8 million at March 31, 2013. As a result of the master netting arrangement, the net amount as it relates to these positions is $0.4 million at March 31, 2013.
The following table shows the net gains recognized for the period indicated in the consolidated statements of comprehensive income related to derivatives not designated as hedging instruments. These gains are recorded in net gains on sales of loans (in thousands):
For the Three Months Ended | ||||
March 31, 2013 | ||||
Gains on interest rate lock commitments |
$ | 58,621 | ||
Losses on forward sales commitments |
(3,937 | ) | ||
|
|
|||
Total |
$ | 54,684 | ||
|
|
8. Residential Loans, Net
Residential loans include loans that are both held for investment and held for sale and consist of residential mortgages, including reverse mortgages, manufactured housing loans and retail installment agreements. The majority of residential loans are held in securitization trusts or pools that have been either consolidated or not consolidated but are recorded in the consolidated balance sheets as the assets serve as collateral for secured borrowings. Refer to Note 4 for further information regarding VIEs and Note 5 for further information regarding transfers of residential loans.
Residential loans, net are comprised of the following (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Reverse loans carried at fair value |
$ | 7,106,943 | $ | 6,047,108 | ||||
Forward loans in Residual Trusts carried at amortized cost |
1,453,431 | 1,475,782 | ||||||
Forward loans in Non-Residual Trusts carried at fair value |
627,430 | 646,498 | ||||||
Forward loans held for sale carried at fair value |
278,474 | 16,605 | ||||||
Unencumbered forward loans carried at amortized cost |
15,514 | 14,539 | ||||||
|
|
|
|
|||||
Residential loans, net |
$ | 9,481,792 | $ | 8,200,532 | ||||
|
|
|
|
Residential loans, net are summarized in the table below (in thousands):
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Carried at | Carried at | Carried at | Carried at | |||||||||||||||||||||
Amortized Cost
(1)
|
Fair Value | Total |
Amortized Cost
(1)
|
Fair Value | Total | |||||||||||||||||||
Residential loans, principal balance |
$ | 1,635,653 | $ | 7,421,152 | $ | 9,056,805 | $ | 1,662,183 | $ | 6,231,682 | $ | 7,893,865 | ||||||||||||
Unamortized premiums (discounts) and other cost basis adjustments, net |
(146,776 | ) | | (146,776 | ) | (151,427 | ) | | (151,427 | ) | ||||||||||||||
Fair value adjustment |
| 591,695 | 591,695 | | 478,529 | 478,529 | ||||||||||||||||||
Allowance for loan losses |
(19,932 | ) | | (19,932 | ) | (20,435 | ) | | (20,435 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Residential loans, net |
$ | 1,468,945 | $ | 8,012,847 | $ | 9,481,792 | $ | 1,490,321 | $ | 6,710,211 | $ | 8,200,532 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Included in unamortized premiums (discounts) and other cost basis adjustments, net for residential loans carried at amortized cost is $12.9 million and $13.5 million in accrued interest receivable at March 31, 2013 and December 31, 2012, respectively. |
27
Residential Loans Carried at Amortized Cost
Disclosures About the Credit Quality of Residential Loans at Amortized Cost and the Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable incurred credit losses inherent in the residential loan portfolio accounted for at amortized cost as of the balance sheet date. This portfolio is made up of one segment and class that consists primarily of less-than prime, credit challenged residential loans. The risk characteristics of the portfolio segment and class relate to credit exposure. The method for monitoring and assessing credit risk is the same throughout the portfolio.
Residential loans accounted for at amortized cost are homogeneous and are collectively evaluated for impairment. The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses, is based on, but not limited to, delinquency levels and trends, default frequency experience, prior loan loss severity experience, and managements judgment and assumptions regarding various matters, including the composition of the residential loan portfolio, known and inherent risks in the portfolio, the estimated value of the underlying real estate collateral, the level of the allowance in relation to total loans and to historical loss levels, current economic and market conditions within the applicable geographic areas surrounding the underlying real estate, changes in unemployment levels and the impact that changes in interest rates have on a borrowers ability to refinance their loan and to meet their repayment obligations. Management evaluates these assumptions and various other relevant factors impacting credit quality and inherent losses when quantifying the Companys exposure to credit losses and assessing the adequacy of its allowance for loan losses as of each reporting date. The level of the allowance is adjusted based on the results of managements analysis. Generally, as residential loans season, the credit exposure is reduced, resulting in decreasing provisions.
While there has been some stabilization in residential property values, there has not been significant improvement in property values particularly in more rural areas of the southeastern U.S. market. Additionally, there are continued high unemployment levels and a generally uncertain economic backdrop. As a result, the Company expects the allowance for loan losses to continue to remain elevated until such time as it experiences a sustained improvement in the credit quality of the residential loan portfolio. The future growth of the allowance is highly correlated to unemployment levels and changes in home prices within the Companys markets.
While the Company considers the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary if circumstances differ substantially from the assumptions used by management in determining the allowance for loan losses.
Loan Modifications
The Company will occasionally modify a loan agreement at the request of the borrower. The Companys current modification program offered to borrowers is limited and is used to assist borrowers experiencing temporary hardships and is intended to minimize the economic loss to the Company and to avoid foreclosure. Generally, the Companys modifications are short-term interest rate reductions and/or payment deferrals with forgiveness of principal rarely granted. A modification of a loan constitutes a troubled debt restructuring when a borrower is experiencing financial difficulty and the modification constitutes a concession. Loans modified in a troubled debt restructuring are typically already on non-accrual status and have an allowance recorded. At times, loans modified in a troubled debt restructuring by the Company may have the financial effect of increasing the allowance associated with the loan. The allowance for an impaired loan that has been modified in a troubled debt restructuring is measured based on the present value of expected future cash flows discounted at the loans effective interest rate or the estimated fair value of the collateral, less any selling costs. Troubled debt restructurings have historically been insignificant to the Company and are expected to continue to be insignificant in the future as the Companys business model continues to shift from being a mortgage portfolio owner to a fee-based business services provider.
Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses on residential loans, net (in thousands):
For the Three Months Ended
March 31, |
||||||||
2013 | 2012 | |||||||
Balance at beginning of period |
$ | 20,435 | $ | 13,824 | ||||
Provision for loan losses |
1,726 | 1,569 | ||||||
Charge-offs, net of recoveries (1) |
(2,229 | ) | (1,609 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 19,932 | $ | 13,784 | ||||
|
|
|
|
(1) | Includes charge-offs recognized upon acquisition of real estate in satisfaction of residential loans of $2.0 million and $1.2 million for the three months ended March 31, 2013 and 2012, respectively. |
28
The following table summarizes the ending balance of the allowance for loan losses and the recorded investment in residential loans carried at amortized cost by basis of impairment method (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Allowance for loan losses |
||||||||
Loans collectively evaluated for impairment |
$ | 18,877 | $ | 19,408 | ||||
Loans collectively evaluated for impairment and acquired with deteriorated credit quality |
1,055 | 1,027 | ||||||
|
|
|
|
|||||
Total |
$ | 19,932 | $ | 20,435 | ||||
|
|
|
|
|||||
Recorded investment in residential loans |
||||||||
Loans collectively evaluated for impairment |
$ | 1,462,310 | $ | 1,483,389 | ||||
Loans collectively evaluated for impairment and acquired with deteriorated credit quality |
26,567 | 27,367 | ||||||
|
|
|
|
|||||
Total |
$ | 1,488,877 | $ | 1,510,756 | ||||
|
|
|
|
Aging of Past Due Residential Loans
Residential loans carried at amortized cost are placed on non-accrual status when any portion of the principal or interest is 90 days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Interest income on non-accrual loans, if received, is recorded using the cash basis method of accounting. Residential loans are removed from non-accrual status when there is no longer significant uncertainty regarding collection of the principal and the associated interest. If a non-accrual loan is returned to accruing status, the accrued interest, at the date the residential loan is placed on non-accrual status, and forgone interest during the non-accrual period, are recorded as interest income as of the date the loan no longer meets the non-accrual criteria. The past due or delinquency status of residential loans is generally determined based on the contractual payment terms. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the bankruptcy court approved mortgage payment obligations. Loan balances are charged off when it becomes evident that balances are not collectible.
The following table presents the aging of the residential loan portfolio accounted for at amortized cost (in thousands):
30-59 | 60-89 | 90 Days | Total | Non- | ||||||||||||||||||||||||
Days Past | Days Past | or More | Total | Residential | Accrual | |||||||||||||||||||||||
Due | Due | Past Due | Past Due | Current | Loans | Loans | ||||||||||||||||||||||
Recorded investment in residential loans |
||||||||||||||||||||||||||||
March 31, 2013 |
$ | 16,434 | $ | 6,280 | $ | 64,184 | $ | 86,898 | $ | 1,401,979 | $ | 1,488,877 | $ | 64,184 | ||||||||||||||
December 31, 2012 |
23,543 | 13,215 | 66,623 | 103,381 | 1,407,375 | 1,510,756 | 66,623 |
Credit Risk Profile Based on Delinquencies
Factors that are important to managing overall credit quality and minimizing loan losses are sound loan underwriting, monitoring of existing loans, early identification of problem loans, timely resolution of problems, an appropriate allowance for loan losses, and sound nonaccrual and charge-off policies. The Company primarily utilizes delinquency status to monitor the credit quality of the portfolio. Monitoring of residential loans increases when the loan is delinquent. The Company considers all loans 30 days or more past due to be non-performing. The classification of delinquencies, and thus the non-performing calculation, excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the bankruptcy court approved mortgage payment obligations.
The following table presents the recorded investment in residential loans accounted for at amortized cost by credit quality indicator (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Performing |
$ | 1,401,979 | $ | 1,407,375 | ||||
Non-performing |
86,898 | 103,381 | ||||||
|
|
|
|
|||||
Total |
$ | 1,488,877 | $ | 1,510,756 | ||||
|
|
|
|
Residential Loans Carried at Fair Value
Residential Loans Held for Investment
Residential loans held for investment and accounted for at fair value include forward loans that are held in the Non-Residual Trusts and reverse loans. At acquisition, the fair value of residential loans acquired outside of a business combination is the purchase price of the residential loans, which is determined primarily based on the outstanding principal balance, the probability of future default and the estimated amount of loss from default. The Company acquired residential loans to be held for investment in the amount of $795.3 million and $1.1 million during the three months ended March 31, 2013 and 2012, respectively. The Company originated $270.1 million in residential loans held for investment during the three months ended March 31, 2013.
29
Residential Loans Held for Sale
The Company originates, purchases and sells forward loans into the secondary market. The Company typically transfers these loans to Fannie Mae which are then transferred into securitization trusts. In connection with these transactions, loans are converted into mortgage-backed securities which are sold to third-party investors. The Company accounts for these transfers as sales and typically retains the right to service the loans. Refer to Note 5 for transfer of residential loan activities.
9. Receivables, Net
Receivables, net consist of the following (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Insurance premium receivables |
$ | 108,619 | $ | 107,824 | ||||
Servicing fee receivables |
69,977 | 44,657 | ||||||
Receivables related to Non-Residual Trusts at fair value |
53,671 | 53,975 | ||||||
Income tax receivables |
| 20,825 | ||||||
Other receivables |
28,809 | 31,751 | ||||||
|
|
|
|
|||||
Receivables |
261,076 | 259,032 | ||||||
Less: Allowance for uncollectible servicing fee and other receivables |
(626 | ) | (23 | ) | ||||
|
|
|
|
|||||
Receivables, net |
$ | 260,450 | $ | 259,009 | ||||
|
|
|
|
10. Servicer and Protective Advances, Net
Servicer advances consist of principal and interest advances to certain unconsolidated securitization trusts to meet contractual payment requirements to investors. Protective advances consist of advances to protect the collateral being serviced by the Company and primarily include payments made for foreclosure costs, property taxes and insurance. The following table presents servicer and protective advances, net (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Protective advances |
$ | 342,864 | $ | 149,041 | ||||
Servicer advances |
48,231 | 48,120 | ||||||
|
|
|
|
|||||
Servicer and protective advances |
391,095 | 197,161 | ||||||
Less: Allowance for uncollectible advances |
(26,903 | ) | (24,114 | ) | ||||
|
|
|
|
|||||
Servicer and protective advances, net |
$ | 364,192 | $ | 173,047 | ||||
|
|
|
|
11. Servicing of Residential Loans
The Company provides servicing for credit-sensitive consumer loans including residential mortgages, manufactured housing and consumer installment loans, and reverse mortgage loans for third parties, as well as for loans recognized on the consolidated balance sheets. The Company also services loans originated and purchased by the Company and sold with servicing rights retained. The Companys total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts sub-serviced for others, as well as loans held for investment, loans held for sale and real estate owned held for sale recognized on the consolidated balance sheets. As a result of recent acquisitions, the Company capitalized the servicing rights associated with servicing and sub-servicing agreements in existence at the dates of acquisition.
Provided below is a summary of the Companys total servicing portfolio (in thousands, except number of accounts):
March 31, 2013 | December 31, 2012 | |||||||||||||||
Number | Unpaid Principal | Number | Unpaid Principal | |||||||||||||
of Accounts | Balance | of Accounts | Balance | |||||||||||||
Third-party investors (1) |
||||||||||||||||
Capitalized servicing rights |
1,366,027 | $ | 145,762,417 | 415,617 | $ | 23,469,620 | ||||||||||
Capitalized sub-servicing (2) |
278,561 | 15,601,246 | 289,417 | 16,333,529 | ||||||||||||
Sub-servicing |
252,591 | 44,392,355 | 240,226 | 42,310,373 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total third-party servicing portfolio |
1,897,179 | 205,756,018 | 945,260 | 82,113,522 | ||||||||||||
On-balance sheet |
||||||||||||||||
Residential loans and real estate owned (3) |
100,560 | 9,133,142 | 93,721 | 7,980,667 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total on-balance sheet serviced assets |
100,560 | 9,133,142 | 93,721 | 7,980,667 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total servicing portfolio |
1,997,739 | $ | 214,889,160 | 1,038,981 | $ | 90,094,189 | ||||||||||
|
|
|
|
|
|
|
|
(1) | Includes real estate owned serviced for third parties. |
(2) | Consists of sub-servicing contracts held by Green Tree and RMS at their respective dates of the acquisition. |
(3) | Consists of residential loans and real estate owned, which are serviced by the Company and recognized in the consolidated balance sheets. |
30
The Companys geographic diversification of its third-party servicing portfolio, based on outstanding unpaid principal balance, is as follows (in thousands, except number of loans and percentage data):
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Number of |
Unpaid
Principal |
Percentage of | Number of |
Unpaid
Principal |
Percentage of | |||||||||||||||||||
Accounts | Balance | Total | Accounts | Balance | Total | |||||||||||||||||||
California |
211,589 | $ | 35,855,976 | 17.2 | % | 81,547 | $ | 16,073,080 | 19.6 | % | ||||||||||||||
Florida |
172,009 | 21,089,405 | 10.1 | % | 91,318 | 10,476,321 | 12.8 | % | ||||||||||||||||
Texas |
147,997 | 10,772,551 | 5.2 | % | 86,406 | 3,621,528 | 4.4 | % | ||||||||||||||||
Other < 5% |
1,365,584 | 138,038,086 | 67.5 | % | 685,989 | 51,942,593 | 63.2 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
1,897,179 | $ | 205,756,018 | 100.0 | % | 945,260 | $ | 82,113,522 | 100.0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Servicing Revenue and Fess
The Company services residential mortgage loans, including reverse mortgage loans, manufactured housing and consumer installment loans for itself and third parties. The Company earns servicing income from its third-party servicing portfolio. The following table presents servicing revenue and fees which includes revenues earned by the Servicing, Asset Receivables Management and Reverse Mortgage segments (in thousands):
For the Three Months Ended
March 31, |
||||||||
2013 | 2012 | |||||||
Servicing fees |
$ | 119,872 | $ | 70,535 | ||||
Incentive and performance fees |
30,325 | 23,016 | ||||||
Ancillary and other fees (1) |
19,211 | 9,097 | ||||||
|
|
|
|
|||||
Servicing revenue and fees |
169,408 | 102,648 | ||||||
Amortization of servicing rights |
(11,324 | ) | (12,915 | ) | ||||
Net fair value losses on servicing rights |
(7,004 | ) | | |||||
|
|
|
|
|||||
Net servicing revenue and fees |
$ | 151,080 | $ | 89,733 | ||||
|
|
|
|
(1) | Includes late fees of $7.3 million and $3.4 million for the three months ended March 31, 2013 and 2012, respectively. |
Servicing Rights
Servicing rights are represented by three classes, which consist of a risk-managed loan class, a forward loan class and a reverse loan class. These classes are based on the availability of market inputs used in determining the fair values of servicing rights and the Companys planned risk management strategy associated with the servicing rights. At initial recognition, the servicing right is established at its fair value using assumptions consistent with those assumptions used to establish fair value of existing servicing rights. Subsequent to initial capitalization, servicing rights are accounted for using either the fair value method or the amortization method based on the servicing class. Servicing rights carried at amortized cost consists of the forward loan class and the reverse loan class. Servicing rights carried at fair value consist of the risk-managed loan class.
Servicing Rights Carried at Amortized Cost
The amortization of servicing rights is recorded in servicing revenue and fees in the consolidated statements of comprehensive income. The following table summarizes the activity in the carrying value of servicing rights carried at amortized cost by class for the period (in thousands):
For the Three Months Ended March 31, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Forward Loans | Reverse Loans | Total | Forward Loans | |||||||||||||
Balance at beginning of period |
$ | 200,742 | $ | 15,588 | $ | 216,330 | $ | 250,329 | ||||||||
Purchases |
| 36 | 36 | | ||||||||||||
Amortization |
(10,406 | ) | (918 | ) | (11,324 | ) | (12,915 | ) | ||||||||
Impairment |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 190,336 | $ | 14,706 | $ | 205,042 | $ | 237,414 | ||||||||
|
|
|
|
|
|
|
|
31
Servicing rights accounted for at amortized cost are evaluated for impairment by strata based on their estimated fair value. The risk characteristics used to stratify servicing rights for purposes of measuring impairment are the type of loan products, which consist of manufactured housing loans, first lien residential mortgages and second lien residential mortgages for the forward loan class and reverse mortgages for the reverse loan class. At March 31, 2013, the fair value of servicing rights for the forward loan class and the reverse loan class was $218.9 million and $15.4 million, respectively. At December 31, 2012 the fair value of servicing rights for the forward loan class and the reverse loan class was $229.9 million and $15.7 million, respectively. The fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income. The estimation of fair value requires significant judgment and uses key economic inputs and assumptions which are provided in the table below (in thousands, except input and assumption data):
March 31, 2013 | ||||||||
Forward Loans | Reverse Loans | |||||||
Servicing rights carried at amortized cost |
$ | 190,336 | $ | 14,706 | ||||
Inputs and assumptions: |
||||||||
Weighted-average remaining life in years |
5.4 | 3.7 | ||||||
Weighted-average stated customer interest rate on underlying collateral |
7.77 | % | 3.21 | % | ||||
Weighted-average discount rate |
11.66 | % | 18.00 | % | ||||
Conditional prepayment rate |
6.32 | % | (1 | ) | ||||
Conditional default rate |
5.04 | % | (1 | ) | ||||
Conditional repayment rate |
(1 | ) | 23.20 | % |
(1) | Assumption is not significant to valuation. |
The valuation of servicing rights is affected by the underlying assumptions including discount rate and prepayments of principal and defaults or repayment rates. Should the actual performance and timing differ materially from the Companys projected assumptions, the estimate of fair value of the servicing rights could be materially different.
Servicing Rights Carried at Fair Value
The change in fair value of servicing rights is recorded in servicing revenue and fees in the consolidated statements of comprehensive income. The following table summarizes the activity in servicing rights carried at fair value (in thousands):
For the Three Months Ended | ||||
March 31, 2013 | ||||
Balance at beginning of period |
$ | 8,949 | ||
Servicing rights capitalized in connection with the acquisition of ResCap net assets |
90,431 | |||
Purchases (1) |
253,588 | |||
Servicing rights capitalized upon transfers of loans |
1,290 | |||
Changes in fair value due to: |
| |||
Realization of expected cash flows |
(6,555 | ) | ||
Changes in valuation inputs or other assumptions |
(449 | ) | ||
|
|
|||
Balance at end of period |
$ | 347,254 | ||
|
|
(1) | Purchases of servicing rights include $242.2 million in servicing rights related to the BOA asset purchase. |
The fair value of servicing rights carried at fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income. The estimation of fair value requires significant judgment and uses key economic inputs and assumptions which are provided in the table below (in thousands, except input and assumption data):
March 31, 2013 | ||||
Servicing rights carried at fair value |
$ | 347,254 | ||
Inputs and assumptions: |
||||
Weighted-average remaining life in years |
5.6 | |||
Weighted-average stated customer interest rate on underlying collateral |
5.31 | % | ||
Weighted-average discount rate |
16.38 | % | ||
Conditional prepayment rate |
10.59 | % | ||
Conditional default rate |
4.37 | % |
32
The valuation of servicing rights is affected by the underlying assumptions including prepayments of principal, defaults and discount rate. Should the actual performance and timing differ materially from the Companys projected assumptions, the estimate of fair value of the servicing rights could be materially different.
The following table summarizes the hypothetical effect on the fair value of servicing rights carried at fair value using adverse changes of 10% and 20% to the weighted-average of certain significant assumptions used in valuing these assets (in thousands, except assumption data):
March 31, 2013 | ||||||||||||
Decline in fair value due to | ||||||||||||
Actual |
10% adverse
change |
20% adverse
change |
||||||||||
Weighted-average discount rate |
16.38 | % | $ | (20,845 | ) | $ | (39,717 | ) | ||||
Conditional prepayment rate |
10.59 | % | (43,547 | ) | (71,179 | ) | ||||||
Conditional default rate |
4.37 | % | (19,452 | ) | (26,343 | ) |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change.
Fair Value of Originated Servicing Rights
For loans sold with servicing retained, the Company used the following inputs and assumptions to determine the fair value of servicing rights at the date of transfer. These servicing rights are included in servicing rights capitalized upon transfers of loans in the table presented above that summarizes the activity in servicing rights carried at fair value.
For the Three Months Ended | ||
March 31, 2013 | ||
Weighted-average life in years |
6.1 - 7.6 | |
Weighted-average stated customer interest rate on underlying collateral |
4.00% - 4.20% | |
Weighted-average discount rates |
10.20% - 12.30% | |
Conditional prepayment rates |
5.40% - 8.10% | |
Conditional default rates |
0.50% - 0.60% |
12. Goodwill and Intangible Assets, Net
During the three months ended March 31, 2013, goodwill and intangible assets were recorded in connection with business combinations and asset acquisitions. Refer to Note 3 for further information. Amortization expense of intangible assets was $22.0 million and $6.2 million for the three months ended March 31, 2013 and 2012, respectively.
Intangible assets consist of the following (in thousands):
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Gross | Net | Gross | Net | |||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Intangible assets: |
||||||||||||||||||||||||
Customer relationships |
$ | 566,268 | $ | (45,578 | ) | $ | 520,690 | $ | 157,201 | $ | (26,838 | ) | $ | 130,363 | ||||||||||
Institutional relationships |
34,800 | (13,142 | ) | 21,658 | 33,600 | (10,398 | ) | 23,202 | ||||||||||||||||
Trademarks and trade names |
10,000 | (233 | ) | 9,767 | 2,000 | (28 | ) | 1,972 | ||||||||||||||||
Licenses |
5,000 | (50 | ) | 4,950 | 5,000 | | 5,000 | |||||||||||||||||
Non-compete agreements |
1,500 | (346 | ) | 1,154 | 1,500 | (111 | ) | 1,389 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total intangible assets |
$ | 617,568 | $ | (59,349 | ) | $ | 558,219 | $ | 199,301 | $ | (37,375 | ) | $ | 161,926 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
33
Based on the balance of intangible assets, net at March 31, 2013, the following is an estimate of amortization expected to be expensed for each of the next five years and thereafter (in thousands):
Amortization
Expense |
||||
For the remainder of 2013 |
$ | 214,593 | ||
2014 |
77,933 | |||
2015 |
47,925 | |||
2016 |
36,159 | |||
2017 |
28,809 | |||
2018 |
23,124 | |||
Thereafter |
129,676 | |||
|
|
|||
Total |
$ | 558,219 | ||
|
|
13. Other Assets
Other assets consist of the following (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Real estate owned, net |
$ | 63,919 | $ | 64,959 | ||||
Derivative instruments |
59,700 | 949 | ||||||
Deferred debt issuance costs |
56,252 | 47,544 | ||||||
ResCap net assets acquisition deposit |
| 15,000 | ||||||
Other |
19,843 | 16,378 | ||||||
|
|
|
|
|||||
Total other assets |
$ | 199,714 | $ | 144,830 | ||||
|
|
|
|
14. Payables and Accrued Liabilities
Payables and accrued liabilities consist of the following (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Business combinations and asset acquisitions deferred purchase price |
$ | 226,505 | $ | 21,011 | ||||
Payables to insurance carriers |
59,013 | 51,377 | ||||||
Employee related liabilities |
43,208 | 37,124 | ||||||
Uncertain tax positions |
25,899 | 26,301 | ||||||
Curtailment liability |
17,800 | | ||||||
Accrued interest payable |
14,913 | 10,764 | ||||||
Acquisition related escrow funds payable to sellers |
14,000 | 14,000 | ||||||
Contingent earn-out payments |
9,794 | 6,100 | ||||||
Mandatory repurchase obligation |
9,695 | 9,999 | ||||||
Professional fees liability related to certain securitizations |
7,739 | 8,147 | ||||||
Income tax payable |
7,733 | | ||||||
Loan acquisitions liability |
6,550 | 8,558 | ||||||
Derivative instruments |
5,408 | 1,102 | ||||||
Insurance premium cancellation reserve |
5,200 | 4,768 | ||||||
Other |
121,216 | 61,359 | ||||||
|
|
|
|
|||||
$ | 574,673 | $ | 260,610 | |||||
|
|
|
|
34
15. Debt
The following table summarizes the components of debt (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Debt |
||||||||
Unpaid principal balance |
||||||||
Term loan |
$ | 1,497,057 | $ | 691,250 | ||||
4.5% Convertible senior subordinated notes due 2019 |
290,000 | 290,000 | ||||||
Master repurchase agreements |
529,250 | 255,385 | ||||||
Other |
3,703 | 4,131 | ||||||
|
|
|
|
|||||
Total debt unpaid principal balance |
2,320,010 | 1,240,766 | ||||||
Discount |
(95,825 | ) | (94,517 | ) | ||||
|
|
|
|
|||||
Total debt |
$ | 2,224,185 | $ | 1,146,249 | ||||
|
|
|
|
Term Loan
On January 31, 2013, the Company entered into the Amendment No. 1, Incremental Amendment and Joinder Agreement, or the Incremental Amendment, to its Term Loan. The Incremental Amendment, among other things, increased certain financial ratios which govern the Companys ability to incur additional indebtedness and provided for a secured term loan, or the Incremental Loan, in an amount of $825.0 million, which was borrowed in its entirety on January 31, 2013. The Company recorded $7.1 million in deferred debt issuance costs and expensed $4.7 million in the three months ended March 31, 2013 in conjunction with this incremental borrowing.
On March 14, 2013, the Company entered into Amendment No. 2, or the Credit Agreement Amendment, to its Term Loan. The Credit Agreement Amendment changes certain financial definitions in the Term Loan to clarify that net cash receipts in connection with the issuance of reverse mortgage securities and the servicing of reverse mortgages count towards pro forma adjusted earnings before interest, taxes, depreciation and amortization, or Pro Forma Adjusted EBITDA, and excess cash flow for purposes of the Term Loan.
Master Repurchase Agreements
During 2012 and 2013, the Company entered into several master repurchase agreements, primarily in conjunction with its acquisitions, which are used to fund the origination of mortgage loans. The facilities have an aggregate capacity amount of $2.0 billion at March 31, 2013 and are secured by certain residential loans. The interest rates on the facilities are primarily based on LIBOR plus between 2.70% and 3.50%, in some cases are subject to a LIBOR floor or other minimum rates and have various expiration dates through March 2014. The facilities are secured by $540.3 million in residential loans at March 31, 2013.
All of the Companys master repurchase agreements contain customary events of default and covenants, the most significant of which are financial covenants. Financial covenants that are most sensitive to the operating results and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements.
16. Mortgage-Backed Debt and Related Collateral
Mortgage-Backed Debt
Mortgage-backed debt consists of debt issued by the Residual and Non-Residual Trusts that have been consolidated by the Company. The mortgage-backed debt of the Residual Trusts is carried at amortized cost while the mortgage-backed debt of the Non-Residual Trusts is carried at fair value. Refer to Note 4 for further information regarding the consolidated Residual and Non-Residual Trusts.
Borrower remittances received on the residential loans collateralizing this debt and draws under LOCs serving as credit enhancements to certain Non-Residual Trusts are used to make the principal and interest payments due on the mortgage-backed debt. The maturity of the mortgage-backed debt is directly affected by principal prepayments on the collateral. As a result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. Certain of the Companys mortgage-backed debt issued by the Residual Trusts is also subject to redemption according to specific terms of the respective indenture agreements, including the option to exercise a clean-up call. The mortgage-backed debt issued by the Non-Residual Trusts is subject to mandatory clean-up calls for which the Company is obligated to exercise at the earliest possible call dates, which is the date the principal amount of each loan pool falls to 10% of the original principal amount.
35
Residual Trusts
The Residual Trusts consist of the consolidated securitization trusts that are beneficially owned by the Company. These trusts have issued mortgage-backed and asset-backed notes, or the Trust Notes, consisting of both public debt offerings and private offerings with final maturities ranging from 2029 to 2050.
The Residual Trusts, with the exception of Trust 2011-1, contain provisions that require the cash payments received from the underlying residential loans be applied to reduce the principal balance of the Trust Notes unless certain overcollateralization or other similar targets are satisfied. These trusts contain delinquency and loss triggers, that, if exceeded, allocate any excess cash flows to paying down the outstanding principal balance of the Trust Notes for that particular securitization at an accelerated pace. Assuming no servicer trigger events have occurred and the overcollateralization targets have been met, any excess cash is released to the Company either monthly or quarterly, in accordance with the terms of the respective underlying trust agreements. For Trust 2011-1, principal and interest payments are not paid on the subordinate note or residual interests, which are held by the Company, until all amounts due on the senior notes are fully paid.
Since January 2008, Mid-State Capital Corporation 2006-1 Trust has exceeded certain triggers and has not provided any excess cash flow to the Company. The delinquency rate for the trigger calculations, which includes real estate owned, was 10.46% at March 31, 2013 compared to a trigger level of 8.00% and the cumulative loss rate for trigger calculations was 7.27% at March 31, 2013 compared to a trigger level of 6.00%. In addition, from September 2012 through February 2013, Mid-State Capital Corporation 2005-1 Trust, or Trust 2005-1, exceeded the delinquency rate trigger of 8.00%. At March 31, 2013, the delinquency rate for Trust 2005-1 was cured. At March 31, 2013, Trust 2005-1 has not exceeded the cumulative loss rate trigger. Certain triggers for Trust 2005-1 and Mid-State Trust X were exceeded in November 2009 and October 2006, respectively, and cured in 2010.
Non-Residual Trusts
The Company has consolidated ten trusts for which it is the servicer, but does not hold any residual interests. The Company is obligated to exercise mandatory clean-up call obligations for these trusts and expects to call these securitizations beginning in 2016 and continuing through 2019. The total outstanding balance of the residential loans expected to be called at the various respective call dates is $418.1 million.
Collateral for Mortgage-Backed Debt
At March 31, 2013, the Residual and Non-Residual Trusts have an aggregate of $2.0 billion of principal in outstanding debt, which is collateralized by $2.6 billion of assets, including residential loans, receivables related to the Non-Residual Trusts, real estate owned, net and restricted cash and cash equivalents. For seven of the ten Non-Residual Trusts, LOCs were issued by a third party as credit enhancements to these securitizations and, accordingly, the securitization trusts will draw on these LOCs if there are not enough cash flows from the underlying collateral to pay the debt holders. The notional amount of expected draws under the LOCs at March 31, 2013 was $54.3 million. The fair value of the expected draws of $53.7 million at March 31, 2013 has been recognized as receivables related to Non-Residual Trusts on the consolidated balance sheet. All of the Companys mortgage-backed debt is non-recourse and not cross-collateralized and, therefore, must be satisfied exclusively from the proceeds of the residential loans and real estate owned held in each securitization trust and from the draws on the LOCs for certain Non-Residual Trusts.
The following table summarizes the collateral for the mortgage-backed debt (in thousands):
March 31,
2013 |
December 31,
2012 |
|||||||
Residential loans of securitization trusts, principal balance |
$ | 2,408,948 | $ | 2,458,678 | ||||
Receivables related to Non-Residual Trusts |
53,671 | 53,975 | ||||||
Real estate owned, net |
41,432 | 43,115 | ||||||
Restricted cash and cash equivalents |
59,267 | 58,253 | ||||||
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Total mortgage-backed debt collateral |
$ | 2,563,318 | $ | 2,614,021 | ||||
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17. Income Taxes
For the three months ended March 31, 2013 and 2012, the Company recorded income tax expense of $18.8 million and $3.1 million resulting in an effective tax rate of 40.4% and 37.8%, respectively.
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Income Tax Exposure
The Company was part of the Walter Energy consolidated group prior to the spin-off from Walter Energy, the principal agent, on April 17, 2009. As such, the Company is jointly and severally liable with Walter Energy for any final taxes, interest and/or penalties owed by the Walter Energy consolidated group during the time that the Company was a part of the Walter Energy consolidated group. However, in connection with the spin-off of the Companys business from Walter Energy, the Company and Walter Energy entered into a Tax Separation Agreement dated April 17, 2009, pursuant to which Walter Energy is responsible for the payment of all federal income taxes (including any interest or penalties applicable thereto) of the consolidated group. Nonetheless, to the extent that Walter Energy is unable to pay any amounts owed, the Company could be responsible for any unpaid amounts including, according to Walter Energys most recent public filing on Form 10-K, those related to the following:
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The Internal Revenue Service, or IRS, has filed a proof of claim for a substantial amount of taxes, interest and penalties with respect to fiscal years ended August 31, 1983 through May 31, 1994. The public filing goes on to disclose that issues have been litigated in bankruptcy court and that an opinion was issued by the court in June 2010 as to the remaining disputed issues. The filing further states that the amounts initially asserted by the IRS do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. Walter Energy believes that any financial exposure with respect to those issues that have not been resolved or settled by the Proof of Claim is limited to interest and possible penalties and the amount of tax assessed has been offset by tax reduction in future years. All of the issues in the Proof of Claim, which have not been settled or conceded, have been litigated before the Bankruptcy Court and are subject to appeal but only at the conclusion of the entire adversary proceedings. |
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The IRS completed its audit of Walter Energys federal income tax returns for the years ended May 31, 2000 through December 31, 2005. The IRS issued 30-Day Letters to Walter Energy proposing changes to tax for these tax years which Walter Energy has protested. Walter Energys filing states that the disputed issues in this audit period are similar to the issues remaining in the above-referenced dispute and therefore Walter Energy believes that its financial exposure for these years is limited to interest and possible penalties. |
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While the IRS had completed its audit of Walter Energys federal income tax returns for the years 2006 to 2008 and issued 30-Day Letters to Walter Energy proposing changes to tax for these tax years which Walter Energy has protested, the IRS reopened the audit of these periods in 2012. Walter Energys filing states that the disputed issues in this audit period are similar to the issues remaining in the above-referenced dispute and therefore Walter Energy believes that its financial exposure for these years is limited to interest and possible penalties. |
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Walter Energy reports that the IRS is conducting an audit of Walter Energys tax returns filed for 2009 and 2010. Since examination is ongoing, Walter Energy cannot estimate the amount of any resulting tax deficiency or overpayment, if any. |
Walter Energy believes that all of its current and prior tax filing positions have substantial merit and intends to defend vigorously any tax claims asserted and they believe that they have sufficient accruals to address any claims, including interest and penalties, and as a result, believes that any potential difference between actual losses and costs incurred and the amounts accrued would be immaterial.
The Tax Separation Agreement also provides that Walter Energy is responsible for the preparation and filing of any tax returns for the consolidated group for the periods when the Company was part of the Walter Energy consolidated group. This arrangement may result in conflicts between Walter Energy and the Company. In addition, the spin-off of the Company from Walter Energy was intended to qualify as a tax-free spin-off under Section 355 of the Code. The Tax Separation Agreement provides generally that if the spin-off is determined not to be tax-free pursuant to Section 355 of the Code, any taxes imposed on Walter Energy or a Walter Energy shareholder as a result of such determination, or Distribution Taxes, which are the result of the acts or omissions of Walter Energy or its affiliates, will be the responsibility of Walter Energy. However, should Distribution Taxes result from the acts or omissions of the Company or its affiliates, such Distribution Taxes will be the responsibility of the Company. The Tax Separation Agreement goes on to provide that Walter Energy and the Company shall be jointly liable, pursuant to a designated allocation formula, for any Distribution Taxes that are not specifically allocated to Walter Energy or the Company. To the extent that Walter Energy is unable or unwilling to pay any Distribution Taxes for which it is responsible under the Tax Separation Agreement, the Company could be liable for those taxes as a result of being a member of the Walter Energy consolidated group for the year in which the spin-off occurred. The Tax Separation Agreement also provides for payments from Walter Energy in the event that an additional taxable dividend is required to cure a REIT disqualification from the determination of a shortfall in the distribution of non-REIT earnings and profits made immediately following the spin-off. As with Distribution Taxes, the Company will be responsible for this dividend if Walter Energy is unable or unwilling to pay.
Other Tax Exposure
On June 28, 2010, the Alabama Department of Revenue, or ADOR, preliminarily assessed financial institution excise tax of approximately $4.2 million, which includes interest and penalties, on a predecessor entity for the years 2004 through 2008. This tax is imposed on financial institutions doing business in the State of Alabama. The Company was informed that the ADOR had requested legal advice with regard to the application of certain provisions of the Alabama Constitution in response to issues the Company had previously raised in its protests to the initial assessments. In November 2012, the Company received communication from the State of Alabama that they anticipate issuing a final assessment if payment is not made. The Company has contested the assessment and believes that it did not meet the definition of a financial institution doing business in the State of Alabama as defined by the Alabama Tax Code.
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18. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations shown on the consolidated statements of comprehensive income (in thousands, except per share data):
For the Three Months Ended
March 31, |
||||||||
2013 | 2012 | |||||||
Basic earnings per share |
||||||||
Net income |
$ | 27,749 | $ | 5,135 | ||||
Less: net income allocated to unvested participating securities |
(463 | ) | (141 | ) | ||||
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Net income available to common stockholders (numerator) |
27,286 | 4,994 | ||||||
Weighted-average common shares outstanding (denominator) |
36,877 | 28,798 | ||||||
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Basic earnings per share |
$ | 0.74 | $ | 0.17 | ||||
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Diluted earnings per share |
||||||||
Net income |
$ | 27,749 | $ | 5,135 | ||||
Less: net income allocated to unvested participating securities |
(454 | ) | (140 | ) | ||||
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Net income available to common stockholders (numerator) |
27,295 | 4,995 | ||||||
Weighted-average common shares outstanding |
36,877 | 28,798 | ||||||
Add: effect of dilutive stock options and convertible notes |
757 | 236 | ||||||
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Diluted weighted-average common shares outstanding (denominator) |
37,634 | 29,034 | ||||||
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Diluted earnings per share |
$ | 0.73 | $ | 0.17 | ||||
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The Companys unvested restricted stock and restricted stock units, or RSUs, are considered participating securities. During periods of net income, the calculation of earnings per share for common stock is adjusted to exclude the income attributable to the unvested restricted stock and RSUs from the numerator and exclude the dilutive impact of those shares from the denominator. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
The calculation of diluted earnings per share does not include 4.9 million shares and 2.2 million shares for the three months ended March 31, 2013 and 2012, respectively, because their effect would have been antidilutive. The convertible senior subordinated notes, or convertible notes, are antidilutive when calculating earnings per share when the Companys average stock price is less than $58.80. Upon conversion of the convertible notes, the Company may pay or deliver, at its option, cash, shares of the Companys common stock, or a combination of cash and shares of common stock. It is the Companys intent to settle all conversions through combination settlement, which involves repayment of an amount of cash equal to the principal amount and any excess of conversion value over the principal amount in shares of common stock.
19. Supplemental Disclosures of Cash Flow Information
The Companys supplemental disclosures of cash flow information are summarized as follows (in thousands):
For the Three Months Ended
March 31, |
||||||||
2013 | 2012 | |||||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities |
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Real estate owned acquired through foreclosure |
$ | 25,483 | $ | 17,736 | ||||
Residential loans originated to finance the sale of real estate owned |
19,531 | 16,402 | ||||||
Payable for acquisition of BOA assets |
226,505 | |
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20. Segment Reporting
Management has organized the Company into six reportable segments based primarily on its services as follows:
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Servicing consists of operations that perform servicing for third-party investors of residential mortgages, manufactured housing and consumer installment loans and contracts, as well as for the Loans and Residuals segment and for the Non-Residual Trusts. Beginning in the first quarter of 2013, the Servicing segment services forward loans that have been originated or purchased by the Originations segment and sold to third-parties with servicing rights retained. |
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Asset Receivables Management performs collections of post charge-off deficiency balances on behalf of third-party securitization trusts and other asset owners. |
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Insurance provides voluntary and lender-placed hazard insurance for residential loans, as well as other ancillary products, through the Companys insurance agency for a commission and a reinsurer to third parties as well as to the Loans and Residuals segment. |
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Loans and Residuals consists of the assets and mortgage-backed debt of the Residual Trusts and the unencumbered held for investment forward residential loan portfolio and real estate owned. |
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Reverse Mortgage Includes purchases and originations, aggregation and securitization activities and operations that perform servicing for third-party investors in reverse mortgage loans and other ancillary services for the reverse mortgage market. The Reverse Mortgage segment also performs servicing of the Companys reverse mortgage portfolio. The Reverse Mortgage segment is a new segment in the fourth quarter of 2012 as a result of the acquisitions of RMS and S1L. |
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Originations consists of operations that originate and purchase forward loans that are sold to third parties with servicing rights generally retained. The Originations segment was previously included in the Other segment; however is now reportable because of growth in the business resulting from the acquisition of ResCap. Activity prior to the acquisition of the ResCap net assets primarily consisted of brokerage operations whereby the Originations segment received origination commissions. |
The Company has revised its presentation of financial results by reportable segment for the three months ended March 31, 2012 to reflect the results of its Originations segment, which was previously included in Other. The Company also revised its method of allocating assets to business segments during the fourth quarter of 2012. As a result, the Company has recast segment assets of the prior periods to reflect the new allocation method on a consistent basis for all periods presented. The revised asset allocation includes intersegment receivables and deferred tax assets in the calculation of total segment assets whereas they previously were not included. As of March 31, 2012, the change in method increased assets allocated to the Servicing, Insurance, Loans and Residuals and Other segments by $29.0 million, $21.3 million, $1.9 million and $226.8 million, respectively, and decreased assets allocated to the Asset Receivables Management segment and eliminations by $1.7 million and $277.3 million, respectively.
In order to reconcile the financial results for the Companys reportable segments to the consolidated results, the Company has presented the revenue and expenses and total assets of the Non-Residual Trusts and other non-reportable operating segments, as well as certain corporate expenses, which have not been allocated to the business segments, in Other. Intersegment servicing and insurance revenues and expenses have been eliminated. Intersegment revenues are recognized on the same basis of accounting as such revenue is recognized in the consolidated statements of comprehensive income.
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Presented in the tables below are the Companys financial results by reportable segment reconciled to the consolidated income before income taxes and total assets by reportable segment reconciled to consolidated total assets (in thousands):
(1) | The Companys Servicing and Asset Receivables Management segment includes servicing revenue and fees of $4.9 million and $0.1 million, respectively, associated with intercompany activity with the Loans and Residuals and Other segments. |
(1) | The Companys Servicing segment includes servicing revenue and fees of $5.4 million associated with intercompany activity with the Loans and Residuals and Other segments. |
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21. Commitments and Contingencies
Mandatory Repurchase Obligation
The Company has a mandatory obligation to repurchase loans at par from an investor when loans become 90 days past due. The total loans outstanding and subject to being repurchased were $83.2 million at March 31, 2013. The Company has estimated the fair value of this contingent liability at March 31, 2013 as $9.7 million, which is included in payables and accrued liabilities on the consolidated balance sheet. The Company estimates that the undiscounted losses to be incurred from the mandatory repurchase obligation over the remaining lives of the loans are $12.4 million at March 31, 2013.
Professional Fees Liability Related to Certain Securitizations
The Company has a contingent liability related to payments for certain professional fees that it will be required to make over the remaining life of various securitization trusts, which are based in part on the outstanding principal balance of the debt issued by these trusts. At March 31, 2013, the Company estimated the fair value of this contingent liability at $7.7 million, which is included in payables and accrued liabilities on the consolidated balance sheet. The Company estimates that the gross amount of payments it expects to pay over the remaining lives of the securitizations is $10.3 million at March 31, 2013.
Letter of Credit Reimbursement Obligation
The Company has an obligation to reimburse a third party for the final $165.0 million in LOCs if drawn for an aggregate of eleven securitization trusts on the LOCs issued to these trusts by a third party. Seven of these securitization trusts were consolidated on the Companys consolidated balance sheets due to the Companys mandatory clean-up call obligation related to these trusts. The LOCs were issued by a third party as credit enhancements to these eleven securitizations and, accordingly, the securitization trusts will draw on these LOCs if there are insufficient cash flows from the underlying collateral to pay the debt holders. The total amount available on these LOCs for all eleven securitization trusts was $283.0 million at March 31, 2013. Based on the Companys estimates of the underlying performance of the collateral in these securitizations, the Company does not expect that the final $165.0 million will be drawn, and therefore, no liability for the fair value of this obligation has been recorded on the Companys consolidated balance sheets, although actual performance may differ from this estimate in the future.
Mandatory Clean-Up Call Obligation
The Company is obligated to exercise the mandatory clean-up call obligations assumed as part of an agreement to acquire the rights to service the loans in the Non-Residual Trusts. The Company expects to call these securitizations beginning in 2016 and continuing through 2019. The total outstanding balance of the residential loans expected to be called at the respective call dates is $418.1 million.
Unfunded Commitments
The Company has floating rate reverse mortgage loans in which the borrowers have additional borrowing capacity of $226.2 million, and similar commitments on fixed rate reverse loans of $4.3 million at March 31, 2013. This additional borrowing capacity is primarily in the form of undrawn lines of credit, with the balance available on a scheduled or unscheduled payment basis. The Company also has short-term commitments to lend $2.0 billion and commitments to purchase loans totaling $125.7 million at March 31, 2013. Additionally, the Company has commitments to sell $1.6 billion in loans at March 31, 2013.
Transactions with Walter Energy
Following the spin-off in 2009 from Walter Energy, the Company and Walter Energy have operated independently, and neither has any ownership interest in the other. In order to allocate responsibility for overlapping or related aspects of their businesses, the Company and Walter Energy entered into certain agreements pursuant to which the Company and Walter Energy assume responsibility for various aspects of their businesses and agree to indemnify one another against certain liabilities that may arise from their respective businesses, including liabilities relating to certain tax and litigation exposure.
Representations and Warranties
The Company sells and securitizes conventional conforming and federally insured forward residential loans predominantly to GSEs, such as Fannie Mae. The Company may also sell residential loans, primarily those that do not meet criteria for whole loan sales to GSEs, through whole loan sales to private non-GSE purchasers. In doing so, representations and warranties regarding certain attributes of the loans are made to the GSE or the third-party purchaser. Subsequent to the sale or securitization, if it is determined that the loans sold are in breach of these representations or warranties, the Company generally has an obligation to either: (a) repurchase the loan for the unpaid principal balance, accrued interest and related advances, (b) indemnify the purchaser or (c) make the purchaser whole for the economic benefits of the loan.
The Companys representations and warranties are generally not subject to stated limits of exposure. However, management believes that the current unpaid principal balance of loans sold by the Company to date represents the maximum exposure to repurchases related to representations and warranties.
The Companys obligations vary based upon the nature of the repurchase demand and the current status of the residential loan. The Companys estimate of the liability associated with risk and warranties exposure is $0.4 million at March 31, 2013 and is recorded in payables and accrued liabilities in the consolidated balance sheet.
Third-Party Servicing Agreements
The Company has entered into a third-party servicing agreement with ResCap as debtors in possession in the Chapter 11 case in the U.S. Bankruptcy Court, or the ResCap Estate, pursuant to which the ResCap Estate is providing, on a short-term basis, certain services with regard to employees that the Company acquired in connection with its acquisition of the ResCap net assets.
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Litigation
As discussed in Note 17, Walter Energy is in dispute with the IRS on a number of federal income tax issues. Walter Energy has stated in its public filings that it believes that all of its current and prior tax filing positions have substantial merit and that Walter Energy intends to defend vigorously any tax claims asserted. Under the terms of the tax separation agreement between the Company and Walter Energy dated April 17, 2009, Walter Energy is responsible for the payment of all federal income taxes (including any interest or penalties applicable thereto) of the consolidated group, which includes the aforementioned claims of the IRS. However, to the extent that Walter Energy is unable to pay any amounts owed, the Company could be responsible for any unpaid amounts.
As disclosed in prior filings, one of the Companys subsidiaries, Walter Mortgage Company, or WMC, had been a party to a lawsuit entitled Casa Linda Homes, et al. v. Walter Mortgage Company, et al., Cause No. C-2918-08-H, 389th Judicial District Court of Hidalgo County, Texas, claiming breach of contract, fraud, negligent misrepresentation, promissory estoppel and unjust enrichment. The plaintiffs were seeking actual and exemplary damages, the amount of which were not specified, but if proven could have been material. WMC maintained counterclaim actions against the plaintiffs for breach of fiduciary duty and conversion related to the defendants alleged misappropriation of escrow funds. The plaintiffs allegations arose from a claim that the WMC breached a contract with the plaintiffs by failing to purchase a certain amount of loan pool packages from the corporate plaintiff, a Texas real estate developer. Alternatively, the plaintiffs claimed that WMC promised to purchase a certain amount of loan pool packages from the corporate plaintiff, plaintiffs relied on that promise, and WMC failed to perform. The case was tried before a jury, and on December 13, 2012 the jury found that we have no liability for these claims and consequently the plaintiffs were entitled to no damages. As to our counterclaim, the jury returned a verdict in our favor awarding us $282,357 in compensatory damages and $282,357 in punitive damages (plus attorneys fees, court costs, and post-judgment interest) due and owing from the plaintiffs Casa Linda Homes and Mark Dizdar.
The Company is a party to a number of other lawsuits arising in the ordinary course of its business. While the results of such litigation cannot be predicted with certainty, the Company believes that the final outcome of such litigation will not have a materially adverse effect on the Companys financial condition, results of operations or cash flows.
22. Subsequent Events
Effective April 1, 2013, the Company amended its Servicer Advance Reimbursement Agreement, which provides for the reimbursement of certain principal and interest and protective advances that are the responsibility of the Company under certain servicing agreements. The amendment increased the reimbursement amount under the agreement to $950.0 million. All other terms of the agreement remained unchanged.
In April 2013, the Company entered into an agreement to acquire an MSR pool associated with reverse loans totaling $12.2 billion in unpaid principal balance from Wells Fargo Home Mortgage. The portfolio of loans is expected to transfer to RMS during the third quarter of 2013.
In May 2013, the Company amended its Receivables Loan Agreement, which provides borrowings and is collateralized by certain principal and interest, taxes and insurance and other corporate advances reimbursable from securitization trusts serviced by the Company. The amendment modified the definition of certain financial covenant requirements. All other terms of the agreement remained unchanged.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 results for the year ended December 31, 2012 filed in our Annual Report on Form 10-K on March 18, 2013. Historical results and trends which might appear should not be taken as indicative of future operations, particularly in light of our recent acquisitions. Our results of operations and financial condition, as reflected in the accompanying statements and related footnotes, are subject to managements evaluation and interpretation of business conditions, changing capital market conditions, and other factors.
We make available, free of charge through the investor relations section of our website, www.walterinvestment.com, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and other documents and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. We also make available, free of charge, access to our Corporate Governance Standards, charters for our Audit Committee, Compensation and Human Resources Committee, and Nominating and Corporate Governance Committee, and our Code of Conduct and Ethics governing our directors, officers, and employees. Within the time period required by the SEC and the NYSE, we will post on our website any amendment to the Code of Conduct and Ethics and any waiver applicable to any executive officer, director, or senior officer (as defined in the Code of Conduct and Ethics). In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, as well as disclosure relating to certain non-GAAP and financial measures (as defined by SEC Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on 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 Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Form 10-Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to certain events that may affect our future performance. 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, or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. 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 in this Quarterly Report on Form 10-Q under the caption Risk Factors and in our other securities filings with the SEC.
In particular (but not by way of limitation), the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in the forward-looking statements:
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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; |
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continued uncertainty in the United States, or U.S., home sale market, including both the volume and pricing of sales, due to adverse economic conditions or otherwise; |
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fluctuations in interest rates and levels of mortgage originations and prepayments; |
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risks related to our acquisitions, including our ability to successfully integrate the large volume of assets and businesses and platforms we have recently acquired into our business; |
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risks related to the financing incurred in connection with our acquisitions, including our ability to achieve cash flows sufficient to service our debt and otherwise comply with the covenants of our debt; |
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delay or failure to realize the anticipated benefits we expect to realize from our acquisitions; |
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our ability to successfully operate the loans originations platforms that we recently acquired, which are significantly larger than our prior originations business; |
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the occurrence of anticipated growth of the specialty servicing sector and the reverse mortgage sector; |
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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; |
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our ability to raise capital to make suitable investments to offset run-off in a number of the portfolios we service and to grow our business; |
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our ability to implement strategic initiatives, particularly as they relate to our ability to develop new business, including the development of our originations business, implementation of delinquency flow programs and the receipt of new business, which are both subject to customer demand and approval; |
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our ability to earn anticipated levels of performance and incentive fees on serviced business; |
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the availability of suitable investments for any capital that we are able to raise and risks associated with any such investments we may pursue; |
43
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changes in federal, state and local policies, laws and regulations affecting our business, including mortgage and reverse mortgage financing or servicing, and changes to our licensing requirements; |
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changes caused by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, including regulations required by the Dodd-Frank Act that have been promulgated or have yet to be finalized; |
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increased scrutiny and potential enforcement actions by the Consumer Financial Protection Bureau, or the CFPB; |
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risks related to the transfer of large volumes of loans; |
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uncertainties related to regulatory pressures on large banks related to their mortgage servicing, as well as regulatory pressure on the rest of the mortgage servicing sector, including increased performance standards and reporting obligations and increase to the cost of doing business as a result thereof; |
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changes in regard to the rights and obligations of property owners, mortgagors and tenants; |
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our ability to remain qualified as a government-sponsored entity, or GSE, approved servicer or component servicer, including the ability to continue to comply with the GSEs respective servicing guidelines; |
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changes to the Home Affordable Modification Program, or HAMP, the Home Affordable Refinance Program, or HARP, or other similar government programs; |
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loss of our loan servicing, loan origination and collection agency licenses; |
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uncertainty relating to the status of GSEs; |
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uncertainty related to inquiries from government agencies into past servicing, foreclosure, loss mitigation, and lender-placed insurance practices; |
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uncertainties related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs, delays or moratoria in the future or claims pertaining to past practices; |
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unexpected losses resulting from pending, threatened or unforeseen litigation or other third-party claims against the Company; |
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the effects of any changes to the servicing compensation structure for mortgage servicers pursuant to programs of GSEs or various regulatory authorities; |
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changes to our insurance agency business, including increased scrutiny by government regulators and GSEs on lender-placed insurance practices; |
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the effect of our risk management strategies, including the management and protection of the personal and private information of our customers and mortgage holders and the protection of our information systems from third-party interference (cyber security); |
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changes in accounting standards; |
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the review of our periodic reports (including, but not limited to, this Quarterly Report on Form 10-Q and other periodic reports filed with the SEC) by the staff of the SEC could result in an amendment to our financial information or other disclosures; |
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the ineffectiveness of our disclosure controls and procedures due to a material weakness in internal control over financial reporting described in our Annual Report on Form 10-K for the year ended December 31, 2012 and the potential that the Company may be unable to effectively implement appropriate remedial measures in a timely manner; |
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the continuation of a material weakness or the discovery of additional material weaknesses in our internal control over financial reporting and any delay in the implementation of remedial measures; |
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our continued listing on the New York Stock Exchange, or the NYSE; |
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the ability or willingness of Walter Energy, Inc., our prior parent, and other counterparties to satisfy material obligations under agreements with us; and |
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other presently unidentified factors. |
All forward-looking statements set forth herein are qualified by these cautionary statements and are made only as of the date hereof. We undertake no obligation to update or revise the information contained herein, including any forward-looking statements whether as a result of new information, subsequent events or circumstances, or otherwise, unless otherwise required by law.
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The Company
Walter Investment Management Corp. and its subsidiaries, which may also be referred to as Walter Investment, the Company, we, our and us, is a full-service, fee-based provider to the residential mortgage industry. Our primary business provides value-added specialty servicing to the forward residential loan market across several product types including agency, non-agency, first and second lien and manufactured housing loans. Our specialty servicing business focuses on credit-sensitive residential mortgages. In addition to the forward loan servicing business, we have a leading franchise in the reverse mortgage sector which provides a full suite of services including loan servicing, loan origination, asset management and related technology. We operate several other related businesses which include a mortgage portfolio of credit-challenged, non-conforming residential loans, an insurance agency serving residential loan customers, and with the acquisition of the ResCap originations business in 2013, a fully integrated loan origination platform that primarily focuses on retention and recapture activities (Consumer Direct channel) for our servicing portfolio but also maintains sizable operations in the Retail and Correspondent lending channels. We operate throughout the United States, or U.S.
Market Opportunity and Strategy
Due to increased delinquencies and foreclosures during the recent recession, traditional large owners and servicers of residential mortgage assets, such as GSEs, large banks and securitization trusts experienced increased servicing volume and complexity, often exceeding in-house capacity or capabilities. These traditional servicers have been unable to effectively service increased balances of delinquent loans, resulting in the need to service troubled first and second lien mortgage assets through third-party specialized servicers offering high-touch servicing strategies. We believe that lessons learned in the economic downturn are leading to a secular shift in the market as credit risk owners and other key constituents, such as monoline insurers, regulators and rating agencies, demand permanent, specialized servicing for higher risk loans. Our businesses have a long history of providing borrower-centric, high-touch servicing and are well positioned to continue to benefit from this secular shift.
As important as providing best-in-class service, however, is the ability to meet and quickly adapt to the ever changing landscape of regulatory requirements imposed by numerous federal, state and local authorities that oversee our business. We have a demonstrated history of being compliant with these regulations, which we believe provides us with an advantage over our competitors.
In addition, we seek to leverage our core servicing business and customer base to provide complementary services. These complementary business lines include:
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Asset Receivables Management: performs collections of delinquent balances on loans serviced for third parties after they have been charged off. |
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Insurance Agency: acts as a nationwide agent of primarily property and casualty insurance products for both lender-placed and voluntary insurance coverage. |
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Loan Originations: facilitates refinancings as a retention and recapture solution for loans we service. |
We are currently actively pursuing a number of opportunities to grow our business through multiple channels such as adding subservicing contracts to our portfolios through: one time transfers and flow agreements; the acquisition of mortgage servicing rights, or MSRs, and servicing platforms; and acquisitions of businesses that are complementary to our historical platform (e.g., reverse mortgages). We are also pursuing opportunities to grow our originations business. We regularly explore such opportunities in the ordinary course of our business, both alone and with potential joint venture partners, and believe there are significant opportunities to acquire such assets. We refer to opportunities or potential opportunities in the market for products, platforms and businesses within our strategic profile that we have identified as targets as our pipeline. Our pipeline of potential transactions includes MSR acquisitions, subservicing contracts, assets and stock purchases, and joint venture arrangements, including those that involve assets and platforms that are originating new loans and MSRs as well as other complimentary activities. In the event we are successful in any such activities, it is likely that we will assume certain liabilities in connection with the acquisitions which could reduce the purchase price based on our valuation of such liabilities (which valuation is subject to our judgment and could differ from actual experience).
Executive Summary
We reported net income of $27.7 million, or $0.73 per diluted share, for the three months ended March 31, 2013 as compared to $5.1 million, or $0.17 per diluted share, for the three months ended March 31, 2012. The increase in net income of $22.6 million during the three months ended March 31, 2013 as compared to the same period of 2012 was due primarily to the acquisitions of Reverse Mortgage Solutions LLC, or RMS, and Security One Lending, or S1L, during the fourth quarter of 2012 and the acquisition of the ResCap net assets during the first quarter of 2013 described below.
We recognized core earnings before income taxes of $92.6 million for the three months ended March 31, 2013 as compared to $33.2 million for the three months ended March 31, 2012. The increase in core earnings before income taxes of $59.4 million was primarily attributable to an increase in total revenues from our Servicing, Reverse Mortgage and Originations segments of $52.1 million, $14.1 million and $75.4 million, respectively, and $36.8 million in net fair value gains from our Reverse Mortgage segment, offset by increases in total salaries and benefits excluding share-based compensation expense and general and administrative expenses of $52.5 million and $40.5 million, respectively, in these three segments. Salaries and benefits and general and administrative expenses increased as a result of an increase in employees in conjunction with acquisitions that took place in the fourth quarter of 2012 and the first quarter of 2013. Core earnings before income taxes when compared to our net income before income taxes reflects the following key adjustments: (1) step-up depreciation and amortization, or depreciation and amortization expense related to the increase in basis recognized on assets acquired through business combinations, (2) step-up amortization of sub-servicing contracts, (3) share-based compensation expense, (4) transaction and integration-related costs, (5) non-cash interest expense and, (6) net non-cash fair value adjustments. For a reconciliation of our consolidated income before income taxes under accounting principles generally accepted in the U.S., or GAAP, to our core earnings before income taxes, refer to the Business Segment Results section.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization, or Adjusted EBITDA, was $140.0 million for the three months ended March 31, 2013 as compared to $59.1 million for the three months ended March 31, 2012. The increase in Adjusted EBITDA of $80.9 million is primarily attributable to the increases in revenues less salaries and benefits and general and administrative expenses above of $85.4 million related to our Servicing, Reverse Mortgage and Originations segments. Adjusted EBITDA when compared to our consolidated income before income taxes reflects the adjustments noted above for core earnings before income taxes as well as the following key adjustments: (1) depreciation and amortization expense excluding step-up depreciation and amortization noted as a core earnings adjustment above, (2) interest expense on our corporate debt, (3) amortization and fair value adjustments of servicing rights, and (4) non-cash interest income. For a reconciliation of our consolidated income before income taxes under GAAP to our Adjusted EBIDTA, refer to the Business Segment Results section.
We used $209.6 million in cash flow from operating activities during the three months ended March 31, 2013 and finished the quarter with $624.7 million in cash and cash equivalents. Our operating cash flows decreased primarily as a result of the ramp up in our originations business which resulted in $433.0 million used in originations and acquisitions of residential loans offset by $227.7 million in proceeds from sales of residential loans. We also had $124.7 million in funds available under our secured revolving credit facility at March 31, 2013.
45
We manage our Company in six primary reportable segments: Servicing; Assets Receivables Management, or ARM; Insurance; Loans and Residuals; Reverse Mortgage; and Originations. Refer to the Business Segment Results section for a presentation and discussion of our financial results by business segment. A description of the business conducted by each of these segments and related key financial highlights are provided below:
Servicing Our Servicing business segment consists of operations that perform servicing for third-party investors in forward residential mortgages, manufactured housing and consumer installment loans and contracts, as well as for the Loans and Residuals segment and for the Non-Residual Trusts which are reported in the Other segment. The Non-Residual Trusts are consolidated variable interest entities, or VIEs. Our Servicing segment recognized $121.9 million in contractual servicing fees, $20.4 million in incentive and performance fees and $14.4 million in ancillary and other fees for the three months ended March 31, 2013. Servicing revenue and fees was offset by $10.4 million in amortization of servicing rights and $7.0 million in fair value losses related to servicing rights carried at fair value for the three months ended March 31, 2013.
ARM Our ARM business segment performs collections of post charge-off deficiency balances on behalf of securitization trusts and third-party asset owners. Asset recovery revenue was $10.1 million for the three months ended March 31, 2013.
Insurance Our Insurance business segment provides voluntary and lender-placed hazard insurance for residential loans, as well as other ancillary products, through our insurance agency for a commission. Net written premiums were $47.3 million for the three months ended March 31, 2013, which included lender-placed activity of $29.5 million and voluntary activity of $17.8 million for the three months ended March 31, 2013. Total insurance revenue was $17.5 million for the three months ended March 31, 2013.
Loans and Residuals Our Loans and Residuals business segment consists of the assets and liabilities of the Residual Trusts, as well as our unencumbered residential loan portfolio and real estate owned, all of which are associated with forward loans. The Residual Trusts are consolidated VIEs. Our net interest margin was 3.89% for the three months ended March 31, 2013, up 5 basis points from the three months ended March 31, 2012 due to several factors including, payoff of lower yielding loans and decreases in delinquency rates. Total delinquent loans have decreased to 6.02% at March 31, 2013 from 7.01% at December 31, 2012. The number of real estate owned properties has declined to 788 units at March 31, 2013, a reduction of 54 units from 842 units at December 31, 2012.
Reverse Mortgage Our Reverse Mortgage business segment, which was formed in the fourth quarter of 2012 as a result of the acquisitions of RMS and S1L includes purchases and originations, aggregation and securitization activities and operations that perform servicing for third-party investors in reverse mortgage loans and other ancillary services for the reverse mortgage market. The Reverse Mortgage business also includes a mortgage portfolio of Home Equity Conversion Mortgages, or HECM, reverse mortgages. Our Reverse Mortgage business segment serviced 42,000 third party accounts with an unpaid principal balance of $7.4 billion at March 31, 2013 and recognized $6.7 million in servicing revenue, $4.4 million in net gains on sales of loans, as well as $36.8 million in net fair value gains on HECM reverse mortgage loans and the Home Equity Conversion Mortgage-backed Securities, or HMBS, related obligations, for the three months ended March 31, 2013.
Originations Our Originations business segment, consists of operations that originate and purchase forward loans that are sold to third parties with servicing rights generally retained. The originations segment was previously included in the Other segment however is now reportable with the acquisition of the ResCap net assets. Activity prior to the acquisition of the ResCap net assets primarily consisted of brokerage operations whereby the Originations segment received origination commissions. The Originations segment funded $375.8 million in originations and recognized $74.1 million in net gains on sales of loans during the three months ended March 31, 2013.
Acquisitions
On January 31, 2013, we acquired the assets and assumed the liabilities relating to all of ResCaps Federal National Mortgage Association, or Fannie Mae, MSRs and related servicer advances, and ResCaps mortgage originations and capital markets platforms, or the ResCap net assets, for an adjusted purchase price of $487.2 million.
On January 31, 2013, we purchased Fannie Mae MSRs, including related servicer advances, from Bank of America, N.A., or the BOA asset purchase, for total consideration of $495.7 million. At closing, the Fannie Mae MSRs were associated with loans totaling $84.4 billion in unpaid principal balance.
On March 1, 2013, we purchased the residential mortgage servicing platform, including certain servicing related technology assets, of MetLife Bank, N.A. located in Irving, Texas for total consideration of $1.0 million.
On March 1, 2013, we purchased the correspondent lending and wholesale broker businesses of Ally Bank, or the Ally Bank net assets, for total consideration of $0.1 million.
Financing Transactions
On January 31, 2013, we entered into the Amendment No. 1, Incremental Amendment and Joinder Agreement, or the Incremental Amendment, to our Term Loan. The Incremental Amendment, among other things, increased certain financial ratios which govern our ability to incur additional indebtedness and provided for a secured term loan, or the Incremental Loan, in an amount of $825.0 million, which was borrowed in its entirety on January 31, 2013 and was used to fund the ResCap net asset acquisition and the BOA asset purchase.
On March 14, 2013, we entered into Amendment No. 2, or the Credit Agreement Amendment, to our Term Loan. The Credit Agreement Amendment changes certain financial definitions in the Term Loan to clarify that net cash receipts in connection with the issuance of reverse mortgage securities and the servicing of reverse mortgages count towards pro-forma adjusted earnings before interest, taxes, depreciation and amortization, or Pro-Forma Adjusted EBITDA and excess cash flow for purposes of the Term Loan.
In February and March 2013, we entered into four additional master repurchase agreements with an aggregate capacity amount of $1.6 billion. These facilities will be primarily used to fund the origination of mortgage loans for the recently acquired ResCap originations business.
46
Results of Operations Comparison of Consolidated Results of Operations for the Three Months Ended March 31, 2013 and 2012
We recognized net income of $27.7 million and $5.1 million for the three months ended March 31, 2013 and 2012, respectively. A summary of our consolidated results of operations is provided below (in thousands):
For the Three Months
Ended March 31, |
||||||||||||
2013 | 2012 | Variance | ||||||||||
Revenues |
||||||||||||
Net servicing revenue and fees |
$ | 151,080 | $ | 89,733 | $ | 61,347 | ||||||
Net gains on sales of loans |
78,445 | | 78,445 | |||||||||
Interest income on loans |
36,898 | 39,280 | (2,382 | ) | ||||||||
Insurance revenue |
17,534 | 19,962 | (2,428 | ) | ||||||||
Other revenues |
7,855 | 3,866 | 3,989 | |||||||||
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|
|
|
|
|||||||
Total revenues |
291,812 | 152,841 | 138,971 | |||||||||
Expenses |
||||||||||||
Salaries and benefits |
106,733 | 57,403 | 49,330 | |||||||||
General and administrative |
87,440 | 29,029 | 58,411 | |||||||||
Interest expense |
54,142 | 45,838 | 8,304 | |||||||||
Depreciation and amortization |
30,404 | 12,019 | 18,385 | |||||||||
Provision for loan losses |
1,726 | 1,569 | 157 | |||||||||
Other expenses, net |
370 | 3,486 | (3,116 | ) | ||||||||
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|
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Total expenses |
280,815 | 149,344 | 131,471 | |||||||||
Other gains (losses) |
||||||||||||
Net fair value gains on reverse loans and related HMBS obligations |
36,788 | | 36,788 | |||||||||
Other net fair value gains (losses) |
(1,261 | ) | 4,763 | (6,024 | ) | |||||||
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Total other gains (losses) |
35,527 | 4,763 | 30,764 | |||||||||
Income before income taxes |
46,524 | 8,260 | 38,264 | |||||||||
Income tax expense |
18,775 | 3,125 | 15,650 | |||||||||
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Net income |
$ | 27,749 | $ | 5,135 | $ | 22,614 | ||||||
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Net Servicing Revenue and Fees
We recognize servicing revenue and fees on servicing performed for third parties. This revenue includes contractual fees earned on the serviced loans, incentive and performance fees earned based on the performance of certain loans or loan portfolios serviced by us and loan modification fees. Servicing revenue and fees also includes asset recovery income, which is included in incentive and performance fees, and ancillary fees such as late fees and prepayment fees. Servicing revenue earned on loans held by consolidated VIEs, which consists of both the Residual and Non-Residual Trusts, is eliminated in consolidation. Servicing revenue and fees which consists of the revenues and fees discussed above are adjusted for the amortization of servicing rights carried at amortized cost and the changes in fair value of servicing rights carried at fair value. Net servicing revenue and fees increased $61.3 million for the three months ended March 31, 2013 as compared to the same period in the prior year due to growth in the average servicing portfolio of 45% or 444,000 accounts, resulting primarily from the ResCap net assets acquisition and the BOA asset purchase. The decline in amortization of servicing rights carried at amortized cost of $1.6 million results primarily from the run-off of the related servicing portfolio. The net fair value losses on servicing rights carried at fair value relates to the newly established class of servicing rights which include the servicing rights relating to the ResCap net assets and the BOA asset purchase. A summary of net servicing revenue and fees is provided below (in thousands):
For the Three Months | ||||||||||||
Ended March 31, | ||||||||||||
2013 | 2012 | Variance | ||||||||||
Servicing fees |
$ | 119,872 | $ | 70,535 | $ | 49,337 | ||||||
Incentive and performance fees |
30,325 | 23,016 | 7,309 | |||||||||
Ancillary and other fees |
19,211 | 9,097 | 10,114 | |||||||||
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Servicing revenue and fees |
169,408 | 102,648 | 66,760 | |||||||||
Amortization of servicing rights |
(11,324 | ) | (12,915 | ) | 1,591 | |||||||
Change in fair value of servicing rights |
(7,004 | ) | | (7,004 | ) | |||||||
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Net servicing revenue and fees |
$ | 151,080 | $ | 89,733 | $ | 61,347 | ||||||
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Included in incentive and performance fees for the three months ended March 31, 2013 and 2012 are incentive fees of $7.3 million and $9.5 million, respectively, that we received for exceeding pre-defined performance hurdles in servicing various loan portfolios. These fees may not recur on a regular basis, as they are earned based on the performance of underlying loan pools as compared to comparable pools serviced by others, as well as the achievement of certain performance hurdles over time, which may not be achieved on a regular schedule.
47
Third-Party Servicing Portfolio
Forward Mortgage Servicing
Provided below are summaries of the activity in our third-party servicing portfolio for our forward mortgage business, which includes accounts serviced for third parties for which we earn servicing revenue and, thus, excludes residential loans and real estate owned that have been recognized on our consolidated balance sheets (in thousands, except number of accounts):
Reverse Mortgage Servicing
Provided below is a summary of the activity in our third-party servicing portfolio for our reverse mortgage business, which includes accounts serviced for third parties for which we earn servicing revenue and, thus, excludes residential loans and real estate owned that have been recognized on our consolidated balance sheets (in thousands, except number of accounts):
For the Three Months Ended March 31, 2013 | ||||||||||||||||||||
Servicing | Sub-Servicing | Sub-Servicing | ||||||||||||||||||
Number | Rights | Rights | Rights | |||||||||||||||||
of Accounts | Capitalized | Capitalized | Not Capitalized | Total | ||||||||||||||||
Unpaid principal balance of accounts associated with reverse mortgages serviced for third parties |
||||||||||||||||||||
Beginning balance |
42,855 | $ | 3,032,569 | $ | 3,023,614 | $ | 1,398,123 | $ | 7,454,306 | |||||||||||
New business added |
113 | 4,770 | | 15,896 | 20,666 | |||||||||||||||
Other additions |
| 31,742 | 52,862 | 22,570 | 107,174 | |||||||||||||||
Payoffs, sales and curtailments |
(899 | ) | (79,265 | ) | (83,627 | ) | (39,329 | ) | (202,221 | ) | ||||||||||
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Ending balance |
42,069 | $ | 2,989,816 | $ | 2,992,849 | $ | 1,397,260 | $ | 7,379,925 | |||||||||||
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March 31, 2013 | ||||||||||||||||||||
Ending number of accounts associated with reverse mortgages serviced for third parties |
19,528 | 18,606 | 3,935 | 42,069 | ||||||||||||||||
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48
Net Gains on Sales of Loans
Net gains on sales of loans consists of gains and losses on sales of loans held for sale, fair value adjustments on loans held for sale and related derivatives, and a provision for the repurchase of loans. Net gains on sales of loans were $78.4 million for the three months ended March 31, 2013 due primarily to the acquisition of the ResCap net assets and as a result, the growth of our originations business.
Interest Income on Loans
We earn interest income on the residential loans held in the Residual Trusts and on our unencumbered forward residential loans, both of which are accounted for at amortized cost. Interest income decreased $2.4 million for the three months ended March 31, 2013 as compared to the same period in 2012 primarily due to a decline in the residential loan balance. The annualized portfolio disappearance rate, consisting of contractual payments, voluntary prepayments and defaults, was 7.03% for the three months ended March 31, 2013. Provided below is a summary of the average balances of residential loans carried at amortized cost and the related interest income and average yields (in thousands, except average yield data):
For the Three Months
Ended March 31, |
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2013 | 2012 | Variance | ||||||||||
Residential loans at amortized cost |
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Interest income |
$ | 36,898 | $ | 39,280 | $ | (2,382 | ) | |||||
Average balance |
1,499,816 | 1,594,283 | (94,467 | ) | ||||||||
Average yield |
9.84 | % | 9.86 | % | -0.02 | % |
Insurance Revenue
Insurance revenue consists of commission income and fees earned on voluntary and lender-placed insurance policies and other products sold to customers, net of estimated future policy cancellations, as well as premium revenue from captive reinsurers. Commission income is based on a percentage of the price of the insurance policy sold, which varies based on the type of product. Insurance revenue decreased $2.4 million for the three months ended March 31, 2013 as compared to the same period in 2012 due to a decrease in total outstanding policies written as well as a decrease in certain commission rates effective January 1, 2013.
Other Revenues
Other revenues consist primarily of management fee income, origination fee income and accretion of certain acquisition-related fair value adjustments. Other revenues increased $4.0 million for the three months ended March 31, 2013 as compared to the same period in 2012 primarily due to origination fee income relating to S1L which was acquired in the fourth quarter of 2012 and the ResCap net assets acquisition in the first quarter of 2013.
Salaries and Benefits
Salaries and benefits expense increased $49.3 million for the three months ended March 31, 2013 as compared to the same period in 2012 due to our recent acquisitions, which resulted in 2,900 additional full-time-equivalent employees, as well as the hiring of additional employees to support the growth of our business.
General and Administrative
General and administrative expenses increased $58.4 million for the three months ended March 31, 2013 as compared to the same period in 2012 due to transaction expenses of $10.9 million related to the Incremental Amendment to our Term Loan and the acquisition of the ResCap net assets and the BOA asset purchase; higher servicing related legal expenses; due diligence expenses to support corporate business development activities; and higher expenses resulting from overall growth of our business.
Interest Expense
We incur interest expense on our corporate debt, including convertible notes, on the master repurchase agreements, on the mortgage-backed debt issued by the Residual Trusts, and on our servicing advance liabilities, all of which are accounted for at amortized cost. Interest expense increased $8.3 million for the three months ended March 31, 2013 as compared to the same period in 2012 due primarily to an increase in our average balances on our corporate debt resulting from the refinancing of our first lien term loan with our $700 million Term Loan during the fourth quarter of 2012 and our Incremental Loan of $825.0 million which was borrowed in its entirety during the first quarter of 2013. The increase in average balances on our corporate debt was offset by decreases in average rates during the three months ended March 31, 2013 as compared to the same period in 2012 as a result of the corporate debt activity discussed above as well as the termination of our second lien term loan and issuance of convertible notes. All of these financing transactions resulted in a lower cost of debt. In addition, interest expense increased as a result of increased average balances on the master repurchase agreements and servicing advance liabilities due to our growing servicing and originations businesses.
49
Provided below is a summary of the average balances of our corporate debt, the master repurchase agreements, the mortgage-backed debt of the Residual Trusts, and our servicing advance liabilities, as well as the related interest expense and average rates (in thousands, except average rate data):
For the Three Months
Ended March 31, |
||||||||||||
2013 | 2012 | Variance | ||||||||||
Corporate debt |
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Interest expense |
$ | 25,218 | $ | 20,428 | $ | 4,790 | ||||||
Average balance |
1,438,195 | 732,078 | 706,117 | |||||||||
Average rate |
7.01 | % | 11.16 | % | -4.15 | % | ||||||
Master repurchase agreements |
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Interest expense |
$ | 4,218 | $ | | $ | 4,218 | ||||||
Average balance |
385,820 | | 385,820 | |||||||||
Average rate |
4.37 | % | | 4.37 | % | |||||||
Mortgage-backed debt at amortized cost |
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Interest expense |
$ | 22,296 | $ | 23,978 | $ | (1,682 | ) | |||||
Average balance |
1,301,650 | 1,400,749 | (99,099 | ) | ||||||||
Average rate |
6.85 | % | 6.85 | % | | |||||||
Servicing advance liabilities |
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Interest expense |
$ | 2,410 | $ | 1,432 | $ | 978 | ||||||
Average balance |
212,963 | 107,515 | 105,448 | |||||||||
Average rate |
4.53 | % | 5.33 | % | -0.80 | % |
Depreciation and Amortization
Depreciation and amortization expense consists of amortization of intangible assets other than goodwill, as well as depreciation and amortization recognized on premises and equipment, which includes amortization of internally-developed software. Depreciation and amortization increased $18.4 million for the three months ended March 31, 2013 as compared to the same period in 2012 primarily as a result of business combinations and servicing asset acquisitions in the fourth quarter of 2012 and the first quarter of 2013. A summary of depreciation and amortization expense is provided below (in thousands):
For the Three
Months
Ended March 31, |
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2013 | 2012 | Variance | ||||||||||
Depreciation and amortization of: |
||||||||||||
Intangible assets |
$ | 21,974 | $ | 6,152 | $ | 15,822 | ||||||
Premises and equipment |
8,430 | 5,867 | 2,563 | |||||||||
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Total depreciation and amortization |
$ | 30,404 | $ | 12,019 | $ | 18,385 | ||||||
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Provision for Loan Losses
We recognize a provision for loan losses for our residential loan portfolio accounted for at amortized cost. The provision for loan losses remained relatively flat for the three months ended March 31, 2013 as compared to the same period in 2012, due to severity rates and defaults which are comparable in the two periods.
Other Expenses, Net
Other expenses, net consist primarily of real estate owned expenses, net, which includes lower of cost or fair value adjustments and holding costs, and claims expense. Other expenses, net decreased $3.1 million for the three months ended March 31, 2013 as compared to the same period in 2012 due primarily to lower real estate owned expenses, net of $2.8 million and lower claims expense of $0.2 million. The decline in real estate owned expenses, net resulted from lower real estate owned holding costs due to fewer number of average real estate owned units during the current period as compared to the same period in the prior year and favorable trends in fair value adjustments required for real estate owned properties that have shorter holding periods. The decline in claims expense was due primarily to our withdrawal from property reinsurance operations beginning in the first quarter of 2012.
Net Fair Value Gains on Reverse Loans and HMBS Related Obligations
We recognized net fair value gains of $36.8 million on reverse loans and HMBS obligations which are accounted for at fair value during the three months ended March 31, 2013 which resulted from the interest rate spread between the loans and related obligations, interest income on loans not securitized, gains on loans originated, gains on tail pools issued, and changes in market pricing for HECM loans and HMBS securities.
50
Other Net Fair Value Gains (Losses)
We recognized other net fair value losses on assets and liabilities accounted for at fair value of $1.3 million for the three months ended March 31, 2013, which included a net gain of $2.9 million on the assets and liabilities of the Non-Residual Trusts and a loss of $3.7 million associated with the increase in the estimated liability for the S1L contingent earn-out payment. Higher than expected cash flows and a favorable spread on contractual interest income net of contractual interest expense contributed to the net fair value gain on the assets and liabilities of the Non-Residual Trusts.
We recognized net fair value gains on assets and liabilities accounted for at fair value of $4.8 million for the three months ended March 31, 2012, which included a net fair value gain of $5.8 million on the assets and liabilities of the Non-Residual Trusts offset by a $0.4 million loss on derivatives associated with our corporate debt. Lower discount rates resulting from changes in market rates impacted the net fair values of the assets and liabilities of the Non-Residual Trusts.
Income Tax Expense
Income tax expense increased $15.7 million for the three months ended March 31, 2013 as compared to the same period in 2012, due primarily to the increase in our income before income taxes for the three months ended March 31, 2013 as compared to the same period in 2012. The effective tax rate increased from 37.8% during the three months ended March 31, 2012 to 40.4% during the same period in 2013 primarily as a result of changes in corporate operations during the current quarter driven by our recent business and asset acquisitions. We now have a substantial presence in new state jurisdictions which have higher state tax rates.
Financial Condition Comparison of Consolidated Financial Condition at March 31, 2013 to December 31, 2012
The acquisitions of certain assets during the three months ended March 31, 2013 had a significant impact on our consolidated balance sheet since December 31, 2012. Our total assets and liabilities increased $2.6 billion during the quarter to $13.6 billion and $12.6 billion, respectively, at March 31, 2013. Provided below is a summary of the consolidated balance sheet as of March 31, 2013 as compared to December 31, 2012 (in thousands) and a discussion of the most significant variances in our assets, liabilities and stockholders equity for the current period.
March 31,
2013 |
December 31,
2012 |
Variance | ||||||||||
Assets |
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Cash and cash equivalents |
$ | 624,725 | $ | 442,054 | $ | 182,671 | ||||||
Restricted cash and cash equivalents |
731,996 | 653,338 | 78,658 | |||||||||
Residential loans, net |
9,481,792 | 8,200,532 | 1,281,260 | |||||||||
Receivables, net |
260,450 | 259,009 | 1,441 | |||||||||
Servicer and protective advances, net |
364,192 | 173,047 | 191,145 | |||||||||
Servicing rights and related intangible assets, net |
964,726 | 238,791 | 725,935 | |||||||||
Goodwill |
644,645 | 580,378 | 64,267 | |||||||||
Intangible assets, net |
145,789 | 148,413 | (2,624 | ) | ||||||||
Premises and equipment, net |
153,073 | 137,785 | 15,288 | |||||||||
Other assets |
199,714 | 144,830 | 54,884 | |||||||||
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Total assets |
$ | 13,571,102 | $ | 10,978,177 | $ | 2,592,925 | ||||||
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Liabilities and stockholders equity |
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Payables and accrued liabilities |
$ | 574,673 | $ | 260,610 | $ | 314,063 | ||||||
Servicer payables |
665,990 | 587,929 | 78,061 | |||||||||
Servicing advance liabilities |
242,943 | 100,164 | 142,779 | |||||||||
Debt |
2,224,185 | 1,146,249 | 1,077,936 | |||||||||
Mortgage-backed debt |
2,026,291 | 2,072,728 | (46,437 | ) | ||||||||
HMBS related obligations |
6,887,583 | 5,874,552 | 1,013,031 | |||||||||
Deferred tax liability |
23,750 | 41,017 | (17,267 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
12,645,415 | 10,083,249 | 2,562,166 | |||||||||
Stockholders equity |
925,687 | 894,928 | 30,759 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities and stockholders equity |
$ | 13,571,102 | $ | 10,978,177 | $ | 2,592,925 | ||||||
|
|
|
|
|
|
Residential loans, net increased $1.3 billion primarily as a result of $1.1 billion in reverse mortgage loans originated and purchased during the first quarter of 2013. The reverse loans are offset by HMBS related obligations once securitized, as the obligations represent proceeds received from the transfer of HMBS securities that are accounted for as a secured borrowing.
Servicing rights and related intangible assets, net increased $725.9 million as a result of the acquisition of the ResCap net assets and the BOA asset purchase during the first quarter of 2013.
Debt increased $1.1 billion as a result of the Incremental Loan of $825.0 million which was borrowed in its entirety during the first quarter of 2013 and a net increase of $273.9 million associated with borrowings on our master repurchase agreements.
HMBS related obligations increased by $1.0 billion as a result of $1.0 billion in proceeds from the transfer of HMBS securities during the first quarter of 2013.
51
Business Segment Results
We manage our Company in six primary reportable segments: Servicing, ARM, Insurance, Loans and Residuals, Reverse Mortgage and Originations. We measure the performance of our business segments through the following measures: income (loss) before income taxes, core earnings (loss) before income taxes and Adjusted EBITDA. Management considers core earnings (loss) before income taxes and Adjusted EBITDA, both non-GAAP financial measures, to be important in the evaluation of the Company as a whole and of our business segments and for allocating capital resources to our segments. Core earnings (loss) before income taxes and Adjusted EBITDA are utilized to assess the underlying operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance.
In calculating income (loss) before income taxes, we allocate indirect expenses to our business segments and include these expenses in other expenses, net. Indirect expenses are allocated to our Insurance segment based on the ratio of the number of policies to the number of accounts serviced and to our ARM, Reverse Mortgage, Originations and certain non-reportable segments based on headcount. All remaining indirect expenses are allocated to our Servicing segment. We do not allocate indirect expenses to our Loans and Residuals segment.
We reconcile our income (loss) before income taxes for our business segments to our GAAP consolidated income (loss) before taxes and report the financial results of our Non-Residual Trusts, other non-reportable operating segments and certain corporate expenses and amounts to eliminate intercompany transactions between segments as other activity. For a reconciliation of our income (loss) before income taxes for our business segments to our GAAP consolidated income (loss) before income taxes, refer to Note 20 in the Notes to Consolidated Financial Statements.
Core earnings before income taxes consists of income before income taxes adjusted primarily for depreciation and amortization of the increased basis in assets acquired with business combinations, or step-up depreciation and amortization; non-cash expenses including share-based compensation and amortization of debt issuance costs; certain transaction charges related to our acquisitions and integration expenses to combine our businesses and overhead functions; and the net non-cash fair value adjustments related to servicing rights at fair value, RMS and the Non-Residual Trusts. For a description of Adjusted EBITDA, refer to the Liquidity and Capital Resources section.
Reconciliation of GAAP Consolidated Income (Loss) Before Income Taxes to Core Earnings (Loss) Before Income Taxes and Adjusted EBITDA (in thousands)
For the Three Months Ended March 31, 2013 | ||||||||||||||||||||||||||||||||
Servicing |
Asset
Receivables Management |
Insurance |
Loans and
Residuals |
Reverse
Mortgage |
Originations | Other |
Total
Consolidated |
|||||||||||||||||||||||||
Income (loss) before income taxes |
$ | 36,100 | $ | 2,368 | $ | 7,569 | $ | 8,613 | $ | 12,089 | $ | 20,338 | $ | (40,553 | ) | $ | 46,524 | |||||||||||||||
Core Earnings adjustments |
||||||||||||||||||||||||||||||||
Step-up depreciation and amortization |
6,189 | 1,473 | 1,464 | | 2,451 | 1,277 | 6 | 12,860 | ||||||||||||||||||||||||
Step-up amortization of sub-servicing contracts (MSRs) |
8,110 | | | | | | | 8,110 | ||||||||||||||||||||||||
Share-based compensation expense |
1,497 | 138 | 339 | | 287 | 268 | 161 | 2,690 | ||||||||||||||||||||||||
Transaction and integration costs |
| | | | | | 16,327 | 16,327 | ||||||||||||||||||||||||
Non-cash fair value adjustments for reverse mortgages |
| | | | 3,536 | | | 3,536 | ||||||||||||||||||||||||
Non-cash interest expense |
220 | | 19 | 677 | | | 2,087 | 3,003 | ||||||||||||||||||||||||
Net impact of Non-Residual Trusts |
| | | | | | (479 | ) | (479 | ) | ||||||||||||||||||||||
Other |
| | | | | | 11 | 11 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total adjustments |
16,016 | 1,611 | 1,822 | 677 | 6,274 | 1,545 | 18,113 | 46,058 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Core earnings (loss) before income taxes |
52,116 | 3,979 | 9,391 | 9,290 | 18,363 | 21,883 | (22,440 | ) | 92,582 | |||||||||||||||||||||||
Adjusted EBITDA adjustments |
||||||||||||||||||||||||||||||||
Interest expense on debt |
| | | | 17 | | 23,114 | 23,131 | ||||||||||||||||||||||||
Non-cash interest income |
(461 | ) | | (7 | ) | (3,949 | ) | (151 | ) | | | (4,568 | ) | |||||||||||||||||||
Depreciation and amortization |
2,668 | 283 | | | 272 | 14,321 | | 17,544 | ||||||||||||||||||||||||
Amortization and fair value adjustments of servicing rights |
9,300 | | | | 918 | | | 10,218 | ||||||||||||||||||||||||
Provision for loan losses |
| | | 1,726 | | | | 1,726 | ||||||||||||||||||||||||
Residual Trusts cash flows |
| | | 400 | | | | 400 | ||||||||||||||||||||||||
Other |
443 | 8 | 18 | (1,692 | ) | 37 | 41 | 104 | (1,041 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total adjustments |
11,950 | 291 | 11 | (3,515 | ) | 1,093 | 14,362 | 23,218 | 47,410 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Adjusted EBITDA |
$ | 64,066 | $ | 4,270 | $ | 9,402 | $ | 5,775 | $ | 19,456 | $ | 36,245 | $ | 778 | $ | 139,992 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
For the Three Months Ended March 31, 2012 | ||||||||||||||||||||||||||||
Servicing |
Asset
Receivables Management |
Insurance |
Loans and
Residuals |
Originations | Other |
Total
Consolidated |
||||||||||||||||||||||
Income (loss) before income taxes |
$ | 10,508 | $ | 1,161 | $ | 9,497 | $ | 5,972 | $ | (163 | ) | $ | (18,715 | ) | $ | 8,260 | ||||||||||||
Core Earnings adjustments |
||||||||||||||||||||||||||||
Step-up depreciation and amortization |
6,696 | 2,004 | 1,347 | | 10 | 7 | 10,064 | |||||||||||||||||||||
Step-up amortization of sub-servicing contracts |
10,144 | | | | | | 10,144 | |||||||||||||||||||||
Share-based compensation expense |
3,467 | 256 | 793 | | 28 | 205 | 4,749 | |||||||||||||||||||||
Transaction and integration costs |
| | | | | 1,417 | 1,417 | |||||||||||||||||||||
Non-cash interest expense |
286 | | 93 | 707 | | | 1,086 | |||||||||||||||||||||
Net impact of Non-Residual Trusts |
| | | | | (3,002 | ) | (3,002 | ) | |||||||||||||||||||
Other |
| | | | | 449 | 449 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total adjustments |
20,593 | 2,260 | 2,233 | 707 | 38 | (924 | ) | 24,907 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Core earnings (loss) before income taxes |
31,101 | 3,421 | 11,730 | 6,679 | (125 | ) | (19,639 | ) | 33,167 | |||||||||||||||||||
Adjusted EBITDA adjustments |
||||||||||||||||||||||||||||
Interest expense on debt |
63 | | | | | 20,365 | 20,428 | |||||||||||||||||||||
Non-cash interest income |
(746 | ) | | (299 | ) | (3,485 | ) | | | (4,530 | ) | |||||||||||||||||
Depreciation and amortization |
1,955 | | | | | | 1,955 | |||||||||||||||||||||
Amortization of servicing rights |
2,771 | | | | | | 2,771 | |||||||||||||||||||||
Pro forma synergies |
1,426 | | | | | 902 | 2,328 | |||||||||||||||||||||
Provision for loan losses |
| | | 1,569 | | | 1,569 | |||||||||||||||||||||
Residual Trusts cash flows |
| | | 262 | | | 262 | |||||||||||||||||||||
Other |
261 | 3 | | 797 | | 79 | 1,140 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total adjustments |
5,730 | 3 | (299 | ) | (857 | ) | | 21,346 | 25,923 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Adjusted EBITDA |
$ | 36,831 | $ | 3,424 | $ | 11,431 | $ | 5,822 | $ | (125 | ) | $ | 1,707 | $ | 59,090 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
Our Servicing business segment consists of operations that perform servicing for third-party investors in forward residential mortgages, manufactured housing and consumer installment loans and contracts. Provided below is a summary statement of operations for our Servicing segment, which also includes core earnings before income taxes and Adjusted EBITDA (in thousands):
For the Three Months | ||||||||||||
Ended March 31, | ||||||||||||
2013 | 2012 | Variance | ||||||||||
Net servicing revenue and fees |
||||||||||||
Third parties |
$ | 134,349 | $ | 81,405 | $ | 52,944 | ||||||
Intercompany |
4,849 | 5,410 | (561 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total net servicing revenue and fees |
139,198 | 86,815 | 52,383 | |||||||||
Other revenues |
462 | 786 | (324 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total revenues |
139,660 | 87,601 | 52,059 | |||||||||
Interest expense |
2,410 | 1,495 | 915 | |||||||||
Depreciation and amortization |
8,857 | 8,651 | 206 | |||||||||
Other expenses, net |
92,048 | 66,661 | 25,387 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
103,315 | 76,807 | 26,508 | |||||||||
Other net fair value losses |
(245 | ) | (286 | ) | 41 | |||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
36,100 | 10,508 | 25,592 | |||||||||
Core Earnings adjustments |
||||||||||||
Step-up depreciation and amortization |
6,189 | 6,696 | (507 | ) | ||||||||
Amortization of capitalized sub-servicing rights (MSRs) |
8,110 | 10,144 | (2,034 | ) | ||||||||
Share-based compensation expense |
1,497 | 3,467 | (1,970 | ) | ||||||||
Non-cash interest expense |
220 | 286 | (66 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
16,016 | 20,593 | (4,577 | ) | ||||||||
|
|
|
|
|
|
|||||||
Core earnings before income taxes |
52,116 | 31,101 | 21,015 | |||||||||
Adjusted EBITDA adjustments |
||||||||||||
Depreciation and amortization |
2,668 | 1,955 | 713 | |||||||||
Amortization and fair value adjustments of servicing rights |
9,300 | 2,771 | 6,529 | |||||||||
Pro forma synergies |
| 1,426 | (1,426 | ) | ||||||||
Interest expense on debt |
| 63 | (63 | ) | ||||||||
Non-cash interest income |
(461 | ) | (746 | ) | 285 | |||||||
Other |
443 | 261 | 182 | |||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
11,950 | 5,730 | 6,220 | |||||||||
|
|
|
|
|
|
|||||||
Adjusted EBITDA |
$ | 64,066 | $ | 36,831 | $ | 27,235 | ||||||
|
|
|
|
|
|
53
Our Servicing segment recognized core earnings before income taxes of $52.1 million and $31.1 million for the three months ended March 31, 2013 and 2012, respectively. Provided below is a summary of the key components of earnings for this segment.
Net Servicing Revenue and Fees
Net servicing revenues and fees includes contractual fees, incentive and performance fees and ancillary fees. Net servicing revenue and fees was $139.2 million and $86.8 million for the three months ended March 31, 2013 and 2012, respectively, resulting in an increase of $52.4 million, primarily due to growth in the average servicing portfolio of 402,000 accounts or 41%, resulting primarily from the ResCap net assets acquisition and the BOA asset purchase.
A summary of net servicing revenue and fees for our Servicing segment is provided below (in thousands):
For the Three Months | ||||||||||||
Ended March 31, | ||||||||||||
2013 | 2012 | Variance | ||||||||||
Servicing fees |
$ | 121,856 | $ | 75,812 | $ | 46,044 | ||||||
Incentive and performance fees |
20,375 | 14,858 | 5,517 | |||||||||
Ancillary and other fees |
14,377 | 9,060 | 5,317 | |||||||||
|
|
|
|
|
|
|||||||
Servicing revenue and fees |
156,608 | 99,730 | 56,878 | |||||||||
Amortization of servicing rights |
(10,406 | ) | (12,915 | ) | 2,509 | |||||||
Change in fair value of servicing rights |
(7,004 | ) | | (7,004 | ) | |||||||
|
|
|
|
|
|
|||||||
Net servicing revenues and fees |
$ | 139,198 | $ | 86,815 | $ | 52,383 | ||||||
|
|
|
|
|
|
Provided below are summaries of the unpaid principal balance of our third-party servicing portfolio and on-balance sheet residential loans and real estate owned, all of which are associated with forward mortgages, and for which the Servicing segment receives intercompany servicing fees (in thousands):
March 31, | ||||||||||||
2013 | 2012 | Variance | ||||||||||
Servicing portfolio composition associated with forward mortgages |
||||||||||||
Third parties |
||||||||||||
First lien mortgages |
$ | 179,337,508 | $ | 60,490,220 | $ | 118,847,288 | ||||||
Second lien mortgages |
9,520,764 | 11,682,476 | (2,161,712 | ) | ||||||||
Manufactured housing |
9,501,985 | 10,786,451 | (1,284,466 | ) | ||||||||
Other |
15,836 | 25,673 | (9,837 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total third parties |
198,376,093 | 82,984,820 | 115,391,273 | |||||||||
On-balance sheet residential loans and real estate owned associated with forward mortgages |
2,749,221 | 2,701,719 | 47,502 | |||||||||
|
|
|
|
|
|
|||||||
Total servicing portfolio associated with forward mortgages |
$ | 201,125,314 | $ | 85,686,539 | $ | 115,438,775 | ||||||
|
|
|
|
|
|
Provided below is a summary of the number of accounts, unpaid principal balance, contractual servicing fee rate and past due status of our third-party servicing portfolio and on-balance sheet residential loans and real estate owned, all of which are associated with forward mortgages, and for which the Servicing segment receives intercompany servicing fees (dollars in thousands):
March 31, 2013 | ||||||||||||||||
Number
of Accounts |
Unpaid Principal
Balance |
Contractual
Servicing Fee |
30 Days or
More Past Due (1) |
|||||||||||||
Third-party servicing portfolio composition of accounts serviced associated with forward mortgages |
||||||||||||||||
First lien mortgages |
1,310,629 | $ | 179,337,508 | 0.23 | % | 15.23 | % | |||||||||
Second lien mortgages |
229,137 | 9,520,764 | 0.44 | % | 3.10 | % | ||||||||||
Manufactured housing |
314,127 | 9,501,985 | 1.08 | % | 3.50 | % | ||||||||||
Other |
1,217 | 15,836 | 0.94 | % | 3.35 | % | ||||||||||
|
|
|
|
|||||||||||||
Total accounts serviced for third parties |
1,855,110 | 198,376,093 | 0.28 | % | 14.09 | % | ||||||||||
On-balance sheet residential loans and real estate owned associated with forward mortgages |
59,448 | 2,749,221 | 6.63 | % | ||||||||||||
|
|
|
|
|||||||||||||
Total servicing portfolio associated with forward mortgages |
1,914,558 | $ | 201,125,314 | 13.98 | % | |||||||||||
|
|
|
|
54
December 31, 2012 | ||||||||||||||||
Number
of Accounts |
Unpaid Principal
Balance |
Contractual
Servicing Fee |
30 Days or
More Past Due (1) |
|||||||||||||
Third-party servicing portfolio composition of accounts serviced associated with forward mortgages |
||||||||||||||||
First lien mortgages |
338,854 | $ | 54,814,557 | 0.22 | % | 15.68 | % | |||||||||
Second lien mortgages |
238,690 | 10,008,324 | 0.44 | % | 3.60 | % | ||||||||||
Manufactured housing |
323,481 | 9,818,686 | 1.08 | % | 4.12 | % | ||||||||||
Other |
1,380 | 17,649 | 0.94 | % | 4.01 | % | ||||||||||
|
|
|
|
|||||||||||||
Total accounts serviced for third parties |
902,405 | 74,659,216 | 0.36 | % | 12.54 | % | ||||||||||
On-balance sheet residential loans and real estate owned associated with forward mortgages |
58,637 | 2,549,050 | 8.25 | % | ||||||||||||
|
|
|
|
|||||||||||||
Total servicing portfolio associated with forward mortgages |
961,042 | $ | 77,208,266 | 12.39 | % | |||||||||||
|
|
|
|
(1) | Past due status is measured based on either the MBA method or OTS method as specified in the servicing agreement. Under the MBA method, a loan is considered past due if its monthly payment is not received by the end of the day immediately preceding the loans next due date. Under the OTS method, a loan is considered past due if its monthly payment is not received by the loans due date in the following month. |
Depreciation and Amortization
Depreciation and amortization expense includes amortization of certain intangible assets including customer and institutional relationship intangibles of the Servicing business, and capitalized software development costs. Depreciation and amortization increased $0.2 million for the three months ended March 31, 2013 as compared to the same period of 2012 primarily as a result of intangible assets acquired in connection with the acquisition of the ResCap net assets and the BOA asset purchase.
Other Expenses, Net
Other expenses, net consists primarily of costs related to salaries and benefits, technology and communications, occupancy and general and administrative expenses as well as allocated indirect expenses. Other expenses, net increased $25.4 million for the three months ended March 31, 2013 as compared to the same period of 2012 due to the overall growth of our Servicing business.
Assets Receivables Management
Our ARM business performs collections of delinquent balances on loans serviced by us for third parties after they have been charged off. Provided below is a summary statement of operations for our ARM segment, which also includes core earnings before income taxes and Adjusted EBITDA (in thousands):
For the Three
Months
Ended March 31, |
||||||||||||
2013 | 2012 | Variance | ||||||||||
Net servicing revenue and fees |
||||||||||||
Third parties |
$ | 9,983 | $ | 8,197 | $ | 1,786 | ||||||
Intercompany |
107 | 131 | (24 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total net servicing revenue and fees |
10,090 | 8,328 | 1,762 | |||||||||
Other revenues |
64 | | 64 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
10,154 | 8,328 | 1,826 | |||||||||
Depreciation and amortization |
1,756 | 2,004 | (248 | ) | ||||||||
Other expenses, net |
6,030 | 5,163 | 867 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
7,786 | 7,167 | 619 | |||||||||
Income before income taxes |
2,368 | 1,161 | 1,207 | |||||||||
Core Earnings adjustments |
||||||||||||
Step-up depreciation and amortization |
1,473 | 2,004 | (531 | ) | ||||||||
Share-based compensation expense |
138 | 256 | (118 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
1,611 | 2,260 | (649 | ) | ||||||||
|
|
|
|
|
|
|||||||
Core earnings before income taxes |
3,979 | 3,421 | 558 | |||||||||
Adjusted EBITDA adjustments |
||||||||||||
Depreciation and amortization |
283 | | 283 | |||||||||
Other |
8 | 3 | 5 | |||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
291 | 3 | 288 | |||||||||
|
|
|
|
|
|
|||||||
Adjusted EBITDA |
$ | 4,270 | $ | 3,424 | $ | 846 | ||||||
|
|
|
|
|
|
|||||||
Gross collections |
$ | 34,014 | $ | 29,334 | $ | 4,680 |
Our ARM segment recognized core earnings before income taxes of $4.0 million and $3.4 million for the three months ended March 31, 2013 and 2012, respectively. Provided below is a summary of the key components of earnings for this segment.
55
Servicing Revenue and Fees
Servicing revenue and fees consists of asset recovery revenue. Servicing revenue and fees was $10.1 million and $8.3 million for the three months ended March 31, 2013 and 2012, respectively, resulting in an increase of $1.8 million, which is due to an overall growth in collections.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of amortization of the customer-relationship intangible asset related to our ARM business. Depreciation and amortization remained flat for the three months ended March 31, 2013 as compared to the same period of 2012.
Other Expenses, Net
Other expenses, net consists primarily of costs related to salaries and benefits, technology and communications, occupancy and general and administrative expenses as well as allocated indirect expenses. Other expenses, net increased $0.9 million for the three months ended March 31, 2013 as compared to the same period of 2012 due primarily to the overall growth of our ARM business.
Insurance
Our Insurance segment consists of our agency business and our reinsurance business. The agency business recognizes commission income net of estimated future policy cancellations at the time policies are effective. The reinsurance business earns premium revenue over the life of an insurance contract and incurs actual costs of property damage claims. With the acquisition of Green Tree, we significantly increased the size of our agency business and we decided to wind down our property reinsurance business. As of the first quarter of 2012, existing property reinsurance policies were terminated and no new property reinsurance policies have been entered into.
Provided below is a summary statement of operations for our Insurance segment, which also includes core earnings before income taxes and Adjusted EBITDA (in thousands):
For the Three Months
Ended March 31, |
||||||||||||
2013 | 2012 | Variance | ||||||||||
Insurance revenue |
$ | 17,534 | $ | 19,962 | $ | (2,428 | ) | |||||
Other revenues |
7 | 302 | (295 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total revenues |
17,541 | 20,264 | (2,723 | ) | ||||||||
Depreciation and amortization |
1,464 | 1,347 | 117 | |||||||||
Other expenses, net |
8,508 | 9,420 | (912 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total expenses |
9,972 | 10,767 | (795 | ) | ||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
7,569 | 9,497 | (1,928 | ) | ||||||||
Core Earnings adjustments |
||||||||||||
Step-up depreciation and amortization |
1,464 | 1,347 | 117 | |||||||||
Share-based compensation expense |
339 | 793 | (454 | ) | ||||||||
Non-cash interest expense |
19 | 93 | (74 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
1,822 | 2,233 | (411 | ) | ||||||||
|
|
|
|
|
|
|||||||
Core earnings before income taxes |
9,391 | 11,730 | (2,339 | ) | ||||||||
Adjusted EBITDA adjustments |
||||||||||||
Non-cash interest income |
(7 | ) | (299 | ) | 292 | |||||||
Other |
18 | | 18 | |||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
11 | (299 | ) | 310 | ||||||||
|
|
|
|
|
|
|||||||
Adjusted EBITDA |
$ | 9,402 | $ | 11,431 | $ | (2,029 | ) | |||||
|
|
|
|
|
|
56
Provided below are summaries of net written premiums (in thousands) and outstanding insurance policies written:
March 31, | ||||||||||||
2013 | 2012 | Variance | ||||||||||
Net written premiums |
||||||||||||
Lender placed |
$ | 29,475 | $ | 28,860 | $ | 615 | ||||||
Voluntary |
17,840 | 20,661 | (2,821 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total net written premiums |
$ | 47,315 | $ | 49,521 | $ | (2,206 | ) | |||||
|
|
|
|
|
|
|||||||
March 31, | ||||||||||||
2013 | 2012 | Variance | ||||||||||
Number of outstanding policies written |
||||||||||||
Lender placed |
110,748 | 111,696 | (948 | ) | ||||||||
Voluntary |
82,173 | 93,586 | (11,413 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total outstanding policies written |
192,921 | 205,282 | (12,361 | ) | ||||||||
|
|
|
|
|
|
Our Insurance segment recognized core earnings before income taxes of $9.4 million and $11.7 million for the three months ended March 31, 2013 and 2012, respectively. Provided below is a summary of the key components of earnings for this segment.
Insurance Revenue
Insurance revenue primarily includes commission and reinsurance income as well as ancillary and other income. Insurance revenue was $17.5 million and $20.0 million for the three months ended March 31, 2013 and 2012, respectively, resulting in a decrease of $2.5 million, which was due primarily to the decrease in net written premiums for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 as well as a decrease in certain commission rates effective January 1, 2013.
Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2013, which includes amortization relating to intangible assets associated with our Insurance business, remained flat as compared to the same period of 2012.
Other Expenses, Net
Other expenses, net consists primarily of salaries and benefits, technology and communications, occupancy, general and administrative, claims expense and allocated indirect expenses. Other expenses, net decreased $0.9 million for the three months ended March 31, 2013 as compared to the same period of 2012 due primarily to a decrease in claims expenses.
Loans and Residuals
Our Loans and Residuals segment consists of the residential loans, real estate owned and mortgage-backed debt of the Residual Trusts, as well as unencumbered residential loans and real estate owned. The entire portfolio of residential loans and real estate owned of the Loans and Residuals segment is comprised of forward-related mortgages. Through this business, we seek to earn a spread from the interest income we earn on the residential loans less the credit losses we incur on these loans and the interest expense we pay on the mortgage-backed debt issued to finance the loans.
57
Provided below is a summary statement of operations for our Loans and Residuals segment, which also includes core earnings before income taxes and Adjusted EBITDA (in thousands):
For the Three Months
Ended March 31, |
||||||||||||
2013 | 2012 | Variance | ||||||||||
Interest income |
$ | 36,898 | $ | 39,280 | $ | (2,382 | ) | |||||
Interest expense |
(22,296 | ) | (23,978 | ) | 1,682 | |||||||
|
|
|
|
|
|
|||||||
Net interest income |
14,602 | 15,302 | (700 | ) | ||||||||
Provision for loan losses |
(1,726 | ) | (1,569 | ) | (157 | ) | ||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for loan losses |
12,876 | 13,733 | (857 | ) | ||||||||
Other revenues |
3 | | 3 | |||||||||
Other losses |
(162 | ) | (295 | ) | 133 | |||||||
Intercompany expense |
(2,832 | ) | (3,024 | ) | 192 | |||||||
Other expenses, net |
(1,272 | ) | (4,442 | ) | 3,170 | |||||||
|
|
|
|
|
|
|||||||
Total other expenses, net |
(4,266 | ) | (7,761 | ) | 3,495 | |||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
8,613 | 5,972 | 2,641 | |||||||||
Core Earnings adjustments |
||||||||||||
Non-cash interest expense |
677 | 707 | (30 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
677 | 707 | (30 | ) | ||||||||
|
|
|
|
|
|
|||||||
Core earnings before income taxes |
9,290 | 6,679 | 2,611 | |||||||||
Adjusted EBITDA adjustments |
||||||||||||
Non-cash interest income |
(3,949 | ) | (3,485 | ) | (464 | ) | ||||||
Residual Trusts cash flows |
400 | 262 | 138 | |||||||||
Provision for loan losses |
1,726 | 1,569 | 157 | |||||||||
Other |
(1,692 | ) | 797 | (2,489 | ) | |||||||
|
|
|
|
|
|
|||||||
Total adjustments |
(3,515 | ) | (857 | ) | (2,658 | ) | ||||||
|
|
|
|
|
|
|||||||
Adjusted EBITDA |
$ | 5,775 | $ | 5,822 | $ | (47 | ) | |||||
|
|
|
|
|
|
Provided below is a summary of the residential loan portfolio, the mortgage-backed debt and real estate owned of the Loans and Residuals segment as well as certain ratios (dollars in thousands):
March 31,
2013 |
December 31,
2012 |
Variance | ||||||||||
Residential loans, net of cost basis adjustments |
$ | 1,488,877 | $ | 1,510,756 | $ | (21,879 | ) | |||||
Allowance for loan losses |
(19,932 | ) | (20,435 | ) | 503 | |||||||
|
|
|
|
|
|
|||||||
Residential loans, net |
1,468,945 | 1,490,321 | (21,376 | ) | ||||||||
Mortgage-backed debt, net of discounts |
1,287,857 | 1,315,442 | (27,585 | ) | ||||||||
Real estate owned |
||||||||||||
Carrying value |
$ | 45,955 | $ | 49,089 | $ | (3,134 | ) | |||||
Number of units |
788 | 842 | (54 | ) | ||||||||
Delinquencies (1) |
||||||||||||
30 days or more past due |
6.02 | % | 7.01 | % | -0.99 | % | ||||||
90 days or more past due |
4.53 | % | 4.63 | % | -0.10 | % | ||||||
Allowance as % of residential loans (2) |
1.34 | % | 1.35 | % | -0.01 | % | ||||||
For the Three Months
Ended March 31, |
||||||||||||
2013 | 2012 | Variance | ||||||||||
Net charge-offs (3) |
$ | 8,916 | $ | 6,436 | $ | 2,480 | ||||||
Charge-off ratio (3) (4) |
0.59 | % | 0.40 | % | 0.19 | % | ||||||
Coverage ratio (3) (5) |
224 | % | 214 | % | 10 | % |
(1) | Delinquency rates are calculated based on unpaid principal balance. |
(2) | The allowance for loan loss ratio is calculated as period end allowance for loan losses divided by period end residential loans before the allowance for loan losses. |
(3) | Annualized |
(4) | The charge-off ratio is calculated as charge-offs, net of recoveries, divided by average residential loans before the allowance for loan losses. Net charge-offs includes charge-offs recognized upon acquisition of real estate in satisfaction of residential loans. |
(5) | The coverage ratio is calculated as period end allowance for loan losses divided by charge-offs, net of recoveries. |
58
Our Loans and Residuals Segment recognized core earnings before income taxes of $9.3 million and $6.7 million for the three months ended March 31, 2013 and 2012, respectively. These earnings primarily reflect the positive spread we earn on the residuals we hold in the Residual Trusts. Provided below is a summary of the key components of earnings for this segment.
Net Interest Income
Net interest income was $14.6 million and $15.3 million for the three months ended March 31, 2013 and 2012, respectively. Net interest income and net interest spread decreased $0.7 million and 2 basis points, respectively, for the three months ended March 31, 2013 as compared to the same period of 2012 primarily due to the decline in residential loans at amortized cost balance and a decline in yield of 2 basis points.
Provided below is a summary of our average yields and rates and the net interest spread and margin on our portfolio (dollars in thousands):
For the Three Months | ||||||||||||
Ended March 31, | ||||||||||||
2013 | 2012 | Variance | ||||||||||
Residential loans at amortized cost |
||||||||||||
Interest income |
$ | 36,898 | $ | 39,280 | $ | (2,382 | ) | |||||
Average balance |
1,499,816 | 1,594,283 | (94,467 | ) | ||||||||
Average yield (1) |
9.84 | % | 9.86 | % | -0.02 | % | ||||||
Mortgage-backed debt at amortized cost |
||||||||||||
Interest expense |
$ | 22,296 | $ | 23,978 | $ | (1,682 | ) | |||||
Average balance |
1,301,650 | 1,400,749 | (99,099 | ) | ||||||||
Average rate (1) |
6.85 | % | 6.85 | % | | |||||||
Net interest income |
$ | 14,602 | $ | 15,302 | $ | (700 | ) | |||||
Net interest spread (2) |
2.99 | % | 3.01 | % | -0.02 | % | ||||||
Net interest margin (3) |
3.89 | % | 3.84 | % | 0.05 | % |
(1) | Annualized |
(2) | Net interest spread is calculated by subtracting the average rate on mortgage-backed debt at amortized cost from the average yield on residential loans at amortized cost. |
(3) | Net interest margin is calculated by dividing net interest income by the average balance of the residential loans at amortized cost. |
Provision for Loan Losses
The provision for loan losses reflects the recognition of incurred credit losses on the residential loans held by the Residual Trusts and our unencumbered forward residential loan portfolio. The provision for loan losses remained relatively flat for the three months ended March 31, 2013 as compared to the same period in 2012, due to severity rates and defaults which are comparable in the two periods.
Intercompany Expenses
Our Loans and Residuals segment is charged a fee from the Servicing segment for performing servicing activities for the residential loans and real estate owned of the Loans and Residuals segment. Intercompany expenses decreased by $0.2 million for the three months ended March 31, 2013 as compared to the same period of 2012 due to a decrease in the rate of the fees charged from the Servicing segment.
Other Expenses, Net
Other expenses, net consists primarily of real estate owned expenses, net and expenses incurred to protect the collateral underlying the residential loans held by the Loans and Residuals segment. Other expenses, net decreased by $3.2 million for the three months ended March 31, 2013 as compared to the same period of 2012 due to a decrease of $0.5 million resulting from operational changes in protection of the collateral and a decrease in real estate owned expenses of $2.7 million, primarily due to lower real estate owned holding costs and favorable trends in fair value adjustments required on real estate owned.
59
Reverse Mortgage
Our Reverse Mortgage business segment, which was formed as a result of the acquisition of RMS, includes purchases and originations, aggregation and securitization activities and operations that perform servicing for third-party investors in reverse mortgage loans and other ancillary services for the reverse mortgage market. Our Reverse Mortgage business also holds a mortgage portfolio of HECM reverse mortgages. Provided below is a summary statement of operations for our Reverse Mortgage segment, which also includes core earnings before income taxes and Adjusted EBITDA (in thousands):
For the Three Months
Ended March 31, 2013 |
||||
Net servicing revenue and fees |
$ | 6,748 | ||
Net gains on sales of loans |
4,383 | |||
Other revenues |
2,945 | |||
|
|
|||
Total revenues |
14,076 | |||
Interest expense |
3,529 | |||
Depreciation and amortization |
2,723 | |||
Other expenses, net |
32,523 | |||
|
|
|||
Total expenses |
38,775 | |||
Net fair value gains on reverse loans and related HMBS obligations |
36,788 | |||
|
|
|||
Income before income taxes |
12,089 | |||
Core Earnings adjustments |
||||
Non-cash fair value adjustments |
3,536 | |||
Step-up depreciation and amortization |
2,451 | |||
Share-based compensation expense |
287 | |||
|
|
|||
Total adjustments |
6,274 | |||
|
|
|||
Core earnings before income taxes |
18,363 | |||
Adjusted EBITDA adjustments |
||||
Depreciation and amortization |
272 | |||
Amortization of servicing rights |
918 | |||
Non-cash interest income |
(151 | ) | ||
Interest expense on debt |
17 | |||
Other |
37 | |||
|
|
|||
Total adjustments |
1,093 | |||
|
|
|||
Adjusted EBITDA |
$ | 19,456 | ||
|
|
Our Reverse Mortgage segment recognized core earnings before income taxes of $18.4 million for the three months ended March 31, 2013. Provided below is a summary of the key components of earnings for this segment.
Servicing Revenue and Fees
Servicing revenue and fees for the Reverse Mortgage business includes contractual servicing fees and ancillary and other fees on our third-party reverse mortgage portfolio. Provided below is a summary of the number of accounts, unpaid principal balance and weighted average contractual servicing fee rate related to our servicing portfolio associated with reverse mortgages (dollars in thousands):
March 31, 2013 | ||||||||||||
Number of
Accounts |
Unpaid Principal
Balance |
Weighted Average
Contractual Servicing Fee |
||||||||||
Third-party servicing portfolio associated with reverse mortgages |
42,069 | $ | 7,379,925 | 0.15 | % | |||||||
On-balance sheet residential loans and real estate owned associated with reverse mortgages |
41,112 | 6,383,921 | ||||||||||
|
|
|
|
|||||||||
Total servicing portfolio associated with reverse mortgages |
83,181 | $ | 13,763,846 | |||||||||
|
|
|
|
|||||||||
December 31, 2012 | ||||||||||||
Number of
Accounts |
Unpaid Principal
Balance |
Weighted Average
Contractual Servicing Fee |
||||||||||
Third-party servicing portfolio associated with reverse mortgages |
42,855 | $ | 7,454,306 | 0.16 | % | |||||||
On-balance sheet residential loans and real estate owned associated with reverse mortgages |
35,084 | 5,431,617 | ||||||||||
|
|
|
|
|||||||||
Total servicing portfolio associated with reverse mortgages |
77,939 | $ | 12,885,923 | |||||||||
|
|
|
|
60
Net Gains on Sales of Loans
Net gains on sales of loans was $4.4 million for the three months ended March 31, 2013. Net gains on sales of loans consists of the following for the periods indicated (in thousands):
For the Three Months | ||||
Ended March 31, 2013 | ||||
Gains on sales of loans |
$ | 4,110 | ||
Net fair value losses on derivatives |
(114 | ) | ||
Provision for repurchases |
(11 | ) | ||
Other |
398 | |||
|
|
|||
Net gains on sales of loans |
$ | 4,383 | ||
|
|
Expenses
Interest expense for the Reverse Mortgage business consists of the cost of debt for origination funding facilities. Depreciation and amortization expense for the Reverse Mortgage business includes depreciation and amortization, including step-up depreciation and amortization, for premises and equipment, intangible assets and servicing rights acquired in connection with the acquisitions of RMS and S1L. Other expense, net consist primarily of costs related to salaries and benefits, general and administrative expenses as well as allocated indirect expenses and real estate owned expenses, net.
Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Net fair value gains includes the impact on income resulting from our election to account for on-balance sheet reverse mortgage loans and the HMBS related obligations at fair value. We recognized net fair value gains of $36.8 million on reverse loans and HMBS obligations which are accounted for at fair value during the three months ended March 31, 2013 which resulted from the interest rate spread between the loans and related obligations, interest income on loans not securitized, gains on loans originated, gains on tail pools issued, and changes in market pricing for HECM loans and HMBS securities.
Originations
Our Originations business segment originates and purchases forward loans that are sold to third parties with servicing rights generally retained. The originations segment was previously a non-reportable operating segment however is now reportable with the acquisition of ResCap net assets. Activity prior to the acquisition of ResCap net assets primarily consisted of brokerage operations whereby the Originations segment received origination commissions. Provided below is a summary statement of operations for our Originations segment, which also includes core earnings (loss) before income taxes and Adjusted EBITDA (in thousands):
For the Three
Months
Ended March 31, |
||||||||||||
2013 | 2012 | Variance | ||||||||||
Net gains on sales of loans |
$ | 74,062 | $ | | $ | 74,062 | ||||||
Other revenues |
1,997 | 618 | 1,379 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
76,059 | 618 | 75,441 | |||||||||
|
|
|
|
|
|
|||||||
Interest expense |
706 | | 706 | |||||||||
Depreciation and amortization |
15,598 | 10 | 15,588 | |||||||||
Other expenses, net |
39,417 | 771 | 38,646 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
55,721 | 781 | 54,940 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) before income taxes |
20,338 | (163 | ) | 20,501 | ||||||||
Core Earnings adjustments |
||||||||||||
Step-up depreciation and amortization |
1,277 | 10 | 1,267 | |||||||||
Share-based compensation expense |
268 | 28 | 240 | |||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
1,545 | 38 | 1,507 | |||||||||
|
|
|
|
|
|
|||||||
Core earnings (loss) before income taxes |
21,883 | (125 | ) | 22,008 | ||||||||
Adjusted EBITDA adjustments |
||||||||||||
Depreciation and amortization |
14,321 | | 14,321 | |||||||||
Other |
41 | | 41 | |||||||||
|
|
|
|
|
|
|||||||
Total adjustments |
14,362 | | 14,362 | |||||||||
|
|
|
|
|
|
|||||||
Adjusted EBITDA |
$ | 36,245 | $ | (125 | ) | $ | 36,370 | |||||
|
|
|
|
|
|
Our Originations segment recognized core earnings (loss) before income taxes of $21.9 million and $(0.1) million for the three months ended March 31, 2013 and 2012, respectively. Provided below is a summary of the key components of earnings for this segment.
61
The volume of our originations primarily governs the fluctuations in revenues and expenses of our Originations segment. Provided below is a summary of our loan originations volume (in thousands):
For the Three Months | ||||
Ended March 31, 2013 | ||||
Originations volume |
||||
Retention |
$ | 319,417 | ||
Retail |
40,284 | |||
Correspondent |
11,223 | |||
Wholesale |
4,844 | |||
|
|
|||
Total originations |
$ | 375,768 | ||
|
|
Net Gains on Sales of Loan
Net Gains on sales of loans was $74.1 million for the three months ended March 31, 2013. Gains on sale of loans, net consists of the following (in thousands):
For the Three Months | ||||
Ended March 31, 2013 | ||||
Gains on sales of loans |
$ | 4,198 | ||
Unrealized gains on loans held for sale |
13,626 | |||
Net fair value gains on derivatives |
54,683 | |||
Provision for repurchases |
(160 | ) | ||
Capitalized servicing rights |
1,290 | |||
Other |
425 | |||
|
|
|||
Net gains on sales of loans |
$ | 74,062 | ||
|
|
Other Revenues
Other revenues for the Originations segment consists primarily of origination fee income. Other revenues was $2.0 million and $0.6 million for the three months ended March 31, 2013 and 2012, respectively, resulting in an increase of $1.4 million, which was due primarily to the acquisition of the ResCap net assets during the quarter.
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay debt and meet the financial obligations of our operations including funding acquisitions, servicing advances, origination of mortgage loans and other general business needs. We recognize the need to have liquid funds available to operate and grow our business and it is our policy to have adequate liquidity at all times. Our liquidity, measured as cash and cash equivalents plus borrowing capacity available on our Revolver, was $749.4 million at March 31, 2013.
Our principal sources of liquidity are the cash flows generated from our Servicing, Reverse Mortgage, Originations, ARM and Insurance businesses, funds obtained from our revolver, master repurchase agreements, servicing advance facilities, issuance of HMBS and Fannie Mae securities, cash releases from the Residual Trusts, as well as cash proceeds from the issuance of equity and debt, and other available financing activities.
We believe that, based on current forecasts and anticipated market conditions, our current liquidity of $749.4 million, along with the funds generated from our operating cash flows, loan portfolio, revolver, servicing advance facilities, master repurchase agreements, issuance of HMBS and Fannie Mae securities, our access to the capital markets, and other available sources of liquidity will allow for financial flexibility to meet anticipated cash requirements to fund operating needs and expenses, servicing advances, mortgage-backed originations, planned capital expenditures, current committed business and asset acquisitions, and all required debt service obligations for the next twelve months. We expect to generate adequate cash flows to fund our operations on both a short and long term basis principally from our servicing and origination operations and expect to fund future growth opportunities with capital obtained from external sources. Our operating cash flows and liquidity are significantly influenced by numerous factors, including changes in the mortgage servicing markets, interest rates, continued availability of financing including the renewal of existing servicing advance facilities and master repurchase agreements, access to equity markets, and conditions in the debt markets. We may access the capital markets from time to time to augment our liquidity position as our business dictates. We continually monitor our cash flows and liquidity in order to be responsive to these changing conditions.
We used a portion of the net proceeds from our public offering of common stock and the refinancing and expansion of our first lien credit facility of $276.1 million and $1.1 billion, respectively, to fund current acquisitions including the ResCap net assets for consideration of $492.0 million and the BOA asset purchase for consideration of $495.7 million. The BOA asset purchase and the ResCap net assets include MSRs as well as related servicer advances that were partially funded through existing advance financing facilities. We anticipate that future acquisitions of MSRs could be financed with debt and/or obtaining capital provided by a financing partner, similar to the other MSR structures in the market today.
62
Servicing Business
Our servicing agreements impose on us various rights and obligations that affect our liquidity. Among the most significant of these obligations is the requirement that we advance our own funds to meet contractual payment requirements for certain investors and to pay taxes, insurance and foreclosure costs and various other items that are required to preserve the assets being serviced. In the normal course of business, we borrow money to fund certain of these servicing advances. We rely upon various counterparties to provide us with financing to fund a portion of our servicing advances on a short-term basis or provide for reimbursement within an agreed-upon period. Our ability to fund servicing advances is a significant factor that affects our liquidity and we depend upon our ability to secure these types of arrangements on acceptable terms and to renew or replace existing financing facilities as they expire. The servicing advance financing agreements that support our servicing operations consist of the following:
Servicer Advance Reimbursement Agreement
In July 2012, we renewed our Servicer Advance Reimbursement Agreement, which provides for the reimbursement of certain principal and interest and protective advances that are our responsibility under certain servicing agreements. The agreement provides for a reimbursement amount of up to $150.0 million in January 2013, $585.0 million during February and March 2013 and $950.0 million thereafter. The cost of this agreement is LIBOR plus 2.50% or 3.50% on certain amounts that are reimbursed as of March 31, 2013. The early reimbursement period expires in June 2013 or upon 120 days after written notice. Collections of advances that have been reimbursed under the agreement require remittance upon collection to settle the outstanding balance under the agreement. We had $178.3 million outstanding under this agreement at March 31, 2013.
Effective April 1, 2013, we amended the Servicer Advance Reimbursement Agreement and increased the reimbursement amount to $950.0 million. All other terms of the agreement remained unchanged.
Receivables Loan Agreement
In May 2012, we renewed our three-year Receivables Loan Agreement that provides borrowings up to $75.0 million and is collateralized by certain principal and interest, taxes and insurance and other corporate advances reimbursable from securitization trusts serviced by us. The principal payments on the note are paid from the recoveries or repayment of underlying advances. Accordingly, the timing of the principal payments is dependent on the recoveries or repayment of underlying advances that collateralize the note. The interest cost under the renewed agreement, which matures in July 2015, is LIBOR plus 3.25%. We had $64.6 million outstanding under this agreement at March 31, 2013.
Our Receivables Loan Agreement contains customary events of default and covenants, the most significant of which are financial covenants. We are in compliance with all covenants at March 31, 2013.
Forward Mortgage Originations Business
Historically our forward mortgage originations business has been insignificant to our overall operations; however, we have grown this business with the acquisition of the ResCap loan originations platform and anticipate significant future growth. We utilize master repurchase agreements to support our originations or purchase of forward mortgage loans. The facilities had an aggregate capacity of $1.5 billion at March 31, 2013. The interest rates on the facilities are primarily based on LIBOR plus between 2.70% and 3.25% and in some cases are subject to a LIBOR floor or other minimum rates and have various expiration dates through March 2014. These facilities are secured by the underlying originated or purchased mortgage loans and provide creditors a collateralized interest in mortgage loans that meet the eligibility requirements under the terms of the particular facility. The source of repayment of these facilities is typically from the sale or securitization of the underlying loans into the secondary mortgage market. We evaluate our needs under these facilities based on forecasted mortgage loan origination production volume, however there can be no assurance that these origination funding facilities will be available to us in the future. The aggregate capacity includes $550.0 million of uncommitted funds. To the extent uncommitted funds are utilized to purchase or originate mortgage loans, the counterparty has the ability to require repurchase on demand. We had $252.3 million of borrowings under these master repurchase agreements at March 31, 2013 which do not include borrowings utilizing uncommitted funds.
All of our master repurchase agreements contain customary events of default and covenants, the most significant of which are financial covenants. Financial covenants that are most sensitive to the operating results and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements. We were in compliance with all covenants at March 31, 2013.
Reverse Mortgage Origination Business
In connection with reverse mortgage business, we finance the capital required to originate or purchase HECM reverse mortgage loans through master repurchase agreements. These agreements were entered into in conjunction with our acquisitions of RMS and S1L in the fourth quarter of 2012. The facilities have an aggregate capacity amount of $517.0 million. The interest rates on the facilities are primarily based on LIBOR plus between 2.75% and 3.50%, in some cases are subject to a LIBOR floor or other minimum rates and have various expiration dates through February 2014. These facilities are secured by the underlying originated or purchased mortgage loans and provide creditors a collateralized interest in mortgage loans that meet the eligibility requirements under the terms of the particular facility. The source of repayment of these facilities is typically from the sale or securitization of the underlying loans into the secondary mortgage market. We evaluate our needs under these facilities based on forecasted mortgage loan origination production volume, however there can be no assurance that these origination funding facilities will be available to us in the future. The aggregate capacity includes $517.0 million of uncommitted funds. To the extent uncommitted funds are utilized to purchase or originate mortgage loans, the counterparty has the ability to require repurchase on demand. We had $277.0 million of borrowings under these master repurchase agreements at March 31, 2013 which includes $277.0 million of borrowings utilizing uncommitted funds.
All of our master repurchase agreements contain customary events of default and covenants, the most significant of which are financial covenants. Financial covenants that are most sensitive to the operating results and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements. We were in compliance with all covenants at March 31, 2013.
Additionally, the Company, as the servicer of reverse mortgage loans, is obligated to fund additional borrowing capacity in the form of undrawn lines of credit on floating and fixed rate reverse mortgage loans. We rely upon our operating cash flows to fund these additional borrowings on a short-term basis prior to securitization. The additional borrowings are generally securitized within 4 to 15 days after funding. Our ability to fund these additional borrowings could have a significant impact on our liquidity.
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We permanently fund HECM reverse mortgage loans through the Government National Mortgage Association, or GNMA, issuance process. The proceeds from the transfer of the HMBS securities are accounted for as a secured borrowing under the fair value option and classified on the consolidated balance sheet as a HMBS related obligation. At March 31, 2013, the total balance outstanding on the HMBS related obligations was $6.1 billion. At March 31, 2013, $6.1 billion of HECM reverse mortgage loans and real estate owned were pledged as collateral to the mortgage-backed debt of the GNMA securitization pools and are not available to satisfy the claims of creditors of the Company. In addition, the holders of the HMBS beneficial interests have recourse to the extent of their participation in the HMBS loans but not to the general net assets of the Company.
Borrower remittances received on the HECM reverse mortgage loans, if any, and proceeds received from the sale of real estate owned collateralizing the related mortgage-backed debt and our funds used to repurchase HECM reverse mortgage loans are used to reduce the HMBS related obligations by making payments to the securitization pools which will then remit the payments to the beneficial interest holders of the mortgage-backed debt. The maturity of the HMBS related obligations is directly affected by the rate of payments on the collateral and events of default as stipulated in the HECM reverse mortgage loan agreements with borrowers. As an HMBS issuer, the Company assumes certain obligations related to each security it issues. The most significant obligation is the requirement to purchase loans out of the HMBS pools once they reach certain limits. Performing repurchased loans are conveyed to the Department of Housing and Urban Development, or HUD, and nonperforming repurchased loans are generally liquidated in accordance with program requirements.
RMS is required to maintain regulatory compliance with HUD, GNMA and Fannie Mae program requirements, some of which are financial covenants related to minimum levels of net worth and other financial ratios. Due to the accounting treatment for reverse mortgage loan securitizations and the related issuance of HMBS obligations, RMS has obtained an indefinite waiver for certain of these requirements from GNMA and through June 30, 2013 from Fannie Mae. In addition, we have provided a guarantee beginning on the date of acquisition, November 1, 2012, whereby we guarantee RMS performance and obligations under the GNMA Mortgage-Backed Securities Program. In the event that we fail to honor this guaranty, GNMA could terminate RMSs status as a qualified issuer of mortgage-backed securities as well as take other actions permitted by law that could impact the operations of RMS, including the termination or suspension of RMSs servicing rights associated with reverse mortgage loans backed by GNMA guaranteed mortgage-backed securities. GNMA has affirmed RMSs current commitment authority to issue HMBS securities.
Corporate Debt
Term Loans and Revolver
In November 2012, we refinanced our $500 million term loan with a $700 million secured term loan, or Term Loan, and refinanced our 2011 Revolver with a $125 million secured revolving credit facility, or Revolver. In January 2013, we entered into the Incremental Amendment to the Term Loan. The Incremental Amendment, among other things, increases certain financial ratios that govern our ability to incur additional indebtedness and provides for a secured term loan, or the Incremental Loan, in an amount of $825.0 million, which was borrowed in its entirety on January 31, 2013.
In March 2013, we entered into the Credit Agreement Amendment to the Term Loan. The Credit Agreement Amendment changes certain financial definitions in the Term Loan to clarify that net cash receipts in connection with the issuance of reverse mortgage securities and the servicing of reverse mortgages count towards Pro Forma Adjusted EBITDA and excess cash flow for purposes of the Term Loan.
Our obligations under the Term Loan and Revolver are guaranteed by substantially all of our subsidiaries and secured by substantially all of our assets and substantially all assets of the guarantor subsidiaries, subject to certain exceptions the most significant of which are the assets of the consolidated Residual and Non-Residual Trusts, the residential loans of the GNMA securitization pools, and assets securing our master repurchase agreements and servicer advance financing facilities.
The terms of our Term Loan and Revolver are summarized in the table below:
Debt Agreement |
Interest Rate |
Amortization |
Maturity/Expiration | |||
$1.525 billion term loan |
LIBOR plus 4.50%, LIBOR floor of 1.25% | 5.00% per annum beginning 4th quarter of 2012; remainder at final maturity | November 28, 2017 | |||
$125 million revolver |
LIBOR plus 4.50% | Bullet payment at maturity | November 28, 2017 |
In addition to the required amortization payments noted in the table above, the Term Loan requires us to prepay outstanding principal with 50% of excess cash flows as defined by the credit agreement when our Total Leverage Ratio is greater than 2.5, 25% of excess cash flows when our Total Leverage Ratio is less than or equal to 2.5 but greater than 2.0, and does not require a prepayment when our Total Leverage Ratio is less than or equal to 2.0. These excess cash flow payments, if required, will be made during the first quarter of each fiscal year beginning in 2014. Additional mandatory payments are required from all net proceeds associated with certain new indebtedness and net proceeds relating to certain sales of assets or recovery events, all subject to certain exceptions.
The capacity under the Revolver allows requests for the issuance of letters of credit, or LOCs, of up to $25 million or total cash borrowings of up to $125 million less any amounts outstanding in issued LOCs. During the three months ended March 31, 2013, there were no borrowings or repayments under the Revolver. At March 31, 2013, we had outstanding $0.3 million in an issued LOC with remaining availability under the Revolver of $124.7 million. The commitment fee on the unused portion of the Revolver is 0.50% per year. At March 31, 2013, we had interest rate caps and a swaption with notional amounts of $391.0 million and $175.0 million, respectively. We use the interest rate caps and swaption as a hedge to the cash flow risk related to the variability in interest rate payments.
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The Term Loan and Revolver contain customary events of default and covenants, including among other things, financial covenants, covenants that restrict our and our subsidiaries ability to incur certain additional indebtedness, create or permit liens on assets, pay dividends and repurchase stock, engage in mergers or consolidations, and make investments. Financial covenants that must be maintained include an Interest Coverage Ratio and a Total Leverage Ratio as defined in the credit agreement. Non-compliance with the Interest Coverage Ratio or the Total Leverage Ratio could result in the requirement to immediately repay all amounts outstanding under the Term Loan and Revolver and the termination of all commitments under the Revolver. These ratios are based on EBITDA, adjusted to conform to requirements of the credit agreement, or Pro Forma Adjusted EBITDA. Pro Forma Adjusted EBITDA is defined for purposes of the Term Loan and Revolver covenants as net income (loss) plus interest, provision for income taxes and depreciation and amortization, and adjustments for certain specified items as defined in the credit agreement, including pro forma adjustments as specified by the agreement.
The Interest Expense Coverage Ratio is calculated by dividing Pro Forma Adjusted EBITDA by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing four-quarter basis preceding the measurement date. The Total Leverage Ratio is calculated by dividing consolidated total indebtedness as of the measurement date by Pro Forma Adjusted EBITDA as measured on a trailing four-quarter basis preceding the measurement date and including those items measured on a pro-forma basis. Beginning on March 31, 2013, the Term Loan and Revolver require a minimum Interest Expense Coverage Ratio of 2.25:1.00 increasing to 2.50:1.00 by the end of 2015, and allows for a maximum Total Leverage Ratio of 5.00:1.00 being reduced over time to 4.00:1.00 by the end of 2015.
Pro Forma Adjusted EBITDA is a material component of these covenants. Pro Forma Adjusted EBITDA is not a presentation made in accordance with GAAP and should not be considered as an alternative to (1) net income or loss or any other performance measures determined in accordance with GAAP or (2) operating cash flows determined in accordance with GAAP. Additionally, Pro Forma Adjusted EBITDA is not intended to be a measure of free cash flow for our discretionary use, as it does not consider certain cash payments required for interest, taxes and debt service. Our presentation of Pro Forma Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentation of Pro Forma Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that the presentation of Pro Forma Adjusted EBITDA is appropriate to provide additional information about the calculation of the financial covenants in the debt agreement.
In accordance with the definitions in the Term Loan and Revolver, Adjusted EBITDA for the last twelve months is $280.2 million plus pro-forma adjustments of $314.9 million for a total Pro Forma Adjusted EBITDA of $595.1 million.
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Interest Expense Coverage and Total Leverage Ratios
Provided below are the Interest Coverage Ratio and the Total Leverage Ratio calculated at March 31, 2013:
Covenant
Requirement |
||||||||
Term Loan | Actual | |||||||
Interest Expense Coverage Ratio equal to or greater than |
2.25:1.00 | 5.96 | ||||||
Total Leverage Ratio equal to or less than |
5.00:1.00 | 3.01 |
Residual and Non-Residual Trusts
The cash proceeds from the repayment of the collateral held in the Residual and Non-Residual Trusts are owned by the trusts and serve to only repay the obligations of the trusts unless, for the Residual Trusts, certain overcollateralization or other similar targets are satisfied, in which case, the excess cash is released to us assuming no trigger event has occurred.
The Residual Trusts, with the exception of WIMC Capital Trust 2011-1, or Trust 2011-1, contain delinquency and loss triggers, that, if exceeded, allocate any excess cash flows to paying down the outstanding mortgage-backed notes for that particular trust at an accelerated pace. Assuming no servicer trigger events have occurred and the overcollateralization targets have been met, any excess cash from these trusts is released to us. For Trust 2011-1, principal and interest payments are not paid on the subordinate note or residual interests, which are held by us, until all amounts due on the senior notes are fully paid.
Since January 2008, Mid-State Capital Corporation 2006-1 Trust has exceeded its delinquency and cumulative loss rate triggers and has not provided any excess cash flow to us. In addition, from September 2012 to February 2013, Mid-State Capital Corporation 2005-1 Trust exceeded its delinquency rate trigger. At March 2013, the delinquency rate for Trust 2005-1 was cured allowing residential cash flows to now flow to us. Provided below is a table summarizing the actual delinquency and cumulative loss rates in comparison to the trigger rates for our Residual Trusts:
Delinquency | Delinquency Rate | Cumulative | Cumulative Loss Rate | |||||||||||||||||||||
Trigger | March 31, 2013 | December 31, 2012 | Loss Trigger | March 31, 2013 | December 31, 2012 | |||||||||||||||||||
Mid-State Trust IV |
(1 | ) | | | 10.00 | % | 4.34 | % | 4.34 | % | ||||||||||||||
Mid-State Trust VI |
8.00 | % | 2.49 | % | 2.74 | % | 8.00 | % | 5.30 | % | 5.33 | % | ||||||||||||
Mid-State Trust VII |
8.50 | % | 3.04 | % | 3.07 | % | 1.50 | % | 0.27 | % | 0.60 | % | ||||||||||||
Mid-State Trust VIII |
8.50 | % | 3.03 | % | 2.69 | % | 1.50 | % | 0.55 | % | 0.48 | % | ||||||||||||
Mid-State Trust X |
8.00 | % | 3.99 | % | 3.77 | % | 8.00 | % | 7.35 | % | 7.32 | % | ||||||||||||
Mid-State Trust XI |
8.75 | % | 3.88 | % | 4.08 | % | 8.75 | % | 6.20 | % | 6.05 | % | ||||||||||||
Mid-State Capital Corporation 2004-1 Trust |
8.00 | % | 6.13 | % | 6.13 | % | 7.00 | % | 3.36 | % | 3.24 | % | ||||||||||||
Mid-State Capital Corporation 2005-1 Trust |
8.00 | % | 7.79 | % | 8.21 | % | 6.50 | % | 3.98 | % | 3.82 | % | ||||||||||||
Mid-State Capital Corporation 2006-1 Trust |
8.00 | % | 10.46 | % | 10.52 | % | 6.00 | % | 7.27 | % | 6.95 | % | ||||||||||||
Mid-State Capital Corporation 2010-1 Trust |
10.50 | % | 9.77 | % | 9.92 | % | 5.50 | % | 1.72 | % | 1.32 | % | ||||||||||||
WIMC Capital Trust 2011-1 |
(1 | ) | | | (1 | ) | | |
(1) | Relevant trigger is not applicable per the underlying trust agreements. |
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Contractual Obligations
Except as described below, there were no other significant changes to our outstanding contractual obligations as of March 31, 2013, from amounts previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 18, 2013.
In January 2013, we borrowed $825.0 million on our Incremental Loan; this amount increased our future cash obligation related to our Term Loan to $1.5 billion at March 31, 2013. We are required to pay 5% of the debt balance on a quarterly basis with the remainder at the maturity date of November 28, 2017. The net proceeds from our Incremental Loan were used to partially fund the ResCap net assets acquisition and the BOA asset purchase.
In order to support further growth of our originations operations, during the three months ended March 31, 2013, we entered into additional master repurchase agreements with an aggregate borrowing capacity of $1.6 billion which increased our total borrowing capacity to $2.0 billion in borrowing capacity at March 31, 2013. At March 31, 2013, we had $529.3 million in borrowings outstanding. As part of our originations activities, we have unfunded commitments of $2.1 billion at March 31, 2013, refer to Note 21 for further discussion on unfunded commitments.
Sources and Uses of Cash
The following table sets forth selected consolidated cash flow information (in thousands):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2013 | 2012 | |||||||
Cash flows provided by (used in) operating activities |
$ | (209,597 | ) | $ | 42,482 | |||
Cash flows provided by (used in) investing activities |
(1,748,443 | ) | 51,845 | |||||
Cash flows provided by (used in) financing activities |
2,140,711 | (73,632 | ) | |||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
$ | 182,671 | $ | 20,695 | ||||
|
|
|
|
Operating Activities
Net cash used in operating activities was $209.6 million for the three months ended March 31, 2013 as compared to $42.5 million in net cash provided by operating activities for the same period of 2012. The primary sources of cash from operating activities were the income generated from our servicing operations, our insurance business and the net interest spread from our forward residential loan portfolio carried at amortized cost and in 2013, our originations activities. The net cash used in operating activities in 2013 is primarily due to the ramp up of our originations activities which resulted in $433.0 million used in originations and acquisitions of residential loans offset by $227.7 million in proceeds from sales of residential loans.
Investing Activities
Our cash flows from investing activities primarily include payments received on our residential loans held for investment, cash proceeds from the sale of real estate owned offset by cash paid to acquire businesses, net of cash acquired, and purchases and originations of residential loans held for investment. Net cash used in investing activities was $1.7 billion for the three months ended March 31, 2013 as compared to $51.8 million in net cash provided by investing activities for the same period of 2012. For the three months ended March 31, 2013, the primary uses of cash was $1.1 billion for purchases and originations of reverse residential loans held for investment, $478.1 million in payments for the acquisitions of the ResCap net assets and the Ally Bank net assets as well as acquisitions of servicing rights and related intangibles of $305.0 million, which includes the BOA asset purchase. During the same period, the primary sources of cash provided by investing activities were the principal payments received from borrowers on our residential loans held for investment of $93.6 million and net cash proceeds from the sales of real estate owned of $6.1 million. For the three months ended March 31, 2012, the primary sources of cash provided by investing activities were the principal payments received from borrowers on our residential loans held for investment of $40.4 million and net cash proceeds from the sales of real estate owned of $3.8 million.
Financing Activities
Our cash flows from financing activities include proceeds from the issuance of and payments on corporate debt, HMBS related obligations, master repurchase agreements, servicing advance facilities and mortgage-backed debt. Net cash provided by financing activities was $2.1 billion for the three months ended March 31, 2013 as compared to $73.6 million in net cash used in financing activities for the same period of 2012. For the three months ended March 31, 2013, the primary sources of cash were $820.9 million in issuance of corporate debt, $1.0 billion in proceeds from securitizations of reverse loans, $142.8 million in issuances of servicing advance liabilities, net of related payments, and $273.9 million in net borrowings of master repurchase agreements. During the same period, the primary uses of cash for financing activities were the payments on HMBS related obligations of $57.7 million and $49.5 million in payments on mortgage-backed debt. For the three months ended March 31, 2012, the primary uses of cash were $21.5 million in payments on corporate debt and $49.9 million in payments on mortgage-backed debt.
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Credit Risk Management
Residential Loan Credit Risk
We are subject to credit risk associated with the residual interests that we own in the consolidated Residual Trusts as well as with the unencumbered forward loans held in our portfolio, both of which are recognized as residential loans on our consolidated balance sheets. Credit risk is the risk that we will not fully collect the principal we have invested due to borrower defaults. We manage the credit risk associated with our residential loan portfolio through sound loan underwriting, monitoring of existing loans, early identification of problem loans, timely resolution of problems, establishment of an appropriate allowance for loan losses and sound nonaccrual and charge-off policies.
We do not currently own residual interests in the Non-Residual Trusts and we consider our credit risk with regard to these trusts to be insignificant. However, we have assumed mandatory call obligations related to the Non-Residual Trusts and will be subject to a certain amount of credit risk associated with the purchased residential loans when the calls are exercised. We expect to call these securitizations beginning in 2016 and continuing through 2019. The total outstanding balance of the residential loans expected to be called at the respective call dates is $418.1 million.
We are subject to credit risk associated with forward and reverse mortgage loans that we purchase and originate during the period of time prior to the transfer of these loans. We consider our credit risk associated with these loans to be insignificant.
We also assume credit risk as issuer of GNMA HMBS securities. Our credit risk relates to our obligation to repurchase reverse mortgage loans out of HMBS securitization pools once they reach certain limits as established by the FHA. Performing repurchased loans are conveyed to HUD and nonperforming repurchased loans are generally liquidated in accordance with program requirements. Although these loans are covered by FHA insurance, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. However, we consider these amounts to be insignificant. As a result of minimal severity, credit risk associated with Non-Residual Trusts, forward and reverse mortgage loans prior to transfer, and repurchased reverse mortgage loans are not discussed further in this section.
At March 31, 2013, the principal balance of our residential loan portfolio that exposes us to credit risk was $1.6 billion. These residential loans, which are accounted for at amortized cost, consist of forward loans held by the consolidated Residual Trusts and unencumbered forward loans. The principal balance of residential loans and the carrying value of other collateral of the Residual Trusts total $1.7 billion and is permanently financed with $1.3 billion of mortgage-backed debt leaving us with a net credit exposure of $410.8 million, which approximates our residual interests in the consolidated Residual Trusts.
The residential loans that expose us to credit risk are predominantly credit-challenged, non-conforming loans with an average loan-to-value, or LTV, ratio at origination of approximately 90.5% and an average refreshed borrower credit score, or FICO score, of 595. While we feel that our underwriting and due diligence with regard to these loans will help to mitigate the risk of significant borrower default on these loans, we cannot assure you that all borrowers will continue to satisfy their payment obligations under these loans, thereby avoiding default.
The information provided below consists of data for the residential loan portfolio for which we are subject to credit risk as explained above.
March 31,
2013 |
December 31,
2012 |
|||||||
Total number of residential loans outstanding (1) |
31,171 | 31,512 | ||||||
Principal balance of residential loans outstanding (in thousands) |
$ | 1,635,653 | $ | 1,662,183 | ||||
Delinquencies as a percent of amounts outstanding: |
||||||||
30-59 days |
1.09 | % | 1.53 | % | ||||
60-89 days |
0.40 | % | 0.85 | % | ||||
90 days or more |
4.53 | % | 4.63 | % | ||||
|
|
|
|
|||||
Total |
6.02 | % | 7.01 | % | ||||
|
|
|
|
|||||
Number of residential loans on non-accrual status (in thousands) |
1,081 | 1,130 | ||||||
Principal balance of residential loans outstanding in non-accrual status (in thousands) |
$ | 74,112 | $ | 76,990 | ||||
Allowance for loan losses (in thousands) |
$ | 19,932 | $ | 20,435 | ||||
Weighted average loan to value (LTV) ratio |
90.53 | % | 90.44 | % | ||||
Weighted average refreshed FICO score |
595 | 595 |
(1) | The majority of the residential loans to which the Company is exposed to credit risk were originated prior to 2005 and are collateralized by property located primarily in the south and southeastern United States, with the largest concentration in Texas. |
(2) | Loans are placed in non-accrual status due to contractual principal and interest payments being past due 90 days or more. |
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Off-Balance Sheet Arrangements
We have interests in VIEs that we do not consolidate as we have determined that we are not the primary beneficiary of the VIEs. In addition, we have interest in forward and reverse loans that have been transferred as a sale or accounted for as a secured borrowing. Refer to Note 4 in the Notes to Consolidated Financial Statements for further information.
Other than the arrangements described in the footnotes referenced above, we do not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or VIEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and have not entered into any synthetic leases. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships other than those described above.
Critical Accounting Policies and Estimates
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. Historically, these policies relate to: the allowance for loan losses on residential loans carried at amortized cost, fair value measurements, goodwill, servicing rights and real estate owned. These critical accounting policies and estimates used in preparation of our consolidated financial statements are described in the Critical Accounting Policies and Estimates section of the Managements Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC on March 18, 2013. There have been no material changes to our critical accounting policies or estimates and the methodologies or assumptions we apply under them other than described below.
Fair Value Measurements
We have an established and documented process for determining fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Refer to Note 6 in the Notes to Consolidated Financial Statements for a description of valuation methodologies used to measure assets and liabilities at fair value and details on the valuation models, key inputs to those models and significant assumptions utilized. The three levels of the fair value hierarchy are as follows:
Basis or Measurement
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As of March 31, 2013 a majority of our assets and liabilities measured at fair value on a recurring and non-recurring basis were valued using significant unobservable (Level 3) inputs, and comprised 60% and 61% of total assets and liabilities recorded on the consolidated balance sheet, respectively.
We determine fair value based upon quoted broker prices, when available, or through the use of alternative approaches, such as the discounting of expected cash flows at market rates commensurate with an instruments credit quality and duration. Level 3 unobservable assumptions reflect our own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
We elected to measure all reverse mortgage assets and liabilities and residential loans held for sale as well as servicing rights related to a risk-managed loan class at fair value. For all other assets and liabilities, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as they are acquired or incurred. The Company elected to measure at fair value residential loans, receivables and mortgage-backed debt associated with the Non-Residual Trusts. The fair value option was elected for these assets and liabilities as we believe fair value best reflects the expected future economic performance of these assets and liabilities. We also record at fair value interest rate lock commitments and forward sales commitments associated with residential loans held for sale. Refer to Note 6 in the Notes to Consolidated Financial Statements for further information
Considerable judgment is used in forming conclusions in estimating inputs to our internal valuation models used to estimate our Level 3 fair value measurements. Level 3 inputs such as, but not limited to, conditional prepayment rate, conditional default rate, loss severity, average life assumptions and loan funding probability are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, our estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
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Servicing Rights
Servicing rights are an intangible asset representing the right to service a portfolio of loans. Capitalized servicing rights relate to servicing and sub-servicing contracts acquired in connection with business combinations. Additionally, we have acquired the rights to service loans through the purchase of such rights from third parties or through the transfer of purchased or originated loans with servicing rights retained. All newly acquired or originated servicing rights are initially measured at fair value. Subsequent to acquisition or origination, we account for servicing rights using the amortization method or the fair value measurement method, based on our strategy for managing the risks of the underlying portfolios. Refer to information surrounding the change in accounting for servicing rights at Note 2 in the Notes to the Consolidated Financial Statements.
We identify classes of servicing rights based upon the availability of market inputs used in determining their fair values and our planned risk management strategy associated with the servicing rights. Based upon these criteria, we have identified three classes of servicing rights: a risk-managed forward loan class, or the risk-managed loan class, a forward loan class and a reverse loan class. Servicing assets associated with the forward loan class and the reverse loan class are amortized based on expected cash flows in proportion to and over the life of net servicing income. Amortization is recorded in net servicing revenue and fees in the consolidated statements of comprehensive income. Forward and reverse loan classes are stratified by product type and compared to the estimated fair value on a quarterly basis. To the extent that the carrying value for a stratum exceeds its estimated fair value, a valuation allowance is established with an impairment loss recognized in other expenses, net in the consolidated statements of comprehensive income. If the fair value of the impaired servicing asset increases, then we adjust the carrying value of the servicing asset as a reduction in the valuation allowance. We recognize a direct impairment to the servicing asset when the recoverability of the valuation allowance is determined to be unrecoverable.
For servicing assets associated with the risk-managed loan class, or those that are accounted for at fair value, we measure the fair value at each reporting date and record changes in fair value in servicing revenue and fees in the consolidated statements of comprehensive income.
We estimate the fair value of our servicing rights by calculating the present value of expected future cash flows utilizing assumptions that we believe a market participant would consider in valuing our servicing rights. The significant components of the estimated future cash inflows for servicing rights include estimates and assumptions related to the prepayments of principal, defaults, ancillary fees, discount rates that we believe approximate yields required by investors for these assets, and the expected cost of servicing.
Changes in these assumptions are generally expected to affect our results of operations as follows:
|
Increases in prepayments of principal generally reduce the value of our servicing rights as the underlying loans prepay faster which causes accelerated servicing right amortization or declines in the fair value of servicing rights, |
|
Increases in defaults generally reduce the value of our servicing rights as the cost of servicing increases during the delinquency period due primarily to increases in servicing advances and related interest expense, which is partially offset by increases in ancillary fees, |
|
Increases in discount rate reduce the value of our servicing rights due to the lower overall net present value of the cash flows. |
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A. Quantitative and Qualitative Disclosure About Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013. Except as noted below, our market risks have not changed materially since December 31, 2012.
Interest Rate Risk
Use of Derivatives to Manage Risk
An integral component of our interest rate risk management strategy is our use of derivative instruments to minimize significant fluctuations in earnings caused by changes in interest rates. As part of our overall interest rate risk management strategy, we enter into contracts or derivatives to hedge interest rate lock commitments and loans held for sale. These derivatives include forward sales commitments.
We enter into these derivative contracts with major financial institutions. Credit risk arises from the inability of these counterparties to meet the terms of the contracts. We minimize this risk through monitoring procedures and collateral requirements.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in Internal Controls
There have been no changes in our internal control over financial reporting during our first quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materia1ly affect, our internal control over financial reporting. We acquired RMS on November 1, 2012, S1L on December 31, 2012, the ResCap net assets on January 31, 2013, the Ally Bank net assets on March 1, 2013 and the MetLife Bank net assets on March 1, 2013. We are currently integrating policies, processes, people, technology and operations for the combined companies. Management will continue to evaluate our internal controls over financial reporting as we execute our integration activities.
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ITEM 1. | LEGAL PROCEEDINGS |
For a description of legal proceedings, see Part I, Item 3. Legal Proceedings, of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 18, 2013. There have been no material developments involving legal proceedings since December 31, 2012.
ITEM 1A. | RISK FACTORS |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Except as noted below, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 18, 2013.
Lender-placed insurance is under increased scrutiny by regulators and, in the event changes are made to current practices, it could result in damages and/or reduced income from commissions for the Green Tree insurance business and/or material changes to the revenues derived from our historical insurance business.
Under certain circumstances, when borrowers fail to provide hazard insurance on their residences, the owner or servicer of the loan may place such insurance to protect the collateral and passes the premium onto the borrower. Walter Investments historical practice had been to place the coverage with a third-party carrier which, in turn, reinsured some of the exposure with Walter Investment Reinsurance Co., Ltd., our wholly-owned subsidiary. This practice ended effective December 31, 2011. Green Trees insurance agency acts as an agent for this purpose by placing the insurance coverage with a third-party carrier and for which the agency earns a commission. Both practices have come under the scrutiny of regulators. On March 21, 2013, Assurant, Inc., a third-party insurance carrier for which Green Trees insurance agency acts as a agent, and certain of Assurants subsidiaries entered into a Consent Order with the New York Department of Financial Services (NY DFS) concerning lender-placed policies issued by Assurant in New York. Among the Consent Order provisions, Assurant agreed that if the NY DFS prohibits all lender-placed carriers from paying compensation to servicers and their affiliates, Assurant will comply with the prohibition. If this prohibition becomes effective, revenues from our insurance agency business will be reduced in New York. We cannot be certain that Green Trees lender-placed insurance practices will not be further restricted or prohibited. Should this occur, the revenues from our insurance business could be significantly reduced or eliminated.
On March 29, 2013, the Federal Housing Finance Agency, or FHFA, as conservator of Fannie Mae and Freddie Mac (the GSEs), published notice in the Federal Register of proposed restrictions on lender-placed insurance practices related to loans purchased or guaranteed by the GSEs. The proposed restrictions would prohibit loan servicers, such as Green Tree, from receiving, directly or indirectly, remuneration associated with placing insurance coverage on serviced loans. This proposal may restrict Green Trees insurance agency from receiving future sales commissions when placing insurance on GSE loans serviced by Green Tree. Interested parties have 60 days from the date of the notice to provide comment or input to the FHFA. The FHFA has indicated that, four months after its receipt of such comments or input, it will provide guidance to servicers, including implementation schedules related to the proposed restrictions on lender-placed insurance practices.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
a) Not applicable.
b) Not applicable.
c) Not applicable.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The exhibits listed on the Exhibit Index, which appears immediately following the signature page below, are included or incorporated by reference herein.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WALTER INVESTMENT MANAGEMENT CORP. | ||||||
Dated: May 10, 2013 | By: |
/s/ Mark J. OBrien |
||||
Mark J. OBrien | ||||||
Chief Executive Officer (Principal Executive Officer) |
||||||
Dated: May 10, 2013 | By: |
/s/ Charles E. Cauthen |
||||
Charles E. Cauthen | ||||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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INDEX TO EXHIBITS
Exhibit
No. |
Notes |
Description |
||
3 | (6) | Amended and Restated Articles of Incorporation. | ||
10.1 | (1) | Amended and Restated 2011 Omnibus Incentive Plan. | ||
10.2 | (2) | Subordinated Indenture, dated as of January 13, 2012, between the Registrant and Wells Fargo Bank, National Association, as trustee. | ||
10.3 | (3) | Warehouse Agreement and Pricing Side Letter, each dated March 27, 2013 by and between Green Tree Servicing LLC, a wholly owned indirect subsidiary of the Registrant, and Credit Suisse First Boston Mortgage Capital LLC. | ||
10.4 | (4) | Amended and Restated Warehouse Agreement dated March 28, 2013 by and between Reverse Mortgage Solutions, Inc., a wholly owned indirect subsidiary of the Registrant, and the Royal Bank of Scotland plc. | ||
10.5 | (5) | Third Amendment to the Addendum to Mortgage Selling and Servicing Contract (Early Advance Funding Agreement) effective April 1, 2013 by and between Green Tree Servicing LLC, a wholly owned indirect subsidiary of the Registrant, and Fannie Mae. | ||
31.1 | (6) | Certification by Mark J. OBrien pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | (6) | Certification by Charles E. Cauthen pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | (6) | Certification by Mark J. OBrien and Charles E. Cauthen pursuant to 18 U.S.C. Section 1352, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101 | (6) | XBRL (Extensible Business Reporting Language) The following materials from Walter Investment Management Corp.s Quarterly Report on Form 10-Q for the three months ended March 31, 2013, formatted in XBRL (Extensible Business Reporting Language); (i) Consolidated Balance Sheets as of March 31, 2013 and 2012; (ii) Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012; (iii) Consolidated Statements of Stockholders Equity for the three months ended March 31, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012; and (v) Notes to Consolidated Financial Statements. | ||
Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
Note |
Notes to Exhibit Index |
|
(1) | Incorporated herein by reference to the Registrants Current Report on Form 8-K as filed with the Securities and Exchange Commission on May 8, 2013. | |
(2) | Incorporated herein by reference to Exhibit 4.6 to the Registrants Registration Statement on Form S-3 filed with the Securities and Exchange Commission on January 13, 2012. | |
(3) | Incorporated herein by reference to the Registrants Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 28, 2013. | |
(4) | Incorporated herein by reference to the Registrants Current Report on Form 8-K as filed with the Securities and Exchange Commission on April 2, 2013. | |
(5) | Incorporated herein by reference to the Registrants Current Report on Form 8-K as filed with the Securities and Exchange Commission on April 9, 2013. | |
(6) | Filed herewith. |
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Exhibit 3
WALTER INVESTMENT MANAGEMENT CORP.
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST : Walter Investment Management Corp., a Maryland corporation (the Corporation), desires to amend and restate its charter as currently in effect and as hereinafter amended.
SECOND : The following provisions are all the provisions of the charter currently in effect and as hereinafter amended:
ARTICLE FIRST
NAME
The name of the corporation (the Corporation) is:
Walter Investment Management Corp.
ARTICLE SECOND
PURPOSE
The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the Code)) for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force. As used herein, REIT means a real estate investment trust under Sections 856 through 860 of the Code.
ARTICLE THIRD
PRINCIPAL OFFICE IN STATE
The address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, 351 West Camden Street, Baltimore, Maryland 21201.
ARTICLE FOURTH
RESIDENT AGENT
The name of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Incorporated, 351 West Camden Street, Baltimore, Maryland 21201. The resident agent is a Maryland corporation.
ARTICLE FIFTH
STOCK
(a) Authorized Shares . The Corporation has authority to issue 100,000,000 shares of stock, consisting of 90,000,000 shares of common stock, $0.01 par value per share (Common Stock), and 10,000,000 shares of preferred stock, $0.01 par value per share (Preferred Stock. The aggregate par value of all authorized shares of stock having par value is $1,000,000. If shares of one class of stock are classified or reclassified into shares of another class of stock pursuant to Section (b) of this Article FIFTH, the number of authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of stock of all classes that the Corporation has authority to issue shall not be more than the total number of shares of stock set forth in the first sentence of this paragraph.
(b) Classification and Reclassification of Stock .
(1) The Board of Directors may classify any unissued shares of Preferred Stock and reclassify any unissued shares of Common Stock or any previously classified but unissued shares of Preferred Stock of any series from time to time, into one or more classes or series of stock.
(2) Prior to issuance of classified or reclassified shares of any class or series, the Board of Directors by resolution shall: (A) designate that class or series to distinguish it from all other classes and series of stock of the Corporation; (B) specify the number of shares to be included in the class or series; (C) set or change, subject to the provisions of Article NINTH and subject to the express terms of any class or series of stock of the Corporation outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (D) cause the Corporation to file articles supplementary with the State Department of Assessments and Taxation of Maryland (SDAT). Any of the terms of any class or series of stock set or changed pursuant to clause (C) of this subsection (b)(2) may be made dependent upon facts or events ascertainable outside Charter (including determinations by the Board of Directors or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles supplementary or other Charter document.
(c) The following is a description of the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the Common Stock of the Corporation:
(1) Except as may be otherwise specified in the Charter, each share of Common Stock shall have one vote, and, except as otherwise provided in respect of any class of stock hereafter classified or reclassified, the exclusive voting power for all purposes shall be vested in the holders of the Common Stock. Shares of Common Stock shall not have cumulative voting rights.
(2) Subject to the provisions of law and any preferences of any class of stock hereafter classified or reclassified, dividends, or other distributions, including dividends or other distributions payable in shares of another class of the Corporations stock, may be paid ratably on the Common Stock at such time and in such amounts as the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Common Stock shall be entitled, together with the holders of any other class of stock hereafter classified or reclassified not having a preference on distributions in the liquidation, dissolution or winding up of the Corporation, to share ratably in the net assets of the Corporation remaining, after payment or provision for payment of the debts and other liabilities of the Corporation and the amount to which the holders of any class of stock hereafter classified or reclassified having a preference on distributions in the liquidation, dissolution or winding up of the Corporation shall be entitled.
(d) Charter and Bylaws . The rights of all stockholders and the terms of all stock are subject to the provisions of the Charter and the Bylaws of the Corporation (the Bylaws). The Board of Directors of the Corporation shall have the exclusive power to make, alter, amend or repeal the Bylaws.
ARTICLE SIXTH
BOARD OF DIRECTORS
(a) The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation may be increased or decreased by at least a majority of the entire Board of Directors pursuant to the Bylaws , but shall never be less than the minimum number required by the Maryland General Corporation Law (MGCL) now or hereafter in force.
(b) Subject to the rights of the holders of any class of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors shall be filled by a vote of the stockholders or a majority of the entire Board of Directors, and any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office, or other cause shall be filled by a vote of the stockholders or a majority of the directors then in office. No decrease in the number of directors constituting the Board of Directors shall affect the tenure of office of any director.
(c) Whenever the holders of any one or more series of Preferred Stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the Board of Directors shall consist of said directors so elected in addition to the number of directors fixed as provided in paragraph (a) of this Article SIXTH or in the Bylaws. Notwithstanding the foregoing, and except as otherwise may be required by law, whenever the holders of any one or more series of Preferred Stock of the Corporation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders.
(d) Subject to the rights of the holders of any class separately entitled to elect one or more directors, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least a majority of the combined voting power of all classes of shares of capital stock entitled to vote in the election for directors voting together as a single class.
(e) The directors of the Corporation shall be divided equally (or as nearly as possible) into three classes, Class I, Class II and Class III.
(f) At each annual meeting of the stockholders, the successors to the class of directors whose term expires at such meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors are duly elected and qualify
ARTICLE SEVENTH
POWERS OF THE CORPORATION, DIRECTORS AND STOCKHOLDERS;
AMENDMENTS
(a) Powers of the Corporation, Directors and Stockholders .
(1) Authorization by Board of Stock Issuance . The Board of Directors may authorize the issuance from time to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or securities or rights convertible into shares of its stock of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set forth in the Charter or the Bylaws.
(2) Preemptive and Appraisal Rights . Except as may be provided by the Board of Directors in setting the terms of classified or reclassified shares of stock pursuant to Article FIFTH Section (b) or as may otherwise be provided by a contract approved by the Board of Directors, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right to purchase or subscribe for any additional shares of stock of the Corporation or any other security of the Corporation which it may issue or sell. Holders of shares of stock shall
not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board of Directors, upon the affirmative vote of a majority of the Board of Directors, shall determine that such rights apply, with respect to all or any classes or series of stock, to one or more transactions occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise such rights.
(3) Determinations by Board . The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Directors consistent with the Charter, shall be final and conclusive and shall be binding upon the Corporation and every holder of shares of its stock: the amount of the net income of the Corporation for any period and the amount of assets at any time legally available for the payment of dividends, redemption of its stock or the payment of other distributions on its stock; the amount of paid-in surplus, net assets, other surplus, annual or other cash flow, funds from operations, net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); any interpretation of the terms, preferences, conversion or other rights, voting powers or rights, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any class or series of stock of the Corporation; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Corporation or of any shares of stock of the Corporation; the number of shares of stock of any class of the Corporation; any matter relating to the acquisition, holding and disposition of any assets by the Corporation; or any other matter relating to the business and affairs of the Corporation or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.
(4) The Corporation shall provide any indemnification permitted by the laws of Maryland and shall indemnify directors, officers, agents and employees as follows: (A) the Corporation shall indemnify its directors and officers, whether serving the Corporation or at its request any other entity, to the full extent required or permitted by the General Laws of the State of Maryland now or hereafter in force, including the advance of expenses (without requiring a preliminary determination of the ultimate entitlement to indemnification) to the full extent permitted by law and (B) the Corporation shall indemnify other employees and agents, whether serving the Corporation or at its request any other entity, to such extent as shall be authorized by the Board of Directors or the Bylaws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the Charter or repeal of any of its provisions shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal or shall limit or eliminate the rights granted under indemnification agreements entered into by the Corporation and its directors, officers, agents and employees. The rights to indemnification and advance of expenses provided by the Charter to a director or officer of the Corporation shall vest immediately upon election of such director or officer.
(5) To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of the Corporation shall be personally liable to the Corporation or its stockholders for money damages. No amendment of the Charter or repeal of any of its provisions shall limit or eliminate the benefits provided to directors and officers under this provision with respect to any act or omission which occurred prior to such amendment or repeal.
(6) For any stockholder proposal to be presented in connection with an annual meeting of stockholders of the Corporation, including any proposal relating to the nomination of a director to be elected to the Board of Directors of the Corporation, the stockholders must have given timely written notice thereof in writing to the Secretary of the Corporation in the manner and containing the information required by the Bylaws. Stockholder proposals to be presented in connection with a special meeting of stockholders will be presented by the Corporation only to the extent required by Section 2-502 of the MGCL.
(7) Notwithstanding any provision of law requiring the authorization of any action by the holders of shares entitled to cast a greater number of votes, such action shall be valid and effective if declared adviseable by the Board of Directors and taken or approved by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter, except as otherwise provided in the Charter.
(8) Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting by consent, in writing or by electronic transmission, in any manner permitted by the MGCL and set forth in the Bylaws.
(b) The Corporation reserves the right to amend, alter, change or repeal any provision contained in the Charter, including any amendments changing the terms or contract rights, as expressly set forth in the Charter, of any of its outstanding stock. Unless otherwise provided herein, the proposed change will be effective only if it is adopted upon the affirmative vote of the holders of shares entitled to cast not less than a majority of the aggregate votes entitled to be cast thereon (considered for this purpose as a single class); provided however, that any amendment to, repeal of or adoption of any provision inconsistent with subparagraphs (a)(4), (a)(5), (a)(6), (a)(7) or this paragraph (b) of this Article SEVENTH, paragraph (c) of Article FIFTH or Article SIXTH will be effective only if it is adopted upon the affirmative vote of the holders of shares entitled to cast not less than two-thirds of the aggregate votes entitled to be cast thereon (considered for this purpose as a single class). In addition, in the event the Corporation becomes qualified as a REIT, no term or provisions of the Charter may be added, amended or repealed in any respect that would, in the determination of the Board of Directors, cause the Corporation not to qualify as a REIT under the Code unless in each such case, such action is approved (in addition to any other vote, approval, authorization or advice (including that of the Board of Directors) that may otherwise be required) by the affirmative vote of the holders of not less than two-thirds (66-2/3%) of all the votes entitled to be cast on the matter.
ARTICLE EIGHTH
REIT QUALIFICATION
If the Corporation elects to qualify for federal income tax treatment as a REIT, the Board of Directors shall use its reasonable best efforts to take such actions as are necessary or appropriate to achieve and/or preserve the status of the Corporation as a REIT; however, if after qualifying as a REIT the Board of Directors thereafter determines that it is no longer in the best interests of the Corporation to continue to be qualified as a REIT, the Board of Directors may revoke or otherwise terminate the Corporations REIT election pursuant to Section 856(g) of the
Code or take such other action as shall cause the Corporation to no longer qualify as a REIT. The Board of Directors also may determine compliance with any restriction or limitation on stock ownership and transfers set forth in Article NINTH is no longer required for REIT qualification.
NINTH
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
(a) Definitions . For the purpose of this Article NINTH, the following terms shall have the following meanings:
Aggregate Stock Ownership Limit . The term Aggregate Stock Ownership Limit shall mean not more than 9.8 percent in value of the aggregate of the outstanding shares of Capital Stock.
Beneficial Ownership . The term Beneficial Ownership shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms Beneficial Owner, Beneficially Owns and Beneficially Owned shall have the correlative meanings.
Business Day . The term Business Day shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close.
Capital Stock . The term Capital Stock shall mean all classes or series of stock of the Corporation, including, without limitation, Common Stock and Preferred Stock.
Charitable Beneficiary . The term Charitable Beneficiary shall mean one or more beneficiaries of the Trust as determined pursuant to subparagraph (c)(6) of this Article NINTH, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
Common Stock Ownership Limit . The term Common Stock Ownership Limit shall mean not more than 9.8 percent (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of Common Stock of the Corporation.
Constructive Ownership . The term Constructive Ownership shall mean ownership of Capital Stock by a Person, whether the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms Constructive Owner, Constructively Owns and Constructively Owned shall have the correlative meanings.
Excepted Holder . The term Excepted Holder shall mean a stockholder of the Corporation for whom an Excepted Holder Limit is created by the Charter or by the Board of Directors pursuant to subparagraph (b)(7) of this Article NINTH.
Excepted Holder Limit . The term Excepted Holder Limit shall mean, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Directors pursuant to subparagraph (b)(7) of this Article NINTH and subject to adjustment pursuant to subparagraph (b)(8) of this Article NINTH, the percentage limit established by the Board of Directors pursuant to subparagraph (b)(7) of this Article NINTH.
Initial Date . The term Initial Date shall mean the date upon which the Corporation qualifies as a REIT.
Market Price . The term Market Price on any date shall mean, with respect to any class or series of outstanding shares of Capital Stock, the Closing Price for such Capital Stock on such date. The Closing Price on any date shall mean the last sale price for such Capital Stock, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Capital Stock, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Capital Stock is not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Capital Stock is listed or admitted to trading or, if such Capital Stock is not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such Capital Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Capital Stock selected by the Board of Directors of the Corporation or, in the event that no trading price is available for such Capital Stock, the fair market value of the Capital Stock, as determined in good faith by the Board of Directors.
NYSE . The term NYSE shall mean the New York Stock Exchange stock exchange.
Person . The term Person shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit applies.
Prohibited Owner . The term Prohibited Owner shall mean, with respect to any purported Transfer, any Person who, but for the provisions of subparagraph (b)(1) of this Article NINTH, would Beneficially Own or Constructively Own shares of Capital Stock, and if appropriate in the context, shall also mean any Person who would have been the record owner of the shares that the Prohibited Owner would have so owned.
Restriction Termination Date . The term Restriction Termination Date shall mean the first day after the Initial Date on which (1) the Board of Directors determines pursuant to Article EIGHTH of the Charter that (i) it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT, or (ii) that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of shares of Capital Stock set forth herein is no longer required in order for the Corporation to qualify as a REIT, or (2) that the Corporation no longer qualifies as a REIT.
Transfer . The term Transfer shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Capital Stock or the right to vote or receive dividends on
Capital Stock, including (1) the granting or exercise of any option (or any disposition of any option), (2) any disposition of any securities or rights convertible into or exchangeable for Capital Stock or any interest in Capital Stock or any exercise of any such conversion or exchange right and (3) Transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Capital Stock; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms Transferring and Transferred shall have the correlative meanings.
Trust . The term Trust shall mean any trust provided for in subparagraph (c)(1) of this Article NINTH.
Trustee . The term Trustee shall mean the Person unaffiliated with the Corporation and a Prohibited Owner, that is appointed by the Corporation to serve as trustee of the Trust.
(b) Capital Stock .
(1) Ownership Limitations . During the period commencing on the Initial Date and prior to the Restriction Termination Date, but subject to paragraph (b)(7) of Article NINTH:
(i) Basic Restrictions .
(A) (1) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Aggregate Stock Ownership Limit, (2) no Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own shares of Common Stock in excess of the Common Stock Ownership Limit and (3) no Excepted Holder shall Beneficially Own or Constructively Own shares of Capital Stock in excess of the Excepted Holder Limit for such Excepted Holder.
(B) No Person shall Beneficially or Constructively Own shares of Capital Stock to the extent that such Beneficial or Constructive Ownership of Capital Stock would result in the Corporation being closely held within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, Beneficial or Constructive Ownership that would result in the Corporation owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Corporation from such tenant would cause the Corporation to fail to satisfy any of the gross income requirements of Section 856(c) of the Code).
(C) Any Transfer of shares of Capital Stock that, if effective, would result in the Capital Stock being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio , and the intended transferee shall acquire no rights in such shares of Capital Stock.
(ii) Transfer in Trust . If any Transfer of shares of Capital Stock occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Capital Stock in violation of subparagraph (b)(1)(i)(A) or (B) of this Article NINTH,
(A) then that number of shares of the Capital Stock the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate subparagraph (b)(1)(i)(A) or (B) of this Article NINTH (rounded up to the nearest whole share) shall be automatically transferred to a Trust for the benefit of a Charitable Beneficiary, as described in Article NINTH (c), effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such shares; or
(B) if the transfer to the Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of subparagraph (b)(1)(i)(A) or (B) Article NINTH, then the Transfer of that number of shares of Capital Stock that otherwise would cause any Person to violate subparagraph (b)(1)(i)(A) or (B) of this Article NINTH shall be void ab initio , and the intended transferee shall acquire no rights in such shares of Capital Stock.
(2) Remedies for Breach . If the Board of Directors or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of subparagraph (b)(1) of this Article NINTH or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any shares of Capital Stock in violation of subparagraph (b)(1) of this Article NINTH (whether or not such violation is intended), the Board of Directors or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Corporation to redeem shares, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or other event; provided , however , that any Transfer or attempted Transfer or other event in violation of Article NINTH (b)(1) shall automatically result in the transfer to the Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Directors or a committee thereof.
(3) Notice of Restricted Transfer . Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of shares of Capital Stock that will or may violate Article NINTH (b)(1)(i) or any Person who would have owned shares of Capital Stock that resulted in a transfer to the Trust pursuant to the provisions of Article NINTH (b)(1)(ii) shall immediately give written notice to the Corporation of such event or, in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer on the Corporations status as a REIT.
(4) Owners Required To Provide Information . From the Initial Date and prior to the Restriction Termination Date:
(i) every owner of five percent or more (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding shares of Capital Stock, within 30 days after the end of each taxable year, shall give written notice to the Corporation stating the name and address of such owner, the number of shares of Capital Stock and other shares of the Capital Stock Beneficially Owned and a description of the manner in which such shares are held. Each such owner shall provide to the Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership on the Corporations status as a REIT and to ensure compliance with the Aggregate Stock Ownership Limit; and
(ii) each Person who is a Beneficial or Constructive Owner of Capital Stock and each Person (including the stockholder of record) who is holding Capital Stock for a Beneficial or Constructive Owner shall provide to the Corporation such information as the Corporation may request, in good faith, in order to determine the Corporations status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance.
(5) Remedies Not Limited . Subject to Article FIFTH, nothing contained in paragraph (b) of this Article NINTH shall limit the authority of the Board of Directors to take such other action as it deems necessary or advisable to protect the Corporation and the interests of its stockholders in preserving the Corporations status as a REIT.
(6) Ambiguity . In the case of an ambiguity in the application of any of the provisions of this Article NINTH (b), (c), or any definition contained in (a), the Board of Directors shall have the power to determine the application of the provisions of this Article NINTH (b) or (c) or any such definition with respect to any situation based on the facts known to it. In the event Article NINTH (b) or (c) requires an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Article NINTH (a), (b) or (c). Absent a decision to the contrary by the Board of Directors (which the Board may make in its sole and absolute discretion), if a Person would have (but for the remedies set forth in Article NINTH (b)(2)) acquired Beneficial or Constructive Ownership of Stock in violation of Article NINTH (b)(1), such remedies (as applicable) shall apply first to the shares of Stock which, but for such remedies, would have been Beneficially Owned or Constructively Owned (but not actually owned) by such Person, pro rata among the Persons who actually own such shares of Stock based upon the relative number of the shares of Stock held by each such Person.
(7) Exceptions .
(i) Subject to Article NINTH (b)(1)(i)(B), the Board of Directors, in its sole discretion, may exempt (prospectively or retroactively) a Person from the Aggregate Stock Ownership Limit and the Common Stock Ownership Limit, as the case may be, and may establish or increase an Excepted Holder Limit for such Person if:
(A) the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individuals Beneficial or Constructive Ownership of such shares of Capital Stock will violate Article NINTH (b)(1)(i)(B);
(B) such Person does not and represents that it will not own, actually or Constructively, an interest in a tenant of the Corporation (or a tenant of any entity owned or controlled by the Corporation) that would cause the Corporation to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board of Directors obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Corporation (or an entity owned or controlled by the Corporation) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the opinion of the Board of Directors, rent from such tenant would not adversely affect the Corporations ability to qualify as a REIT shall not be treated as a tenant of the Corporation); and
(C) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Article NINTH (b)(1) through (b)(6)) will result in such shares of Capital Stock being automatically transferred to a Trust in accordance with Article NINTH (b)(1)(ii) and (c).
(ii) Prior to granting any exception pursuant to Article NINTH (b)(7)(i), the Board of Directors may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Corporations status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception.
(iii) Subject to Article NINTH (b)(1)(i)(B), an underwriter which participates in a public offering or a private placement of Capital Stock (or securities convertible into or exchangeable for Capital Stock) may Beneficially Own or Constructively Own shares of Capital Stock (or securities convertible into or exchangeable for Capital Stock) in excess of the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit, or both such limits, but only to the extent necessary to facilitate such public offering or private placement.
(iv) The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (A) with the written consent of such Excepted Holder at any time or (B) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Common Stock Ownership Limit.
(8) Increase or Decrease in Aggregate Stock Ownership and Common Stock Ownership Limits . Subject to Article NINTH (b)(2)(i)(B) and in connection with establishing an Excepted Holder Limit or at any other time, the Board of Directors may from time to time increase or decrease the Common Stock Ownership Limit or the Aggregate Stock Ownership Limit; provided, however, that any decreased Common Stock Ownership Limit and/or Aggregate Stock Ownership Limit will not be effective for any Person whose percentage ownership in Stock is in excess of such decreased Common Stock Ownership Limit and/or Aggregate Stock Ownership Limit until such time as such Persons percentage of Stock equals or falls below the decreased Common Stock Ownership Limit and/or Aggregate Stock Ownership Limit, but any further acquisition of Stock in excess of such percentage ownership of Stock will be in violation of the Common Stock Ownership Limit and/or Aggregate Stock Ownership Limit and, provided further, that the Board of Directors may not increase or decrease the Common Stock Ownership Limit or the Aggregate Stock Ownership Limit if such increase or decrease would allow five or fewer Persons to Beneficially Own more than 49.9% in value of the outstanding Stock.
(9) Legend . Any certificate for shares of Capital Stock shall bear substantially the following legend:
The shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose, among others, of the Corporations maintenance of its status as a Real Estate Investment Trust under the Internal Revenue Code of 1986, as amended (the Code). Subject to certain further restrictions and except as expressly provided in the Corporations Charter, (i) no Person may Beneficially or Constructively Own shares of the Corporations Common Stock in excess of 9.8 percent (in value or number of shares) of the outstanding shares of Common Stock of the Corporation unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively
Own shares of Capital Stock of the Corporation in excess of 9.8 percent of the value of the total outstanding shares of Capital Stock of the Corporation, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Capital Stock that would result in the Corporation being closely held under Section 856(h) of the Code or otherwise cause the Corporation to fail to qualify as a REIT; and (iv) no Person may Transfer shares of Capital Stock if such Transfer would result in the Capital Stock of the Corporation being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own shares of Capital Stock which causes or will cause a Person to Beneficially or Constructively Own shares of Capital Stock in excess or in violation of the above limitations must immediately notify the Corporation. If any of the restrictions on transfer or ownership are violated, the shares of Capital Stock represented hereby may be automatically transferred to a Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In addition, the Corporation may redeem shares upon the terms and conditions specified by the Board of Directors in its sole discretion if the Board of Directors determines that ownership or a Transfer or other event may violate the restrictions described above. Furthermore, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio . All capitalized terms in this legend have the meanings defined in the Charter of the Corporation, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Capital Stock of the Corporation on request and without charge. Requests for such a copy may be directed to the Secretary of the Corporation at its Principal Office.
Instead of the foregoing legend, any certificate may state that the Corporation will furnish a full statement about certain restrictions on transferability to a stockholder on request and without charge.
(c) Transfer of Capital Stock in Trust .
(1) Ownership in Trust . Upon any purported Transfer or other event described in Article NINTH (b)(1)(ii) that would result in a transfer of shares of Capital Stock to a Trust, such shares of Capital Stock shall be deemed to have been transferred to the Trustee as
trustee of a Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Trust pursuant to Article NINTH (b)(1)(ii). The Trustee shall be appointed by the Corporation and shall be a Person unaffiliated with the Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Corporation as provided in Article NINTH (c)(6).
(2) Status of Shares Held by the Trustee . Shares of Capital Stock held by the Trustee shall be issued and outstanding shares of Capital Stock of the Corporation. The Prohibited Owner shall have no rights in the shares held by the Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the shares held in the Trust.
(3) Dividend and Voting Rights . The Trustee shall have all voting rights and rights to dividends or other distributions with respect to shares of Capital Stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares held in the Trust and, subject to Maryland law, effective as of the date that the shares of Capital Stock have been transferred to the Trustee, the Trustee shall have the authority (at the Trustees sole discretion) (i) to rescind as void any vote
cast by a Prohibited Owner prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Corporation has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Notwithstanding the provisions of this Article NINTH, until the Corporation has received notification that shares of Capital Stock have been transferred into a Trust, the Corporation shall be entitled to rely on its share transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of stockholders.
(4) Sale of Shares by Trustee . Within 20 days of receiving notice from the Corporation that shares of Capital Stock have been transferred to the Trust, the Trustee of the Trust shall sell the shares held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Article NINTH (b)(1)(i). Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Article NINTH (c)(4). The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Trust ( e.g. , in the case of a gift, devise or other such transaction), the Market Price of the shares on the day of the event causing the shares to be held in the Trust and (2) the price per share received by the Trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the shares held in the Trust. The Trustee may reduce the amount payable to the Prohibited Owner by the amount of dividends and distributions which
have been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Article NINTH (c)(3). Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Corporation that shares of Capital Stock have been transferred to the Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Article NINTH (c)(4), such excess shall be paid to the Trustee upon demand.
(5) Purchase Right in Stock Transferred to the Trustee . Shares of Capital Stock transferred to the Trustee shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation may reduce the amount payable to the Prohibited Owner by the amount of dividends and distributions which has been paid to the Prohibited Owner and are owed by the Prohibited Owner to the Trustee pursuant to Article NINTH (c)(3). The Corporation may pay the amount of such reduction to the Trustee for the benefit of the Charitable Beneficiary. The Corporation shall have the right to accept such offer until the Trustee has sold the shares held in the Trust pursuant to Article NINTH (c)(4). Upon such a sale to the Corporation, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner.
(6) Designation of Charitable Beneficiaries . By written notice to the Trustee, the Corporation shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Trust such that the shares of Capital Stock held in the Trust would not violate the restrictions set forth in Article NINTH (b)(1)(i) in the hands of such Charitable Beneficiary.
(d) NYSE Transactions . Nothing in this Article NINTH shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction occurs shall not negate the effect of any other provision of this Article NINTH and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article NINTH.
(e) Enforcement . The Corporation is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article NINTH.
(f) Non-Waiver . No delay or failure on the part of the Corporation or the Board of Directors in exercising any right hereunder shall operate as a waiver of any right of the Corporation or the Board of Directors, as the case may be, except to the extent specifically waived in writing.
THIRD : The amendment and restatement of the charter as hereinabove set forth have been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law.
FOURTH : The current address of the principal office of the Corporation is as set forth in Article THIRD of the foregoing amendment and restatement of the charter.
FIFTH : The name and address of the Corporations current resident agent is as set forth in Article FOURTH of the foregoing amendment and restatement of the charter.
SIXTH : The Corporation currently has nine directors. The names of the directors currently in office are:
Steven Berrard
Ellyn Brown
Alvaro de Molina
Denmar Dixon
William Meurer
Mark OBrien
James Pappas
Shannon Smith
Michael Tokarz
SEVENTH : The Corporation has elected to be subject to Section 3-804(a) and Section 3-804(c) of the Maryland General Corporation Law (the MGCL). The repeal of the Corporations election to be subject to Section 3-804(a) and/or Section 3-804(c) of the MGCL may be effected only by a resolution adopted by the Board of Directors.
EIGHTH : The undersigned acknowledges these Articles of Amendment and Restatement to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its Chairman and Chief Executive Officer and attested to by its Vice President, General Counsel and Secretary on this 3rd day of May, 2013.
ATTEST: | WALTER INVESTMENT MANAGEMENT CORP. | |||||||
/s/ Stuart D. Boyd |
By: |
/s/ Mark OBrien |
||||||
Name: | Stuart D. Boyd | Name: | Mark OBrien | |||||
Title: |
Vice President, General Counsel and Secretary | Title: | Chairman and CEO |
EXHIBIT 31.1
CERTIFICATION BY MARK J. OBRIEN
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark J. OBrien, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Walter Investment Management Corp. (the Registrant) for the period ended March 31, 2013 (the Report);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; and
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c) evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) disclosed in this Report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and
5. The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.
/s/ Mark J. OBrien |
Mark J. OBrien |
Chief Executive Officer |
Date: May 10, 2013 |
EXHIBIT 31.2
CERTIFICATION BY CHARLES E. CAUTHEN
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles E. Cauthen, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Walter Investment Management Corp. (the Registrant) for the period ended March 31, 2013 (the Report);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; and
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c) evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) disclosed in this Report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and
5. The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting.
/s/ Charles E. Cauthen |
Charles E. Cauthen |
Chief Financial Officer |
Date: May 10, 2013 |
EXHIBIT 32
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Mark J. OBrien, Chief Executive Officer, and Charles E. Cauthen, Chief Financial Officer, of Walter Investment Management Corp. (the Company), certify to each such officers knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that:
1. The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2013 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 10, 2013 | By: |
/s/ Mark J. OBrien |
||||
Mark J. OBrien | ||||||
Chief Executive Officer | ||||||
Dated: May 10, 2013 | By: |
/s/ Charles E. Cauthen |
||||
Charles E. Cauthen | ||||||
Chief Financial Officer |