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Walter Investment Management (NYSE:WAC)

Q4 2012 Earnings Call

March 19, 2013 10:00 am ET

Executives

Whitney K. Finch - Vice President of Investor Relations

Mark J. O'Brien - Chairman and Chief Executive Officer

Charles E. Cauthen - Chief Financial Officer and Chief Operating Officer

Kimberly A. Perez - Chief Accounting Officer and Senior Vice President

Denmar John Dixon - Vice Chairman and Executive Vice President

Analysts

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Douglas Harter - Crédit Suisse AG, Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Ryan O'Steen - Keefe, Bruyette, & Woods, Inc., Research Division

James J. Fowler - Harvest Capital Strategies LLC

Ben Glaze

Jordan Hymowitz

Ravi Chopra

Operator

Welcome, and thank you for standing by. [Operator Instructions]

I would like to turn the meeting over to your host, Ms. Whitney Finch, Vice President, Investor Relations. You may begin.

Whitney K. Finch

Thank you, Sherry. Good morning, and thank you for joining us for Walter Investment Management Corp.'s earnings conference call for the quarter and full year ended December 31, 2012. This call is being webcast live on the Internet and will be archived on our website for at least 30 days. This morning, management will discuss earnings for the quarter and full year ended December 31, 2012, as well as our current business outlook.

Let me remind you that comments on the call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These statements are based on the company's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those statements. Please refer to our SEC filings for a full disclosure of the risk factors that may affect any forward-looking statements. Except for any obligation to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after this call.

We will discuss non-GAAP financial measures during this call. These non-GAAP measures are fully reconciled in the tables attached to the earnings press release we issued earlier today and the presentation accompanying this call. We believe that these measures provide investors useful information about our business trends. However, our non-GAAP measures do not replace and are not superior to GAAP measures.

Participating in today's call are Walter Investment's Chairman and CEO, Mark O'Brien; COO and CFO, Charles Cauthen; Vice Chairman and Executive Vice President, Denmar Dixon; and CAO, Kim Perez. Once we have completed our prepared remarks, we will open the call to questions from our dial-in participants.

At this time, I will turn the call over to Mark.

Mark J. O'Brien

Thank you, Whitney, and good morning, everyone. 2012 was an extremely successful year for Walter Investment. Beginning from the strategic acquisition of Green Tree in 2011 and our demonstrated ability to produce solid cash flows, 2012 was about executing against our strategic plan and delivering on the huge market opportunity from the secular shift that we have identified and promised our stakeholders.

Our goals for 2012 were clear: to capture our share of the wave of servicing migrating to the specialty servicing sector; and secondly, to make strides in building a more diversified, profitable and sustainable business model. We believe we were very successful in achieving both goals. Our capture of additional business and execution against our strategic plan drove significant value for our shareholders, producing a total shareholder return for the year of 110% that added to the prior successes and drove total shareholder return since our inception in 2009 in excess of 600%.

While we were doing all of this, we were able also to deliver very good financial results. More than a year ago, we indicated that we expected the business to generate EBITDA in the range of $225 million to $240 million. Today, we reported full year EBITDA of $241.7 million. In 2013, we look to capitalize on and extend the successes of 2011 and 2012. The scale of the opportunity ahead of us hasn't diminished at all. In fact, we believe it has increased measurably. We are now even better positioned against that opportunity than we were at the beginning of 2012.

In the servicing business, we have added significant additional product capabilities and clearly added scale. We have achieved this while maintaining high standards of -- for performance and compliance across the entire platform. We have built the leading franchise in the reverse mortgage sector and have positioned the company to gain a significant position in the origination business. Most importantly, we have the team in place throughout all levels of the organization which has and will continue to execute against this opportunity.

I would now like to you ask Charles and Denmar to provide more details and specifics to you with regards to the 2012 accomplishments and an outlook into 2013 and beyond. Kim will also provide you with financial highlights for the full year and for the quarter. After that, I'll make a few more remarks before we take your questions. Charles?

Charles E. Cauthen

Thanks, Mark. Mark mentioned 2 key goals for 2012. With regard to the first, we were highly successful in capturing our share of the large amount of business that moved to specialty services over the last 12 months. More importantly, we did so in a very deliberate manner that maximized our profit opportunities while mitigating operating risks.

Our 2 biggest additions were the acquisitions of the Fannie Mae MSRs from ResCap and BofA, totaling $128 billion in UPB. In both of these opportunities, we intentionally focused on product with a strategic partner, where we already know and understand the product extremely well, where we have a strong fit with our existing platform and servicing infrastructure and where we have significant experience with large transfers and integrations. Much of this product will also be eligible for the type of incentive opportunities we have proven our ability to capitalize on as a result of our ability to add value to the portfolio through our excellent servicing results.

And it's not only in choosing the right opportunity that makes you successful, it's also on how you execute against that opportunity when it's available that makes a difference. In the case of the ResCap transaction, we identified an opportunity to participate in the transaction that otherwise would not have been possible by partnering with Ocwen in a structure that improved both partner's chances for success. In the BofA transaction, we were instrumental in working with 2 strategic partners, BofA and Fannie Mae, to help construct a transaction that was advantageous to all 3 parties. At the end of the day, the result was that we were able to add significant UPB to our platform, which leverages our fixed cost, is priced at attractive lifetime servicing margins, offers significant upside incentive opportunities and should have a long life, if we're successful in our recapture effort.

With respect to building a more diversified, profitable and sustainable business model, we were able to make major strides and progressed on many fronts in 2012. In total, we believe we developed the platform into a much more broad-based, attractive, profitable and sustainable business. One of the 3 most important developments in that regard in 2012 was we acquired the ResCap origination platform in a deliberate tactical transaction. This was an asset that was acquired at relatively little cost compared to its earnings production capacity. As you will hear later, this platform is a tool we expect to generate significant EBITDA earnings and value in 2013 and beyond.

We were able to enhance this platform further through our acquisition of the correspondent and wholesale broker business of Ally at virtually no cost. Our acquisitions of these platforms are a key component in the execution of our strategic initiatives. Originations are key to enhancing the long-term value of our core servicing business. In addition to the origination earnings provided, the retention and recapture capabilities of the platform strongly support the core servicer by extending the duration of the serviced portfolio particularly at a time when the assets it generates are at attractive values.

This effort also dovetails nicely with our ongoing commitments to serve our borrowers and help meet the goals of our strategic partner, Fannie Mae. Through this, we find ways to help homeowners who qualify for our programs stay in their homes, refinancing their current high LTV loans into more affordable loans and decreasing the risk of default for these homeowners. The acquisition of the correspondent and wholesale broker business of Ally will serve as both a near-term and long-term enhancement to our efforts. In the near term, it will assist in leveraging the overall cost of the platform in the originations business generally. In the long-term, the volume this business can produce and the ability to quickly leverage it up and down with market conditions makes it a very important part of the business that can produce MSRs that we could either choose to sell or high-quality, low-cost MSRs that we can retain in our servicing business.

A second important area of development for us in 2012 was our expansion into the reverse mortgage sector. In looking at strategic business opportunities, we felt that the extension of our core competencies from the forward space into the reverse mortgage sector made a lot of sense. In the same way, we saw opportunity in the turmoil of the market 3 years ago, we see that same type of opportunity today in the reverse mortgage market, albeit on a smaller scale. Through the acquisitions of RMS and Security One, 2 of the preeminent players in that space, we have created the #1 reverse franchise in the space. We believe there's meaningful growth opportunity in this sector in the coming years due to favorable demographics, and we see an ability to consolidate servicing for this product in the near term. With the best platform technology and management team in the sector, we are well positioned to capitalize on those opportunities.

While it has not been a major topic of discussion by us, the recently announced acquisition of the MetLife Bank servicing platform is another small but strategic transaction we completed. We acquired this platform at a nominal price, and while it doesn't factor significantly into our financial projections for 2013, it is an important addition for the long term. This acquisition accelerates the extension of our product capabilities to Freddie and Ginnie product and gives us additional flexibility in prime servicing [ph]. And importantly, the platform not only expands our capacity for these new product offerings, it provides increased capacity for our core high-touch platform by allowing us to move better performing, less credit-sensitive assets off of the Green Tree platform to this platform.

I'd now like to have Kim review fourth quarter and full year 2012 financial results with you. And then, Denmar can provide some detail about how our individual businesses were doing, as well as some color on current market conditions, our pipeline and business development opportunities. Kim?

Kimberly A. Perez

Thanks, Charles. During 2012, our strong operational performance drove solidly improved financial performance as compared to the prior year. Total revenue for 2012 was $667 million, including incentive and performance-based revenues for 2012 totaling $105 million. Significant year-over-year increases reflect the inclusion of Green Tree for the full year in 2012 versus a half-year in 2011. However, fourth quarter year-over-year comparison shows strong increases reflective of contributions from the Fannie Mae subservice portfolios added in late 2011, as well as solid improvements in incentive and in performance-based revenues.

Total revenue for the fourth quarter of 2012 of $176.4 million increased 13% or $20.5 million over the prior year period. Incentive and performance-based revenues increased by $15 million or 83% as compared to the fourth quarter of 2011. The GAAP net loss for 2012 of $22.1 million or $0.73 per fully diluted share reflects, among other items, a loss of $48.6 million primarily relating to the extinguishment of the company's second lien debt in the fourth quarter and a total of $15.8 million of transaction and integration charges over the course of the year.

Adjusted EBITDA for the full year of 2012 of $241.7 million was 15% or $30.7 million higher than 2011, largely as a result of increased servicing revenues generated on portfolios boarded in the last 4 months of 2011. This year's results also included a $7.7 million contribution from the Reverse Mortgage segment for the months of November and December. These results were slightly above the high end of management's previously provided guidance range for the year of $225 million to $240 million. Adjusted EBITDA for the fourth quarter was $64.1 million, including the additional contribution from the Reverse Mortgage segment.

Core earnings for the year of $83.1 million after taxes or $2.73 per diluted share doubled as compared to core earnings of $41.5 million or $1.50 per diluted share for 2011. Core earnings for the fourth quarter of 2012 of $22.5 million reflected the increased revenue from the late 2011 new business additions, along with 2012 new business, more than offsetting normal portfolio runoff.

The servicing segment generated revenue of $398.7 million in 2012, which included $293 million of servicing fees, $64 million of incentive and performance-based fees and $38.6 million of ancillary and other fees. Servicing revenues include a full year's worth of results in 2012 for Green Tree, including the growth in the servicing portfolio and improved generation of incentive and performance-based revenues. The servicing segment's core earnings before taxes for the year was $125 million. Core earnings before taxes for the fourth quarter of $31.3 million was a 13% increase or $3.6 million higher when compared to the prior year.

On a side note, our UPB runoff for Q4 looks high, but this reflects HARP runoffs in the quarter that was recaptured through our partnership with Quicken, which will come back to us in Q1. This was approximately $5 billion of UPB.

In the ARM segment, higher gross collections and improved margins drove higher revenues and core earnings. In Q4, this segment generated revenue of $11.3 million and core earnings before taxes of $5.4 million as compared to revenues of $7.1 million and pretax core earnings of $2.8 million for the fourth quarter of 2011. For the full year, the ARM segment generated revenue of $39 million and core earnings before taxes of $17 million.

The Insurance segment generated revenue of $19.2 million in the quarter, roughly $1.4 million lower than the prior year quarter. The decrease reflected the runoff of Walter's reinsurance business combined with fewer written policies on the MH portfolio, offset by additional lender-placed policies written on the residential real estate portfolio. Insurance segment core earnings before taxes of $10.6 million for Q4 2012 was essentially flat as compared to the prior year period. The Insurance segment generated revenue of $74 million for the year and core earnings before taxes of $41 million for 2012.

The Loans and Residuals segment, which includes the legacy Walter Investment-owned portfolio, generated net interest income of $58 million for the year, $15.7 million below the $73.7 million generated in 2011. The decrease reflected lower average balances outstanding as a result of runoff and a slightly lower average yield on loans due to an increase in 90-day delinquencies. Segment pretax earnings was $21 million in 2012 compared to $31.8 million for 2011.

This segment generated net interest income of $10.4 million for the fourth quarter of 2012, slightly below the $12 million generated in the fourth quarter of 2011 as a result of normal portfolio runoffs. Segment pretax core earnings was $1.5 million for the fourth quarter of 2012 compared to $5.1 million for the fourth quarter of 2011, primarily as a result of lower net interest income and an increase to provision for losses of $2.6 million. Performance for the Walter Investment legacy portfolio remained strong, with REO inventory declining as compared to the prior year period, partially offset by 128-basis-point increase in 30-day delinquencies.

The newly reporting Reverse Mortgage segment generated revenue of $7.7 million for the months of November and December, which included $5.1 million in servicing fees and $2 million of other revenue. Additionally, there was a $7.3 million gain from the net impact of the HECM loans and HMBS-related obligation fair value adjustments. Segments core earnings before income taxes was $6.9 million in the fourth quarter. Segment core earnings for the Reverse Mortgage segment reflects the exclusion of fair value adjustments made in accordance with GAAP and adds, as cash gain, the excess of proceeds received in Ginnie Mae financing transactions above the purchase price or cost for the related loans originated or acquired.

Overall, the company generated EBITDA margins of 36% for the year, demonstrating the strict focus we have on delivering strong and consistent financial results from our business while protecting our EBITDA margins, which has consistently remained in the 35% to 40% range. Since October, we have raised $2 billion of capital to support our growth initiatives and refinance our existing credit facilities on more attractive terms. The capital raises completed in the fourth quarter strengthened our capital structure with additional common equity, while we were also able to refinance existing debt to reduce its cost and provide much greater flexibility with respect to potential future capital needs as we seek to take advantage of the market opportunity ahead of us.

While we had many successes in 2012, I would like to comment on one item contained in the 10-K that is not indicative of the standards we strive to maintain. We noted that we had a material weakness in certain of our internal controls related to the significant increase in our acquisitions and related transactions in the fourth quarter of 2012. This issue manifested itself in the form of an incorrect capitalization of an arrangement fee paid to our investment bankers associated with our fourth quarter refinancing.

This item, which totaled $4.7 million, was detected by our auditors and corrected before we reported our results. While we were already in the process of adding to our accounting staff and have been supplementing our needs with qualified accounting consultants, we have now accelerated our efforts in this area. We also have plans to make additional improvements, including further automation of our processes and procedures in order to remediate this deficiency in our control structure on a timely basis.

I'd now like to turn the discussion over to Denmar.

Denmar John Dixon

Thank you, Kim. I will provide brief comments on the market overall, then walk you through an update of our pipeline, our view on capital plans and our perspective on key business lines. First, we see current economic conditions and the economic outlook as generally positive for the business overall. An assessment of all the potential impacts is complicated, but the key takeaway is that a slowly improving economy and housing market in a continued low interest rate environment should be an environment conducive to each of our key business units hitting their objectives.

Diving a little deeper, the market drivers that are providing the catalyst for the significant level of activity in the sector remain positive and in full force. In fact, recent large transactions in this sector have acted as an impetus to a ramp in activity with some of our clients. Our clients continue to be motivated to move assets for all the reasons we have previously noted: compliance, capital, regulatory and operational efficiencies as the large owners and servicers of credit-sensitive assets seek to relocate high-risk, non-core product, out of their shops and off their balance sheets in an effort to improve their internal efficiencies, lower cost and improved performance on the assets. The sector has seen over $500 billion of assets transferred in the last 6 months, but it remains our view that we are still in the middle innings of the aggregation phase of a market with over $1 trillion of assets still to move in the next several years.

We continue to see MSR priced at relatively attractive levels, as the level of supply and transfer constraints offset the declining cost of capital for the assets. Our pipeline currently stands at over $300 billion of UPB and is made up of a diverse mix of product that includes a spread of multiple clients that provides us diversity. We are pleased to announce that we've converted approximately $20 billion of the exclusive pipeline in the last 75 days. This would include the $5 billion we announced as having closed at year-end. Importantly, some of this business is represented in new client relationships, and our experience is that we tend to be able to generate repeat transactions from clients after getting the first piece of business done. The exclusive pipeline now stands at approximately $40 billion and is heavily weighted towards subservicing opportunities, which, if converted, will represent high-margin business for us with an impact beginning in 2014. We would expect to convert a high percentage of this exclusive pipeline and for it to transact over the near term.

I should also note that there are opportunities to convert other near-term business from the nonexclusive portion of the pipeline, as many of those deals are being bid in comp and tend to transact on a faster timeline. As always, I would caution that while the total active pipeline contains multiple clients and solid product diversification, the business is not done until signed and there can be changes and surprises along the way.

Now let me spend a minute on our outlook and views about capital availability in the sector. We are quite pleased with the momentum that exist with significant capital being deployed against the sector in key assets, such as MSR and advances. This is reflected in the meaningful decline in yields that has occurred for publicly traded vehicles specializing in the product and trading levels of the financings done by us and our peers and in the number and magnitude of private players who are already active who are looking for opportunity in the sector. We see these trends as positive for the specialty servicing industry and look for these trends to continue.

While we've used our balance sheet to fund recent activity, it's important to note that this may not be the permanent funding source of those transactions, and this is not a proxy for how we may handle future activity. To that end, I'd like to provide an update in our previously mentioned plans for a capital vehicle. We continue to make good progress on the project and hope to have something done in the near future. We are targeting an externally managed vehicle, managed by Walter, one that will initially be private and licensed to own MSR that we will also consider a public option at the appropriate time. We expect this vehicle to have a multiproduct mandate and to capitalize on a fair trade with the Green Tree servicing operation and our ability to supply float product in both forward and reverse origination businesses.

We have submitted our private letter ruling request to support the entity and are taking other actions to move this initiative along. At the same time, it is important to note that we will continue to remain opportunistic in our access to capital. As we've said before, we have identified several capital partners and have discussed structures and bid transactions with them. We continue to be opportunistic and like being in the position to match appropriate capital to individual transactions.

Now I'd like to turn to some of our key businesses. I'd like to spend a few minutes on the positioning of each of our businesses for the future, taking into account our recent transactions. As Charles went through in some detail, we've employed a very thoughtful and focused strategy to drive profitability, growth and sustainability. We believe we are very well positioned to achieve these goals.

On Slide 8, we have laid out the key components of contribution to the core servicing and reverse business. In so doing, we've excluded contribution from the forward origination business due to the newness of this business to us -- for us, the unique circumstances around HARP, et cetera. Also, I'd like to note the boxes are not sized to represent expected dollars of contribution, just the relationship between initial contributions and key contribution over time. As you can see in 2012, the key contributions were from the pre-2011 legacy business and the first full year of the Fannie Mae subservicing deal boarded in late 2011, although it has not yet reached its expected level of peak contribution.

As compared to 2012, results for 2013 will benefit from 3 significant items: the Fannie Mae subservice portfolio will be entering its peak contribution period; 11 months of contribution from the ResCap and BofA purchases; and lastly, the first full year of contribution from the combined RMS and S1 businesses. The potential earnings of the business continues to ramp from there into 2014 as the Fannie Mae subservice business moves deeper into its potential incentives earnings curve, and there's a full year contribution from ResCap and BofA portfolios that also become more profitable without Year 1 startup and transfer cost and as costs come down as delinquencies improve and as the incentive opportunities ramp up. In addition, we would expect to have the full year impact of any 2013 new business. As an indication of the scale of the ramp at the end of 2013 and going into 2014, based on our 2013 guidance, we expect the Q4 2013 adjusted EBITDA for these core businesses to be in excess of 50% higher than Q4 2012.

Now let me return to the Reverse Mortgage business. We are very excited about 2013 and beyond. As Charles said, we've assembled what we believe to be the #1 franchise in the sector, and the opportunity set is attractive. The Reverse Mortgage business is composed primarily of 2 earning streams: originations and servicing. On the origination side, we have a very positive outlook with an expectation of roughly $4 billion to $5 billion of issued volume for 2013, above the current approximate run rate of $3.9 billion. We anticipate that the shift in originations mix on the retail side from 2% to 18% of originated UPB resulting from the S1 acquisition will drive solid margin enhancement, with our expectation that as we transition customers from the fixed-rate HECM product to the ARM product, volumes and originations spreads will remain firm. For 2013, we expect blended net origination margins to be in the range of 250 to 300 basis points.

On the servicing side of the business, we expect to be able to continue to grow the portfolio at attractive rates through the combination of growth from originations and servicing acquisitions. We are looking for the originations platform to add nearly $3 billion of UPB to the portfolio, net of disappearance for 2013, and are confident that we will be able to double the service portfolio to more than $25 billion by the end of Q2. The servicing business is expected to maintain its strong pretax profit margins of 45% to 55%. The reverse business is a model for sustainable profitable growth.

Finally, I want to finish with a report on our acquisition and integration of the ResCap origination and capital markets platform and an update on our forward originations business. The ResCap platform transferred to us on February 1, and its integration into Walter has tracked quite well with our plans. We now have approximately 1,400 associates in the business motivated to make the platform a sector leader. The platform came to us with essentially no beginning pipeline with the exit of the Ally Bank portfolio. While the lack of a beginning pipeline presents challenges, on the other hand, this available capacity was exactly what attracted us to the opportunity. It's eliminated a significant amount of ramp time that otherwise would have been required in building our capacity at Walter, which would allow us to achieve our objectives for retention and recapture on our existing and recently acquired portfolios.

Our early integration plans have been focused around continuing to recapture volume from the existing ResCap portfolio while quickly filling the capacity of the platform with the BofA portfolio and our other owned portfolios. The platform is principally focused on retention and recapture efforts for our portfolio. To date, the platform has some of the strongest recapture statistics in the sector, supporting our estimation for funded origination volumes of approximately $10 billion in 2013 for this channel, with net gain on sale margins of 350 to 400 basis points. This represents approximately 50% of the platform's expected total volume of $20 billion. These volumes are based on currently booked or committed servicing acquisitions. There is potential for upside opportunity from additional new business or from providing retention and recapture to others' portfolios.

To supplement our product offerings, we added the correspondent and wholesale broker business of Ally that was mentioned earlier. This unit, along with an attractive in-place retail unit, will quickly add origination volume that will allow us to fully leverage the resident [ph] capabilities of the platform and efficiently utilize the cost structure currently in place. The volume from the retail and correspondent channels, which is expected to represent the other half of the total volume in 2013, will not be a major contributor to earnings in 2013, but it will serve to cover a significant amount of the infrastructure cost of the platform.

We now have in place a multi-channel platform already at scale and one that has had tremendous success with the HARP program in the past. While near-term 2013 opportunity by the HARP program is significant, we expect the originations business to be an important element of our long-term success. As a best-in-class, multi-channel originator, the platform has existing infrastructure and vendor relationships that have supported peak originations volume of nearly $70 billion. At the same time, the platform needs to be scalable to allow flexibility to size the platform up or down to meet market conditions and capacity needs. Our plans are to prepare for the transition of the consumer direct channel and buildout of the retail, private label, wholesale and correspondent channels while simultaneously investing in [ph] the business to materially improve its efficiency, maximizing the value and profitability of the platform once the HARP opportunity winds down.

Though there is certainly a significant short-term upside through the retention and recapture originations or the consumer direct channel, the long-term strategic fit of this platform is most important as we look for it to generate high-quality, low-cost MSR for the servicer, mitigating runoff in the portfolio and building increased sustainability in the core business model. It should be noted that we will be opportunistic in our retention of low MSR, especially during the current aggregation phase of the servicing side of the market. We expect to retain most of the MSR generated through the consumer direct channel, but our capital markets team will constantly -- will be constantly evaluating cash pricing in order to maximize the return on the business. We continue to view the broader market as a tremendous opportunity set and remain convinced that our unique value proposition and the scale and breadth of our platform will allow us to continue to achieve our strategic objectives. Our focus on executing against these plans ensures we will continue to build a business model centered on sustainable, profitable growth. As we said before, we believe the scale of the opportunity set currently in front of the business exceeds that existing at any time since I've been with Walter.

I'll now hand it back over to Charles to cover the 2013 outlook.

Charles E. Cauthen

Thanks, Denmar. As you've heard, 2013 will be a year of significant growth and change for Walter Investment. In light of the scale of the changes, we thought it important to share our views not only on our expectations for 2013 but also on some of the key components of those expectations, key drivers of that profitability and the potential variability in some of those components.

Overall, we estimate the company will generate adjusted EBITDA in the range of $650 million to $725 million for 2013, which is more than 2.7x 2012 amount. With respect to the core servicing and other businesses, EBITDA is generally very stable and predictable in those businesses. Results for 2013 will reflect the recent additions to and growth of the core servicing business as described on the previous slide and in Denmar's comments. However, incentive is always [ph] an opportunity for us. The Fannie Mae subservice pools we boarded in the last half of 2011 are moving into their strong incentive earnings periods, and we expect to see a ramp in the incentive earnings on these portfolios. At the same time, the new business we're now boarding is not expected to reach its threshold for incentives in 2013, but it is expected to ramp up and contribute significantly in future periods.

The Reverse Mortgage segment should be another key driver of EBITDA growth in 2013. Again, the core servicing component of this business will see growth in EBITDA from the large expansion of its service book, which is expected to more than double. Adding to this will be origination earnings from the Reverse product. As Denmar said earlier, we are targeting origination volumes of approximately $4 billion to $5 billion and are assuming a weighted average net cash gain on sale margin of about 300 basis points on this product. And I'm using a weighted average as margins vary greatly by channel in this business. These EBITDA numbers also reflect cash gain on sale as opposed to fair value accounting. Important to achieving these results were -- will be our ability to transition customers from the HECM Fixed Rate product to adjustable-rate products and to maintain stable gain on sale margins.

We expect the performance of our new origination business against the unique opportunity presented by the HARP program to be a major driver of earnings in 2013. As Denmar stated, we are projecting approximately $20 billion of volume in the business in 2013 with a key component of that being approximately $10 billion of recapture retention volume from the consumer direct channel, and we are projecting that at net margins of approximately 350 to 400 basis points. This area is probably the largest variable in our 2013 guidance. Achievement of these anticipated volumes driven largely by how effective we are and our recapture pull-through rates, as well as our ability to hit these forecasted margins, will be the major driver of where we finish relative to our guidance range.

I also want to note that the margins in our forward origination business and our overall EBITDA guidance reflect both the cash and noncash gain on sale for forward originations and that the noncash gain is net of expected rep and warranty reserves. The noncash portion of our -- of this gain in our guidance is approximately $50 million in EBITDA.

To summarize, we estimate 2013 adjusted EBITDA to be between, again, $650 million and $725 million, which translates to approximately $17.40 to $19.40 per share at 37.3 million shares outstanding. Our estimate for total depreciation and amortization for the year is between $330 million and $370 million. This rate includes both step-up D&A that we have historically excluded from core earnings of approximately $70 million, as well as significant amortization associated with our recent acquisitions.

Our D&A estimate includes amortization for 2013 that equals approximately 27% of the amortization intangibles -- amortizable intangibles recently added. And it's at a rate that reflects the near-term HARP impact as factored into our pricing models. We believe this range, which is simply driven against these projected run-off levels, represents the high end of expected GAAP impact of this amortization. And further, we would expect this amortization rate to normalize in subsequent years post HARP. We are projecting corporate interest expense in the range of $115 million to $135 million with the low end of this range equating to the interest on the financings we currently have in place. And finally, we're estimating an effective tax rate of 38% for the year.

The efforts of the Company in 2011 and 2012 have resulted in solid financial results to-date and have set the stage for a strong 2013. Continued favorable market conditions, as described by Denmar, and solid execution by the Walter team should allow us to continue to post the kind of results that we and you expect.

I'll now turn it back over to Mark.

Mark J. O'Brien

Thank you, Charles. 2012 was an incredibly successful year for our company. We executed against our strategic plan and accomplished our strategic goals, beating the core servicing business through significant, targeted MSR acquisitions, expanding the forward platform into the Reverse Mortgage space through the acquisitions of RMS and S1, expanding our originations footprint through the ResCap acquisition and undertaking capital initiatives necessary to ensure that we have adequate financial flexibility to pursue the growth opportunities in our sector, all the while remaining focused on delivering strong operational and financial performance.

Though our efforts appear aggressive when charted on a growth curve, it is important to note again that our acquisitions were firmly rooted in a product that we know very well: Fannie Mae MSRs, in which we have extensive experience transferring and servicing and with whom we have strong strategic relationships. These factors allow us to deliberately and significantly mitigate the execution risks associated with these acquisitions.

I'd like to close by thanking all of our employees for their extraordinary efforts during 2012 and all of our business partners, clients, vendors and shareholders for their support, which made these remarkable accomplishments in 2012 possible. We were particularly fortunate to be able to strategically partner with Fannie Mae and BofA in support of their goals and ours and objectives going into 2013. We will begin 2013 extremely well positioned to continue to execute against our strategic plan, capitalize on the market opportunities ahead of us and continue to deliver significant returns for our shareholders.

That concludes our prepared remarks, and we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Henry Coffey with Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

A real simple question and then I'll get into some of the more meat of it. You've got servicing UPB in the Reverse Mortgage business going from $12.9 billion to $25 billion on what looks like, what, about $4 billion of originations. How does that -- what's the -- what are we missing there?

Denmar John Dixon

Well, Henry, I don't think you're missing anything. The originations business will add, over the course of the year, roughly that net number. But as we've said in the past, we're actively looking to acquire servicing in the industry, and you could assume that there are several transactions that we've been working that would allow us to accomplish that number.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

So the $25 billion includes some acquisitions [indiscernible]? And then just in terms of understanding the numbers, I'm going to focus -- I think somewhat the rest of the business we caught up -- sort of understand, but I'm going to focus in on the Reverse Mortgage business. Maybe you can work -- walk through what some of this points to you, that $7.3 million of net fair value gain and about $2.5 million of noncash fair value adjustments in the fourth quarter. What exactly is that? And how does that tie into core?

Charles E. Cauthen

Henry, those are -- those numbers that you're referencing are the GAAP accounting results using the fair value methodology, and I'm not sure I always know how fluent people are in the accounting in this, but that is -- reflects a fact that the Reverse Mortgage business is different in the -- from the forward mortgage business in that you can't presently use gain on sale accounting for that business. So we used a fair value method instead. However, in our EBITDA and core earnings presentations, we reversed that and used the cash gain instead. So the EBITDA and the core earnings numbers that we have there would reflect that cash gain.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

So the -- if you added $7.3 million and $2.5 million that would be the cash gain, which is around $10 million?

Charles E. Cauthen

That's correct.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And then just finally, the EBITDA guidance is -- and the details help as well, but in terms of likely add-backs to do get to the core number, it sounds like we should use pretty much numbers very similar to what we saw last year. The step-up in depreciation you're going to add back is only about $70 million. Is that correct?

Charles E. Cauthen

That's correct.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And then the other estimates would be about what they've been?

Charles E. Cauthen

Yes, there was not a major variability in the other items.

Operator

And our next question comes from Kevin Barker of Compass Point.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

During 2013, you assumed 25% to 28% of runoff in the portfolio, it was awfully high.

Denmar John Dixon

Kevin, we're having a little hard time hearing you. Can you speak up?

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Sure. In 2013, you assumed 25% to 28% runoff in the portfolio. Theoretically, if you had no major bulk acquisitions during 2013, what level of depreciation expense and interest expense would you expect in 2014? How much will we expect that to decline if you kept the portfolio static from here?

Charles E. Cauthen

Yes, I haven't -- we haven't forecast that far out, so I can only give you a general range of guidance. I think that we would probably expect that the HARP program is probably pushing those up, those run-off rates up by maybe about 10 points. So on a normalized basis, I think we would expect to get back to what had been a historical kind of run-off rates for us in the low teens, low to mid-teen.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

And then -- so theoretically, how much would your depreciation expense decline if you saw 10-basis-point decline in your runoff?

Charles E. Cauthen

Well, I mean, off the way we are looking at it, which is we're driving it and tying it to the rate of runoff, although that may not be exactly how the accounting works, it would be a comparable number understanding that, as I said, that out of that range of the EBITDA -- I mean, D&A guidance, there's a $70 million piece of that, that is on the depreciation side. That's a step-up side of that. So you back that out. You're going to see that more like what the core amortization number is, and you would kind of broadly expect it to move proportionately to whatever the run-off rates are.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay. And then also, if HARP is extended into 2014, would you expect the depreciation expense to be roughly the same as in 2013? Or how much lower would you expect it to come down?

Denmar John Dixon

It's Denmar. I'd say if HARP's extended, what's going to matter, Kevin, is what they do with the extension, right? If they just extend the current program, we would expect some burnout over the year, so it won't be a level of disappearance. It'll decline. If the HARP pool or box that HARP's drawn around is expanded, then we have to see how they expanded it and who is eligible and make some estimations at that time. But I think overall, with the low-interest-rate environment we've had with HARP having had a full year of '13, I would expect that in either case it'd likely be lower.

Kevin Barker - Compass Point Research & Trading, LLC, Research Division

Okay. And then on HARP, if it's not extended in 2014, what are your expectations for gain on sale in 2014 with HARP ending?

Charles E. Cauthen

Yes. I don't think, we -- again, we haven't forecast out that far, but without -- obviously, HARP is driving some outsized gain on sale numbers today, and just depending on what anything else and everything else that might happen in the market, you would just normally expect those margins to come back into their normalized ranges.

Mark J. O'Brien

And as we said, while the margins would come into normalized ranges, we expect our business lending business to pick up some of the volume.

Denmar John Dixon

If you think about it, Kevin, we historically have not had a contribution from the originations business. So we've got this very, as we said, opportunistic opportunity around HARP to build the originations business. We were able to access the ResCap platform opportunistically, and we then, therefore, end up or pasted together, if you will, a multi-channel originator, which will be strategic to supporting the sustainability and the growth of the business over time and we would expect would contribute to earnings past just the HARP period.

Operator

And our next question comes from Paul Miller. You're with FBR.

Paul J. Miller - FBR Capital Markets & Co., Research Division

You talk about -- just going back to the 25% to 28% runoff, do you think you can replace most of that? Like what do you think you will be a year or 2 out on UPB if you didn't -- keeping the portfolio static relative to any new acquisitions? Or you think you can replace all that through new acquisitions of MSRs?

Denmar John Dixon

Yes, Paul. I'd say a couple of things. I mean, we've been pretty clear that we think we are feeding the core servicing program -- core servicing platform numerous ways now, right? We still are in the aggregation phase in the business, so we do believe we will add to the program -- the platform in a more stair-step fashion. We'll continue to do it over the next several years as we stay in this phase, right? We now also have the ability to feed the platform through a forward flow off the originations business. Okay? And that could be, as you can see from the scale of the originator, significant dollars flowing into the servicing portfolio. At the same time, we continue to work on both delinquent and forward flow programs outside of just our originator. So the delinquent programs, we've got a couple that we're working on, and we'd like to add to that, very attractive business for us. And on the forward side, we are being careful about signing those up, but we have signed one up, for instance, that meets the platform very well because it's an acquisition of HARP MSR, if you will, therefore more credit-sensitive borrowers that meet the core competency of our platform. So I think we will, once again, my favorite word, be a little bit opportunistic to grow the portfolio in the right way using the best channels to do that and have the flexibility to move the dials as necessary. But I don't think that our #1 concern on a go-forward basis is replenishment and growth of the portfolio.

Mark J. O'Brien

Paul, this is Mark. Let me just expand on that just a little bit. Our entry into the forward originations business was particularly designed around sustainability. Clearly, HARP creates a marvelous opportunity in 2013. And to dwell on the obvious for a minute, I mean, the one thing that will keep prepayment speeds accelerated are very low interest rates. So in that environment, our originator and the gain on sale business ought to be pretty strong. On the other hand, if rates go up a fair bit, it's going to significantly retard the runoff, and there'll be a corresponding offset in the volume available in the originations business. So everything we're doing -- no, not everything, but certainly, an awful lot of the things we have done and intend to do over the course of '13 are about creating sustainability in the business. It is no accident that we coveted the ResCap Origination platform because it had done significant volume. Our challenge, obviously, is going to be to execute and keep it there. But as long as we're in this low-interest-rate environment, we have a wonderful opportunity to replace the runoff using -- by creating, by building low-cost MSR widgets.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And do you guys disclose -- because you've been working with Quicken, am I correct? And now you're going to start bringing all that stuff on -- in-house or you started this quarter. The recapture rate you've gotten off these portfolios so far?

Charles E. Cauthen

Yes, I think the -- on that program, it's been very successful, as we would have expected it because the generation of the hot leads, if you will, are really coming off our servicing platform. So I think an indication of the success, if you will, that we've had in recapture, when it's on our platform, is I think in the fourth quarter, there was a total of $4 billion, $5 billion of loans refinanced, if you will, through that partnership, which we're now getting the MSR back as it round trips in the first quarter. I think we've gotten approximately $3 billion of that back now in the first quarter, but that's a significant recapture rate against that portfolio, and we would expect to be able to extend it on serviced portfolios by us, which is where, obviously, the ResCap portfolio is now and the BofA portfolio is very quickly being on boarded. So we look forward to the ramp that's going to come from accelerating the retention and recapture rates on those portfolios.

Paul J. Miller - FBR Capital Markets & Co., Research Division

But could you give a percentage? Is it like 30%, 20%, I mean, to put it in context?

Denmar John Dixon

Yes. Paul, I think the issue we've had with that is, is we've always said, whether it comes to what we paid for them, we're now looking at retention and recapture, each portfolio is different. It really matters what is the breakup or the breakdown stratification, if you will, of the overall HARP-eligible population. So you could take 2 tapes with the same gross amount of HARP-eligible loans and get 20% pull-through from 1 and 40% pull-through through the other, and without having all the detail, you can't tell who's doing a better job. But I think we want to shy away from giving specific numbers overall until we get a little more history with the business, and we can give you a more blended look. But I would say that from our detailed reviews, we are performing at the top of the sector, if you will, on retention and recapture, which is just an outcome of the fact that the ResCap platform was one of the first platforms to be addressing that opportunity.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And then can you go back a little bit in the very beginning? You talked about creating this external vehicle to hold, am I correct, MSRs and other things? Would it be -- can you just go and add more color to that? That's very similar to what Newcastle is to Nationstar?

Denmar John Dixon

Yes. So I think the concept is clearly the same. I think we said it will be a multi-product platform because we believe in sustainability over time. Clearly, its focus will be on the MSR product as we sit today, and it's really a facilitator, if you will, for us, the servicing operation and originations platform. You can see its role in the cycle, if you will, where it can take flow on the [ph] MSR subservice to the servicer, et cetera. And then obviously, over time, we would also begin to grow a management stream revenue back to Walter, the external manager. So we think the market is in a good place. We've seen yields come down over time for vehicles like that. We think we have a very attractive franchise between the originator to feed it and the servicer to do the subservicing to properly position that entity. And we're just looking to take advantage of an attractive alternative source of capital over time.

Paul J. Miller - FBR Capital Markets & Co., Research Division

When you say multiproduct, can you just add very little color around that? I mean, what do you mean by multiproduct besides MSRs?

Denmar John Dixon

So again, key focus would be MSRs, but it could do some reperforming loans, et cetera. Other product that would be utilizing the core competency of the platform, which is a servicer for an owner of credit. And then I think you kind of throw in the kitchen stink a little bit in the docs so that you could manage your cash properly, et cetera. But focus on it as a vehicle really oriented toward the MSR opportunity but certainly, would have the capability to augment the products suite if there were attractive other opportunistic buys.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And would it try to build other relationships besides the relationship with Walter?

Denmar John Dixon

Yes, I think that the vehicle would certainly have the opportunity on a couple of fronts to access product elsewhere certainly, and then in some instances, if there were a platform, servicing platform for a pure prime or otherwise that makes sense to subservice, too, it would have flexibility to do that too. So the entity would certainly be operated to maximize the return to that entity's equity holders.

Operator

Our next question comes from Brad Ball with Evercore.

Bradley G. Ball - Evercore Partners Inc., Research Division

Charles, just to clarify your guidance on Slide 12, I think you're saying that the higher depreciation and amortization is mainly driven by HARP and that in a post-HARP world, you would expect D&A to be back in the, what did you say? 12% to 15% range long-term. Is that right?

Charles E. Cauthen

Yes, that's correct.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. So just doing the math on what you have given us in Slide 12, it spits out EPS in the sort of $3.75 range. Is that the right way to do that? Or are we missing something in the math?

Charles E. Cauthen

Yes. I'd have to look at your individual way of calculating it because different people include or exclude things in the core and -- but I think we intentionally gave the guidance the way we did so that each person could kind of take their own slide that [ph] -- how they wanted to look at the EPS of the business in that regards.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And in the guidance of $650 million to $725 million in EBITDA, adjusted EBITDA, is that including the full impacts that you had previously guided to for BofA. I think it was $55 million to $60 million in the first year related to servicing; $110 million, $135 million related to originations?

Charles E. Cauthen

Yes, those items are all rolled up into that guidance, yes.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And a lot of the HARP that you're referring to is in the BofA book. Is that right?

Charles E. Cauthen

No, it's across the portfolio, in the ResCap deal, too, as well as some of the existing books that we have and some of the smaller MSRs we've acquired too. It's really across the platform. So obviously, some, as Denmar talked about, some portfolios have greater or lesser amounts of HARP eligibility, and then the mix within those portfolios can affect how much come from each one. But as a general statement, all of the different pieces of business we have, have a meaningful amount of HARP-eligible deal [ph].

Operator

Our next question comes from Douglas Harter with Crédit Suisse.

Douglas Harter - Crédit Suisse AG, Research Division

I was hoping you could talk about the profitability of the servicing business. Just kind of in relation to the fact, the one comment where you said that the run rate, adjusted EBITDA should be 50% higher at the end of this year than the fourth quarter. Obviously, the portfolio is going to be substantially higher. Could you just talk about the underlying expectations for unit economics or profitability?

Charles E. Cauthen

Sure. I'd say as a general comment, as we've said in the past, is that the relationship from UPB and EBITDA from the servicing platform is not a linear one simply because the different mixes of the different types of business all have different characteristics. So think about it this way as one example. The core business includes a piece, a large piece of manufactured housing servicing that has gross revenues on it of over 100 basis points. And obviously, that has a very different contribution profile than, say, for example, the Fannie Mae service, subservice piece of business versus an acquired MSR. So again, you can't look at it linearly to UPB, so that's why UPB is doubling, but the EBITDA is kind of 50-plus percent up move. That's the reasoning for that. But I will also say, remember and go back to some of the comments that we made in this presentation, as well as in the announcements of the BofA transactions, for example, the first year is usually your lower base level of contribution in terms of a portfolio acquisition because you have upfront, onetime transfer-type cost incurred. You also have -- you're early in the portfolio. As we bring this on, we will, over time, make a meaningful improvement in the delinquency profile that will drive cost down in future years. And as we said, a big chunk of this, we expect to be eligible for incentive opportunities, which the incentives come down the road even after you've had runoff, you get incentives, you get incentives on that. So that's all a factor in that. And lastly, one thing that we didn't talk about, but I'll just throw in there is in addition to the HARP impact that we talked about before, the HARP impact affects the servicer in another way in that you have compensating interest and some other costs that get absorbed by the servicer that as the HARP program goes away, that won't be a kind of recurring cost going forward. And the way you ought to look at that is that it's kind of a cost that's absorbed by the servicer this year but it is offset by the pickup that we get on the origination side.

Douglas Harter - Crédit Suisse AG, Research Division

If you could just -- when you look at the extra amortization cost from HARP offset by the extra origination revenue, do you view HARP in 2013 as net positive? How much of a net -- and if you could size that, that would be helpful.

Charles E. Cauthen

Sure, it's a great positive for the business overall. Obviously, the short-term impact on the Servicing business is that you'd rather not have it in that business. But, overall, it's a very great net positive impact to the overall business. It's clearly a short-term opportunity, whether it is limited to this year or even if it's extended to next year, it's still a limited duration opportunity. We plan to take advantage of it, and in fact, use the opportunity as a way to leverage ourselves into a long-term sustainable originations platform that kind of is another leg on the stool of the business in terms of long-term sustainability. It's a great thing to come along at this time, not just because of the profit opportunities in it, but that it affects funds and funds our strategic opportunity for the long-term, too.

Mark J. O'Brien

So, Doug, I mean, think about, A, you're getting obviously the cash and noncash gain on sale from the business. And out of the HARP business, it's important to note, that gain on sale is mostly cash. So I think Charles gave the number that there'd be about $50 million of noncash gain on sale. Obviously, they're substantive, at 350 to 450 basis points margins, cash gain on sale that comes with HARP. And then the MSR you're creating from that refinance should be one with a very long duration. So you're taking a high LTV asset, refinancing it at a low coupon, and we would expect that MSR to be around and in the servicing book for a long while. So it's a very attractive MSR to our portfolio.

Charles E. Cauthen

Doug, you wouldn't think very much of us, I don't think, if we didn't take advantage of the HARP opportunity by acquiring a broad-shouldered, NFL-sized originator. It would be a -- I think anybody who owns an MSR, or who's doing sub-servicing, that is subjected to the prepayments and not have the ability to round trip them, is in for a very difficult year.

Operator

And our next question comes from Mike Grondahl with Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

The first one, the $20 billion from the exclusive bucket that you closed in the first quarter, was that from one seller? And does the slight delay from the fourth quarter -- is that because of something on your side or the seller side?

Denmar John Dixon

Mike, it's Denmar. No, there will be a couple of transactions in there. Those are signed and they'll be boarded over time. I'd say the -- I wouldn't point to either side for the delay, it's the process. The rest of the business, we said, is kind of heavy sub-servicing. That's a thick contract, thick compliance process, procedural, due diligence, et cetera. So it tends to take time, given the nature of the client base there, large depositories, et cetera. So we're grinding through them and getting them done, and I think the upside is what I've said consistently, which is we're not losing anything out of that pipeline, it's just kind of extending from the time frame that we thought that, maybe me, a little too optimistically thought that we could get those closed up. But we're closing them and we feel good about what's in there and what it'll contribute in the future.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

So post-BofA, in ResCap, there's no pause on your part or anything? I mean you're sort of still actively in the market looking for boardings?

Denmar John Dixon

Yes, and I think you consistently have to be active in the market. So our business development efforts across broad fronts are certainly ongoing. Now, near-term, in the Servicing business, of course for boarding, we did -- Keith's team did a great job taking on, I think it was 360,000 units with the ResCap portfolio in February. We had a reasonable sized boarding from BofA in March. We've got a big one coming up April 1. So when we think about business development in the pipeline, the boardings will have to be post this crunch, if you will, but we certainly are still active in the market.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then your adjusted EBITDA guidance for 2013. Could you give us a sense maybe the range for incentive fees? And also, just simply, HARP origination adjusted EBITDA kind of based on those ranges. I mean, just how should we think about both of those, incentive fees and HARP originations?

Charles E. Cauthen

Well, we didn't give any specific guidance on that. I'll just tell you, generally, that -- obviously, as we talked about, the Fannie Mae 2011 sub-servicing book of business is ramping up in its incentive curve. So that should be additive to where we were in 2012. So you should be able to expect that 2013 is greater than '12 in that regard. And with regard to the HARP fees, I think I would point you to what we talked about in terms of the volumes we expect to generate and the net margins we expect to get off of that.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay, and the most common question I get, relative to Walter today, is really how these guys think about or execute growth in 2014. And I know it's a year away, but considering the benefit or the HARP bubble that you're going to get in 2013, how are you guys thinking about growing off of 2013 if you see growth into 2014? Could you talk about that a little bit?

Denmar John Dixon

Yes. Mike, it's Denmar. Look, I think we think about all the time. As we said, I think we've been very consistent around a strategic plan that was conceived to drive growth and sustainability in the business. And I think the keys for us are: we will grow the Servicing business over time, both through acquisition and now organically through flow from the originator and flow from the outside, which is a big positive from where we started just a year or so ago. We feel like we've got a great handle on where we can take that core business. The Reverse business, as I pointed out, is currently, certainly through 2013, we think will prove to be a sustainable growth story, in and of itself, through organic growth and growth in the servicing platform. So we're very excited about that piece of business. And on originations, if you think about the HARP opportunity, as Charles said, it gave us the point-in-time opportunity to really put in place this large scaled originator, if you will. Which you need scale to do well in that business. And our challenge is to execute against the HARP opportunity and then to make sure that we're paying attention to and growing the retail, the correspondent channel to some extent, but then also transitioning the retention and recapture opportunity, which is really a consumer direct channel, if you will, that we're taking the steps to transition that to an outward consumer direct channel over time. And we will rightsize the business, if you will, to the size opportunity based on the economy outlook, business opportunity in 2014 and beyond, but we're excited about that platform and its capacity, because we can look at doing things that we feel are sustainable, like Private Label business, et cetera. So we've got work to do, but we feel that -- as I've said, the opportunity set in front of us is as good as it's been. We execute on what we got in place and we kind of stick to the plan, and we'll have, we think, some pretty solid success past 2013.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then, lastly, you're going to generate a lot of cash in 2013. What are your priorities for that cash?

Denmar John Dixon

Well, I think we're always looking at maintaining and growing the business. So if we see the opportunity to acquire assets, et cetera, on the right return profile, we will continue to do that. We will also have, I think, access to alternative sources of capital. So I think we're going to have an interesting challenger opportunity, is probably better put, to look at that cash and deploy it correctly against the opportunities set, up to and including -- we've got to be careful to reduce the debt as appropriate based on the cash flow generation over time. So I think the keys are to look at the sustainability and growth of the business, and we always look at our uses of cash and reduction of debt, which is a direct increase to shareholder value, is something we can clearly do.

Operator

And our next question comes from Bose George from KBW.

Ryan O'Steen - Keefe, Bruyette, & Woods, Inc., Research Division

Actually, this is Ryan O'Steen on for Bose. First, just a follow-up on the external vehicle that you talked about, to hold MSRs. Would this preclude you from potentially working with other third-party capital partners?

Denmar John Dixon

No. You heard me say, over and over again, I like options, I like optionality. So I think we've got some relationships with partners that make a lot of sense and there's different product available in the market at different times, and I think what we want to be able to do is match the capital to the product. So while it certainly is advantageous, we believe, to have a vehicle that we're managing, have that at the ready, if you will. There certainly could be other transactions, and I think will be other transactions, that other capital finds more attractive and, therefore, the cost of capital to us is better. And we will access those. Having some outs in your poker hand is good place to be.

Ryan O'Steen - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. That makes sense. Switching to the origination side. So, just to confirm, the net gain on sales margin that you gave, I assume those are averages for 2013, and presumably the gross margins are a bit higher right now and they're expected to decline. Could you also give a sense of where your cost originate is at?

Unknown Executive

Yes, I think I would say, broadly, that with respect to the numbers we gave you, those are net numbers, so they're net of our direct expenses. I would say the gross numbers are modestly lower than the gross gains that we've seen in the last 6 months because the market trends have been tightening somewhat on those and our perspective was to make sure that we were reflective of that. So that's the generation of those numbers, and as you can see, some of those numbers, for the biggest piece of this, were in our presentation, on the retention and recapture, that our gross gain on sale numbers were in the 500 to 540 basis point range, and the net 350 to 400. The difference is the cost in that channel. And as I said, another thing that we're also doing is we're going to focus on cost in those channels, all those channels. Try to make those businesses, across the platform, more efficient for the long-term.

Ryan O'Steen - Keefe, Bruyette, & Woods, Inc., Research Division

Great. Lastly, could you give a sense of your pro forma servicing advances after ResCap and Bank of America and any idea on the cost of funds you expect to get on those?

Denmar John Dixon

Yes, it's Denmar. I think the bulk of what -- we've carried relatively minimal advances, couple of hundred million dollars-ish I think, to date. I think we'll be picking up more with ResCap, maybe about that number, a little less actually, $150 million or so. And then the bigger piece comes with the BofA portfolio. We utilize programs, funding programs from Fannie, for those 2 portfolios which are priced, if you will, or the cost of those programs are pretty much on top of the market you're seeing for outside third-party financing today.

Mark J. O'Brien

And I don't have gross numbers at my fingertips, on a pro forma basis, but I can get those for you.

Charles E. Cauthen

Yes, I'm, sorry, when you add that together, it would be 380 and about -- it's a little over $1 billion probably.

Operator

And our next question comes from Jim Fowler with Harvest.

James J. Fowler - Harvest Capital Strategies LLC

I wanted to ask you one quick thing on the Servicing business. If I go back a couple of quarters, even to the Green Tree acquisition, the commentary was to have a lot of capacity and excess capacity so you can bring on Servicing, both direct and sub-servicing, without having significant need for incremental expense. But when I look at the fourth quarter compared to the third quarter, revenue was up 5%, expenses were up 14% and pre-taxes down 30%. So I'm wondering -- intra-quarter, we get a lot of commentary about things the company is doing and I expect to see some level of stability in expenses. Then the results come out and expenses continue to go higher in the Servicing business. So when do we get to a point where the expense of the -- I'm speaking mostly of labor here, not amortization, which has been reasonably stable. It's the other operating expenses are continuing to go up a lot. When does that stop? I mean, when do we get to a level where we can hear about pools coming in and not see expenses rising more rapidly than revenue?

Denmar John Dixon

Jim, it's Denmar. So I want to make sure we get to your question directly. So you're talking about the numbers on the Servicing segment only or overall? Because I...

James J. Fowler - Harvest Capital Strategies LLC

Yes, no. I'm just focused on Servicing. I'm looking at Servicing. I mean, I'm not looking at EBITDA and all, I'm just looking at pre-tax numbers. And the revenue was up a couple of million dollars and you had almost a 15% increase in expenses quarter-over-quarter. I just continue to wonder when where we're going to see the leverage in the business -- I mean, you bring in more business but the expense base just continues to go up to levels that I don't quite understand.

Denmar John Dixon

So two points I would make. Let me take the servicing acquisitions broadly, right? So there always is -- going to be, as we build, take on, we keep, I don't know, call it 10%, 15% kind of capacity if you will, generally, in the system, in kind of a steady state base. So that -- if we did something small that fit inside of that, you may not see a bill. When you're seeing substantive adds like we've been doing, you are going to definitely see variable expense build as we add people, space, computers, phones, et cetera, because it does take variable expense to take those portfolios on. So anytime we add, outside of pure prime current portfolio, which doesn't take the people that a more credit-sensitive delinquent portfolios does, if we take on kind of our norm type portfolios, you're going to see variable expense adds. Now, the other thing I'd say about the fourth quarter. You have to be a little careful because there's other servicing expense, like compensating interest we mentioned, where that would have increased with the refis that were done, right? And we're getting a round-trip of the MSR, it comes back to us, et cetera. Inside of our Originations business, when we're doing those refis, you're kind of offsetting the compensating interest expense with your cash originations, gains, et cetera. So I think we've got to break it down so that you -- look at the expense to add capacity, to service a portfolio, and then there is some expense that's resident in kind of the refis and the captures that are going on.

Kimberly A. Perez

And Jim, this is Kim. In the third quarter, we also had a reduction in that compensating interest because we did negotiate to get some relief from the refis that were occurring. And so, in the third quarter, we picked up about 5 months of relief, whereas in the fourth quarter, we only picked up the normal 3 months.

James J. Fowler - Harvest Capital Strategies LLC

So I wanted to ask about that. Because when I look at just the uncapitalized -- and I haven't looked through the fourth quarter, through the K, yet, to get these numbers out. So let's just talk about the third quarter, if I might, and then you can tell me the directionality in the fourth quarter. But if I look at the prepayment speeds on the sub-servicing that's not capitalized, it was 8% CPR in the first quarter, and then in the second and third quarter, jumped to 24%, 25%. Why does that portfolio prepay so rapidly? Is that fully explained by HARP? And then secondly, as you're looking at more sub-servicing deals, are you now pricing it for that level of prepays or do you think that level of prepays comes down if HARP goes away? Then I have one last question.

Denmar John Dixon

Okay. So, Jim, it's Denmar. I would say, number one, to be very clear, we price all of our deals modeled to the prepays that we expect, and I don't think we've been off much in what we've done. So both on the MSRs acquired or sub-servicing deals we're looking for, we spend a lot of time on what we think prepays are and so on. On that portfolio, specifically, I think it's a clear indication of the kind of implementation of the marketing, where retention and recapture kicked in the third and fourth quarter. And it accelerated, by design, if you will, at Fannie's behest, it accelerated that recapture. And, again, think about, in the fourth quarter, with the deal we had with Quicken, we don't get that MSR back. It's about a 90-day lag. So you'll see runoff without the replacement, which we got some of that replacement back in with a lag in the first quarter. But we certainly price in expected speeds, model that in. And to be honest, I don't think we've been surprised, if you will, on transactions we're doing.

Mark J. O'Brien

Yes. To be very specific about it, Jim, all the recent deals, we've absolutely factored in the impact we expect from HARP for that. The Fannie Mae sub-servicing deal from 2011, obviously, we wouldn't have factored it in because we didn't have a HARP program then. But Fannie Mae has been extremely favorable and cooperative in working for us to develop things to offset and compensate for that, like paying the compensating interest, agreeing to the round trip of the servicing, refinances. All those type of things are really mitigating that impact that we didn't anticipate when we priced that deal 2 years ago. So the one other thing I wanted to mention in regard to the fourth quarter numbers, that wasn't mentioned in any of the other comments is with the big ResCap, the BofA transactions, we were spending some money ramping up and staffing up in advance of those acquisitions and transfers, and getting prepared for that. So there will never be some of that too, as there always will be, as we're growing and building the portfolio.

Denmar John Dixon

In that scale. So go back to the slide where we kind of build the layer of the cake, if you will, there is a significant ramp, as you can see, by the guidance that we gave in the numbers. But '14 is really the year and it should carry through, in the progression, that we really get the bigger deals to kick in, in full force. And that's a great place to be, because looking forward, we've got an extremely strong base with growth kind of embedded in it to build off of the core business.

James J. Fowler - Harvest Capital Strategies LLC

And then last question, and I suspect it's early, and if I don't understand this exactly right, please correct me and then clarify. But I'm wondering, as you're beginning to look at the incentive fees that you're receiving on the Fannie Mae pool, the sub-servicing. Is there anything different about how the, I don't know what you want call it, the test pool or they compare you, benchmark you against. Is there anything about that comparison or that dynamic that's different than you thought it would be when you entered into the agreements with Fannie Mae? Is everything going according to what you expected now that you're actually in the beginning...

Denmar John Dixon

Well, I think, Jim, we're in good shape there. And on the new pools, I think what we've said, when we talked about in the past, it takes a quarter or so lag for them to build the pool and build the model. And we get together with them and do that together. So that is all coming together as we speak, right? But we're not aware of anything that would take us outside of the zone that we've been in, in the past. We look forward to performing against those pools and bringing the fees in like we've been able to do historically. We probably need to take a couple of other questions.

Operator

Our next question will come from Ben Glaze with Apollo.

Ben Glaze

I was just hoping you might be a able to help us think about -- I think accounting kind of distorts some of the acquisition profitability, and I would love to just get your view on what the kind of cash return on invested capital for the most recent ResCap and Bank of America acquisitions, including origination and ongoing servicing that you get after a HARP refi and kind of the longer tail that, that might have with it. Would love to hear kind of any thoughts around that, so we can think about how you guys...

Denmar John Dixon

Yes, Ben. I would say this, we've been pretty careful because we are always in the market bidding and trying to be competitive against those assets to give absolute levels. But it's fair to say we look very hard at the cash returns. That's really our methodology, if you will, is the cash-on-cash. And I'm kind of in your camp. I think the accounting is something, especially with the type of MSRs that we've required, the HARP Program, et cetera, that for us and investors need to kind of think hard about. As Charles said, we've always been conservative. And I think we've given -- in our ranges for amortization, we've given ranges that we feel are conservative. Probably a little ahead of the GAAP accounting. But we'll see, over the year, as we see what the execution against retention, recapture, what the runoff is. I think we always want to be in a position where we're giving ranges that makes sense to the investors. And it's very interesting, we get a split in the investor group of those that want all the amortization in the earnings number and those that don't. And I think what we've attempted to do is give you the higher level guidance, and then the components, so that you can look at the ranges and see where you feel comfortable, vis à vis, your view on speeds, et cetera, and come up with a range. So we think we are getting very strong cash-on-cash returns off of the investments we've made. We've acquired -- many of the businesses we've acquired, we've done on what we think are extremely attractive levels, such as the Reverse business and the originations platform and opportunity. And I think we were able to, given the scale and the barriers of entry, in the larger MSR trades that took place and where we participated, that those asset acquisition levels were very attractive for the business.

Operator

And our next question comes from Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz

I have a question on the thought behind the guidance on Page 12. It seems like, in your adjusted EBITDA, you're excluding non-cash share-based compensation and noncash interest expense, correct?

Charles E. Cauthen

That's correct.

Jordan Hymowitz

But you're including noncash gain on sale to the tune $50 million, correct?

Charles E. Cauthen

That's correct.

Jordan Hymowitz

So why would you include noncash in the revenue side but exclude noncash in the expense side?

Denmar John Dixon

Jordan, we just look at each those items when we kind of build out that number. And we try and stay, if you will, more with kind of market convention. And the first 2 items you mentioned tend to be added back, if you will, and the noncash gain is something the industry kind of looks to in an originator. So we've stayed with market convention, if you will. But importantly, as we report over time, you'll see the components. And as I said, the investors can kind of take in or pullout the components they feel most comfortable with. There is no -- and we kind of sought [ph] it. There is no overwhelming view on how it ought to be done. So our view is we'll give you our take on the number and we'll give you the components and you can do with it what fits your investment philosophy.

Jordan Hymowitz

Okay. I think that's fair. I mean, analyzing financials for almost 20 years, I've never seen a financial company take out noncash interest expense or stock-based comps that's primarily a balance sheet lender though. So, I mean, I think you should you either take them both out or leave them both in. And if you take them both out, you seem like you end up with a pure cash number the way cash earnings is determined, of about $2.20 next year.

Denmar John Dixon

Your call Jordan, we'll take your comments under advisement.

Operator

And our next question comes from Henry Coffey with Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Going all the way back to this idea of getting financing for your interest sensitive MSRs, I assume that's what we're talking about. Two questions. One, maybe you can help us understand that business model a little bit. What is sub-servicing fees likely to look like in that transaction? I know PNP threw some numbers out there. And secondly, I know some of the REITs have recently said that they think they can make a 10% to 15% un-levered yield on these assets, but the math seems to point to more like 6% to 7%, so maybe you could help us sort through some of that. And 6% to 7% would obviously be good for you all.

Denmar John Dixon

Look, we haven't come out with the model. It's not done. So I don't think we want to get ahead of what we've got. Obviously, we believe that we can acquire the assets at the appropriate yields, if you will, to provide a market return to the investors as we go forward. And obviously resident in that is the opening cost of capital, sub-servicing fees, expense within the entity, et cetera. We feel pretty comfortable, as you've seen with other entities in the market, that we can make that transaction come together in a reasonable way and have an entity that will add value, overall, to Walter and then also to the equity holder of that entity [ph].

Unknown Executive

Okay. I think we have time for one more question, and coincidentally we have one more question in the queue. So why don't we go ahead?

Operator

Our last question will come from Ravi Chopra of Samlyn Capital.

Ravi Chopra

My simple question is, when you look at pre-tax income in 2013, how much of it do you expect to come from gain on sale, either through the Originations business or Reverse business versus servicing and everything else?

Unknown Executive

Yes, I mean, we gave you all the numbers to do your own calculation. We gave the projected volumes and projected net margins, and both of those, as well as the number for $50 million for the noncash portion of that. So I think all the information is there to get to that.

Ravi Chopra

Okay, right. So if I'd take, say, $10 billion of originations associated with the retention and recapture, at the 350 to 400 basis points, and then add in the $5 billion of Reverse to $300 million and then add in the noncash, it looks like it's probably north of $550 million of...

Charles E. Cauthen

The noncash is in the first number. So you don't add it.

Ravi Chopra

I'm sorry. Say, it's around $525 million. Should I think of that as $525 million relative to the $650 million to $725 million of EBITDA?

Charles E. Cauthen

No, I mean you're only looking at direct margin, so you've not got any G of A [ph] or anything like that allocated to that piece of that business.

Ravi Chopra

Okay. And then the amortization expense that you guys are expecting, is that substantially all related to the servicing business?

Charles E. Cauthen

No, there'll be a big chunk of that was really, effectively, relates to this piece, this origination number.

Denmar John Dixon

Think about the construct of an MSR, has got embedded servicing value, recapture value, origination value. That amortization is ratably done, if you will, across those based on the expected runoff. So value you've got in originations, given the peak in HARP, comes off at a higher speed and certainly impacts that number.

Mark J. O'Brien

Okay. I think that concludes our call for today. We thank you all for joining and your support.

Denmar John Dixon

Thank you.

Operator

Thank you for participating in today's conference. You may now disconnect.

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