Aware that sweeping regulatory changes would likely send the reverse mortgage business into a tailspin, Ditech – then named Walter Investment Management – shut down the HECM origination channel of its subsidiary, Reverse Mortgage Solutions, in January 2017.
But the company has continued to service reverse mortgages – a tricky business, to be sure – and it’s not going well.
According to a report filed Tuesday with the Securities and Exchange Commission, Ditech’s reverse mortgage business is operating at a sizable loss – and this trend isn’t likely to turn around anytime soon.
The company said this segment of its business incurred “significant losses” in 2017 and 2018.
“We service a substantial portfolio of reverse loans and expect to incur continued losses on that servicing activity,” it stated.
“We expect these losses will be driven by the costs of servicing defaulted reverse loans that are a part of our securitized portfolio, including appraisal-based claims, shortfalls between the debenture rate we receive on defaulted loans and the note rate we must continue to pay, property preservation expenses, curtailment costs and other servicing costs,” it continued.
Ditech said it is evaluating its options, including the possibility of selling some or all of its assets or collaborating with other parties to pursue alternative solutions.
Noting that it had $60.9 million in reverse business on the line, it added that it could not be certain that any actions it took could successfully curb losses.
In February, Ditech filed for bankruptcy for the second time in 14 months.
Just a year prior, it emerged from Chapter 11, shedding its former moniker Walter Investment and announcing the completion of a financial restructuring plan that eliminated $800 million in corporate debt.
But, apparently, that wasn’t enough.
Ditech filed again two months ago, including its subsidiaries Ditech Financial and RMS in this go-around, entering the entities into a “restructuring support agreement” that seeks to restructure the company’s debt.
And it seems that debt is sizable.
In its latest filing, the company said its current debt obligations total $3 billion and called into question its ability to successfully emerge from Chapter 11, adding that even if it can reorganize, the timeline for exiting bankruptcy remains unclear.
In regard to its reverse mortgage business, Ditech said RMS currently maintains operations centers in Houston, but that it reduced its headcount by 100 at the end of 2018 to just 500 employees, and spent $9 million less on salaries and benefits for RMS employees, in part due to its exit from the originations business.
The filing also enumerated a number of risks facing the nonbank’s HECM channel, noting that “the reverse loan business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks.”
Among those risks:
-The potential for an increase in foreclosure rates, which would drive up the cost of servicing and result in negative publicity
-Regulation by the Consumer Financial Protection Bureau, the Department of Housing and Urban Development or other federal agencies that could “materially and adversely” affect business operations and lead to increased oversight, which may in turn increase operational costs and potentially lead to litigation fees
-The potential for limited access to the securities market or for a reduction in margins earned in the securities market that could adversely affect liquidity and profitability
-The potential for adverse publicity, a risk inherent in the reverse mortgage servicing business. “As the servicer of HECM loans, from time to time we are required to foreclose on and evict delinquent borrowers, who are likely to be elderly,” the filing noted. “This has attracted, and may continue to attract, adverse publicity.”
