It was once a sleepy division of a conglomerate-turned-energy
Now Tampa, Fla.-basedWalter Investment Management (
) seems to have shot up from nowhere to become one of the top
specialty mortgage servicers in the U.S.
In its field, onlyNationstar Mortgage Holdings (
) andOcwen Financial (
) are bigger.
And its fee-based business keeps getting bigger. On Jan. 7,
Walter snagged a $93 billionFannie Mae (
) servicing portfolio fromBank of America (
) for $519 million. It includes 650,000 loans, 80% of them
That followed an agreement to take on $50 billion in loan
servicing from bankrupt Residential Capital, or ResCap.
When those and other new loans are boarded, Walter's servicing
portfolio will jump from $79 billion in unpaid principal, as of
Sept. 30, to $230 billion.
And that is if no other new business comes on line. As
Walter's vice chairman, Denmar John Dixon, told analysts and
investors recently, "There's plenty more to do."
That includes both prime and "high-touch, credit-sensitive"
loans, Walter's forte.
"We've got the capability to handle a very broad set of
products," Dixon said.
Headaches Are Us
This is a good time to be an independent mortgage servicer.
Banks continue to sell off servicing rights of their home-loan
portfolios -- and for good reason. With ever more regulatory
scrutiny and new rules, out go the headaches and costs that come
Specialty servicers don't mind the hassle. That's what they
are born to do, and their soaring growth rates speak to just how
much they are in demand.
"I'm finding more and more evidence that there is a secular
shift in the market and that it makes sense for originators and
mortgage bankers to sell servicing rights to the special
servicers," said analyst Kevin Barker of Compass Point.
He says government service agencies are also urging banks to
shift loans to top special servicers such as Nationstar, Ocwen
and Walter. A majority of Walter's servicing platform is on
Fannie Mae loans, Barker has noted.
Walter's revenue has grown from $180 million in 2010 to an
estimated $658 million in 2012. Analysts forecast 2013 revenue
will top $1.2 billion, according to Thomson Reuters.
Walter's growth took off in 2011 after it acquired loan
servicer Green Tree Credit Solutions in a deal valued at more
than $1 billion. Green Tree added nearly 2,000 employees to
Walter's 350 and more than two dozen offices in as many
With Green Tree, Walter lost its REIT status. But the Green
Tree acquisition let Walter go after more business in the growing
specialty mortgage services market, especially risky mortgages,
which come with higher fees. And it landed an origination
platform that allows it to capture refinancings of loans that may
have gone elsewhere.
Since the Green Tree acquisition, Walter's shares have climbed
from 15 to as high as 49 on Jan. 8. Shares are now trading around
At the same time as the Bank of America announcement, Walter
said it would acquire the government-agency-focused home-mortgage
servicing platform and related assets of MetLife Bank, based in
Walter's earnings, meanwhile, have gone from a loss of $2.51 a
share in 2011 to a forecasted $2.76-per-share profit in 2012. EPS
is projected to reach $6.32 this year, says Thomson Reuters.
Economies Of Scale
Nonbank servicers that buy new business at a decent price can
achieve economies of scale and thus "cover the cost of loans that
go bad," said Fitch Ratings' managing director, Diane Pendley.
"So they can still be profitable."
Management expects Bank of America's servicing prize to add
$55 million to $60 million in operating cash flow this year and
$70 million to $80 million the next two years. Originations and
insurance could add $110 million to $135 million.
Walter's has the largest insurance business of the top-three
nonbank servicers, but regulatory crackdowns on "force-placed"
insurance could weaken commissions, Barker has warned.
Reverse mortgage originations following Walter's acquisition
last year of Reverse Mortgage Solutions will also contribute to
earnings, despite regulatory head winds, analysts say.
How much more business will banks offload? "That is the big
question," Barker said. "I think banks have a long way to
Barker says Bank of America could likely sell $100 billion to
$300 billion more in servicing rights, primarily to Nationstar,
Ocwen and Walter.
He seesJPMorgan Chase (JPM) and home loan kingWells Fargo
(WFC) selling larger chunks of their servicing portfolios as
Walter's management says $2 trillion of assets could shift to
special servicers by 2015. Today's U.S. mortgage market is about
Walter, Nationstar and Ocwen "have grown tremendously since
September," Barker said, mostly via acquisitions. "They are
almost completely different companies."
In 2009, Walter was spun off from Walter Industries as an
independent publicly traded REIT. The parent company then changed
its name toWalter Energy (WLT) as part of a rebranding
Walter is considered "capital light" relative to Nationstar
and Ocwen. A larger share of its portfolio is subserviced vs.
rivals, so not as much capital investment is needed, though
that's changing as its own originations rise and it pursues more
It earns incentive and performance-based fees on subservicing
contracts, which boosts profits.
In the third quarter, Walter's return on net investment on
servicing was 83.3% vs. Nationstar's 26.2% and Ocwen's 52.2%, as
measured by earnings before interest, taxes, depreciation and
amortization, according to a recent Sterne Agee industry
Walter's originations business helps offset outflow as loans
are paid off or refinanced out of its portfolio.
Its deal with ResCap includes an origination platform.
Originations give it the ability "to generate servicing assets
long-term," Barker said.