Continuing an unfortunate trend for non-bank mortgage servicers in the second quarter of 2016, Walter Investment Management reported a net loss of $232 million for the three-month period ending June 30, 2016, according to the company’s Q2 2016 earnings report released Tuesday.
One result of the losses for Walter Investment was a change in leadership. George M. Awad took over as the company’s Executive Chairman of the Board and Interim CEO on June 30, the last day of Q2. The company reported that they have hired an industry veteran as permanent CEO who is expected to start sometime during Q4.
Declining interest rates played a major role in the $172 million net loss that Walter Investment reported for Q1, and it was more of the same for the company in Q2. Walter’s Q2 net loss included goodwill impairment charges of $133.6 million after tax and non-cash charges of $87.2 million after tax, resulting from fair value changes due to changes in valuation inputs and other assumptions, according to the company’s announcement.
The goodwill impairment charges incurred by Walter Investment during Q2 related to Servicing and ARM reporting units within the company’s servicing segment—and were primarily the result of elevated discount rates applied to lower re-forecasted cash flows, according to Walter Investment.
“While second quarter performance showed improvement in some areas as compared to the prior quarter, our results continue to fall short of expectations, driven by both external factors such as the declining interest rate environment as well as internal operational inefficiencies,” Awad said. “We remain resolute on achieving sustainable growth, delivering consistent profitability and maximizing our capital allocation. Our strategy to achieve these goals is founded on three pillars: capital efficiency, process efficiency and an engaged workforce and new leadership.”
“While second quarter performance showed improvement in some areas as compared to the prior quarter, our results continue to fall short of expectations, driven by both external factors such as the declining interest rate environment as well as internal operational inefficiencies.”
George Awad, Interim CEO, Walter Investment
Ditech, the company’s servicing segment, in particular took a hit because of the goodwill impairment changes; after reporting a pre-tax income of $82.3 million for Q2 2015, Ditech reported a pre-tax loss of $356 million for Q2 2016. Ditech remains one of the top 10 servicers in the country when ranked by unpaid principal balance (UPB); Ditech services approximately 2.1 million accounts with a UPB of approximately $248.6 billion as of the end of Q2. Ditech completed MSR sales of $8.5 billion during Q2. Expenses for the Servicing Segment increased from $239.4 million in Q2 2015 way up to $428.4 million, primarily due to $215.4 million in goodwill impairment charges during the quarter.
The Origination segment fared somewhat better than the Servicing segment, reporting a net income of $45.6 million—an increase of $12.7 million over-the-year. Still, revenue for the Origination segment declined over-the-year by $18.5 million, down to $110.2 million—primarily due to a $15.2 million decrease in net gains on sales of loans. Ditech is ranked as a top 20 originator in the country according to UPB.
The year 2016 has been as tough for non-bank servicers as 2015 was earnings-wise. Out of the three largest non-bank servicers rated by Moody’s (Ocwen Financial, Nationstar Mortgage, Walter Investment), all reported quarterly losses for both Q1 and Q2 this year. Out of the three, only Nationstar turned a profit for the full year of 2015 ($43 million). Both Ocwen and Walter Investment experienced losses of more than $200 million last year.
Click here for Walter Investment’s complete Q2 earnings report.