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Walter Investment Management (NYSE:WAC)

Q4 2013 Earnings Call

February 27, 2014 10:00 am ET

Executives

Whitney K. Finch - Vice President of Investor Relations

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

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

Denmar John Dixon - Vice Chairman and Executive Vice President

Analysts

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Douglas Harter - Crédit Suisse AG, Research Division

Daniel Furtado - Jefferies LLC, Research Division

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

Michael J. Grondahl - Piper Jaffray Companies, 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

Operator

Good morning, and thank you, all, for holding. [Operator Instructions] And I would now like to turn the call over to Whitney Finch, Vice President of Investor Relations.

Whitney K. Finch

Thank you, Elan. 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, 2013. 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 year ended December 31, 2013, 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 on the statement. Please refer to our SEC filings for a full disclosure of the risk factors that may affect any forward-looking statement. Except for any obligations 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 the conference 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; CFO (sic) [COO], 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 for 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. By all accounts, 2013 was an exceptional year for Walter Investment. We achieved the goals laid out in our strategic plan and produced strong financial and operating results in this transformational year, while ensuring that our value-added business model retain -- remain dedicated to serving the needs of our customers without sacrificing our strong track record of regulatory compliance. To this end, we received upgrades or reaffirmations of our superior service ratings from S&P, Moody's, Fitch during the year, and we're awarded a 4-star service rating by Fannie Mae, all in the year when we boarded 1 million accounts.

We deliberately grew our servicing portfolio with a focus on maintaining our historically high level of compliance and performance. We did this in asset transactions that were structured to limit assumed liabilities and risks. In February, we launched our originations segment, successfully growing that business from a standing start to capitalize on the HARP opportunities embedded in the ResCap and Bank of America portfolios acquired in early 2013. We helped 63,000 customers access affordable refinancing and funded approximately $16 billion of loans during the year.

Our Reverse Mortgage franchise, consisting of RMS and S1L, is a market leader in the reverse sector and was the #1 Ginnie Mae HECM insurer for 2013. In addition, we're close to finalizing Walter Capital Opportunity Corp. in partnership with York Capital Management, laying the foundation for our return to a more capitalized model and the expansion of a high-value asset management revenue stream.

Each of these accomplishments is significant when viewed on their own. But when viewed within the context of our achievements for the year, they're infinitely more meaningful. They demonstrate a sound strategy and deliberate execution by the management team, which was required to ensure that each of our goals were met.

I'd now like to turn to Kim and Denmar to cover our financial and operational highlights and our outlook for the business. Kim, would you help us with the financials?

Kimberly A. Perez

Thanks, Mark, and good morning, everyone. During the fourth quarter, Walter Investment continued to deliver solid financial results and strong operational performance from its core business segments, despite certain headwinds in the originations market and lower gains on our mortgage servicing rights.

During the quarter, we also had strong execution on our initial issuance of senior unsecured notes, helping to diversify our capital structure, and we're able to reduce our cost of funds by the refinancing of our term loan. For the quarter, we had GAAP net income of $10 million and core earnings of $41 million after taxes. Core earnings after taxes were $47 million lower than the third quarter, principally due to a $37 million reduction in fair value gains on servicing rights and a decrease in originations revenue of $32 million

on a 15% reduction in lost volume. Also impacting the fourth quarter was an additional $8 million in advance reserves and debt issuance costs and losses on the early extinguishment of debt of $21 million.

Finally, the third quarter benefited from a onetime reduction of $8 million insurance cancellation reserves that did not recur in the fourth quarter. The fourth quarter and full year are both impacted

by incremental amortization of $7 million and $20 million, respectively, for the increase in fair value of our mortgage servicing rights recorded during the year. Given this lumpiness in our business, we feel it is important to look at the full year to measure overall performance of our businesses.

For the year, we had GAAP net income of $254 million or $6.63 per diluted share and core earnings of $363 million or $9.63 per diluted share, an increase over 2012 of $276 million and $280 million, respectively.

Core earnings, without fair value adjustments net of related amortization, was $267 million or $7.09 per diluted share for the year. These results were driven by total company servicing revenues and fees of $783 million, an increase of $415 million or 113% over 2012 due to our significant bulk MSR acquisition.

Loss origination volumes drove gains on sales of loans of $599 million. Additionally, we reported $120 million of reverse fair value gains, mostly resulting from a favorable spread between the market value of originated and acquired loans and our basis on those loans, which is converted to cash as the loans are securitized.

Our strong 2013 operating performance resulted in a core earnings return on equity of over 30%, with our GAAP book value also increasing 30% to $1.2 billion. Our operations generated cash of $456 million before our investments in originated and retained MSRs of $188 million. This cash was primarily utilized in conjunction with our debt financing to acquire MSRs from third parties and for working capital needs. We ended the year with GAAP cash of approximately $492 million, most of which is available for investment.

Our servicing and originations segments experienced significant growth during 2013. Specifically, our servicing business boarded 1 million accounts during the year while maintaining top servicer ratings and improving 30-plus day delinquencies on the first-lien GSE pools boarded in the first and second quarters by approximately 300 basis points as compared to the end of the second quarter. Additionally, we originated and funded $16 billion of UPB, primarily from the HARP retention program, where we maintained an average recapture rate of 39% on GSE first-lien portfolios during 2013.

Now let's spend a little time on our 3 key operating segments. Our core Servicing segment contributed $286 million of pretax core earnings, an improvement of $160 million or 128% over 2012. This included over $100 million of incentive and performance fees earned during the year. Our Servicing operations experienced significant growth during the year, resulting in service UPB of approximately $200 billion at year end. Loan boardings were completed efficiently. In addition, we were able to complete approximately 39,000 modifications, helping to keep customers in their homes and also directed consumers to our HARP refinance program, leading to a recapture rate of 49% in the fourth quarter and keeping our portfolio disappearance rate at low levels during the year.

The originations segment generated pretax core earnings of $273 million during 2013. Despite the start-up nature of our originations business, we funded $16 billion of loans in 2013, including over 63,000 HARP loans, providing affordable refinance options to homeowners.

In our consumer channels, we earned a direct margin of 345 basis points for the full year. So rising rates through the second half of the year put pressure on margins, we were able to stabilize margins and generate some slight improvement in the fourth quarter, improving consumer direct margins to 309 basis points, compared to 291 basis points in the third quarter.

Capitalized MSRs increased to 136 basis points of UPB in the fourth quarter, compared to 127 basis points in the third quarter. Our base MSR was capitalized at 110 basis points of UPB in the fourth quarter, along with 26 basis points associated with excess servicing fees retained. This represents the strategic decision to retain more excess servicing. In the prior quarters, we more frequently delivered into higher coupons, thus limiting the opportunity to create excess. Said a different way, when delivering into lower coupons, we took cash in exchange for a higher guaranteed fee rather than retain excess servicing.

Rising interest rates and the anticipated HARP volume tapering drove an industry-wide slowdown in volume in the second half of the year. However, we were able to maintain strong application volumes, with $6.3 billion in new applications in the fourth quarter. This does represent a drop from the $7.6 billion in the third quarter but an increase in share of volumes sold to Fannie Mae from 3.4% in the third quarter to 4.1% in the fourth quarter, making us one of Fannie Mae's top HARP lenders since mid-2013.

The reverse segment generated free cash core earnings of $40 million during 2013. This level of earnings was driven by the origination and securitization of $3 billion in HECM loan products. The business achieved a cash gain margin of 336 basis points for the year, which represents a spread between the proceeds from the securitization and our basis in the loan. Reverse also recorded $27.3 million in Servicing revenues and fees and, as of yearend, the business serviced a total of 97,000 loans, with a UPB of $16 billion.

During 2013, the reverse business was impacted by product changes and new guidelines for servicing protocols, which have had an impact on origination volumes and servicing profitability. However, it is expected that these changes will ultimately benefit and strengthen the industry, which has favorable, long-term demographics.

Finally, I would like to spend a few minutes to review how we look at the profitability of our servicing operations and its ancillary businesses. Looking at the combined results of these businesses, it's necessary to truly be comparative to our peers. Our AEBITDA and core earnings margin for total servicing-related operations is roughly 19 basis points and 11 basis points on average UPB service for 2013. However, we do not believe these levels are reflective of normalized margins, as results were impacted by the high HARP content in the portfolio and the significant new business board during 2013. Specifically, the results reflect a high level of HARP retention-related costs, such as compensating interest and increased amortization, as well as sizeable ramp costs incurred during 2013 in anticipation of the significant loan boardings.

Servicing margins on the existing portfolio are expected to increase 2 to 4 basis points, over time, as HARP activity recedes, purchased portfolios mature, credit quality improves and efficiency programs are implemented.

As a result of the significant impact that HARP activity has on the Servicing segment, we believe that Servicing performance measures should be viewed in conjunction with a significant contribution from the Originations segment in order to properly assess performance and the value of these businesses.

I would now like to turn it over to Denmar, who will cover sector dynamics and our outlook for 2014.

Denmar John Dixon

Thanks, Kim. The current economic environment and outlook provides a solid base for our operations. In addition, the positive sector fundamentals we've discussed for some time now remains solidly in play. We had a significant target market of $4 trillion to $5 trillion of credit-sensitive assets, which we believe will drive transfers of $1 trillion of servicing over the next several years.

Given our core competency in specialty servicing, we believe we will be -- we will directly benefit from these transfers. The key drivers behind the movement continues to be the depositories' focus on divesting noncore clients and servicing and a need to reduce legacy servicing costs. As is usually the case, the capital markets have recognized the opportunity and capital availability is strong, with innovative capital structures continuing to improve both cost of capital and liquidity.

Lastly, the mortgage market as a whole continues to undergo a significant, almost daily, change, providing multiple opportunities for Walter as we look to maximize the value of the platform we have developed. We believe Walter is very well positioned to capitalize on the opportunities that will inevitably present themselves.

Now let me discuss the current pipeline and outlook for new business in 2014. The current pipeline stands at $345 billion, reflecting a continued uptick in the dialogue with clients. Pipeline has strong diversity of product and is not significantly concentrated with any particular client. There continues to be a good mix of purchase and sub-servicing opportunities available. In fact, we have seen increase in conversations regarding outsourcing in the last several months. We believe we will continue to be successful converting from this pipeline and we'll significantly add to the $60 billion UPB of transactions previously announced and expected to be boarded in 2014.

Recent reports and commentary confirm, as we have highlighted on past calls, that there has been an increase in the regulatory focus on the sector and oversight of potential MSR sales or transfers. And as a result, the approval process has slowed. We believe that this process is a necessary part of the maturation of the industry. And while it may have a short-term impact on transactions and timing, it ultimately will benefit those participants such as Walter who have a demonstrated track record of efficiently managing transfers, highly rated platforms with robust performance and who maintain a strong compliance environment. In fact, we believe there continues to be significant alignment with Green Tree's platform and the emphasis on the consumer experience, servicing quality and counterparty oversight. Benefiting from our significant experience in large-scale transfers, we deploy best practices against potential transfers. In particular, we have developed detailed protocols for capacity planning, extensive pre-board due diligence and post-transfer protocols. We are proud of our track record here. The ability to meet these high standards will prove a barrier to entry to the sector and benefit those that can truly comply.

While I'm on regulatory matters, let me provide a brief update on our previously disclosed FTC-CFPB investigation. As you may recall, this inquiry began over 3 years ago. We were notified in October of last year that they were considering recommending an enforcement action. We were notified last week that they are now recommending an action and will seek approvals to proceed. We expect that process to take 30 days or so, at which time we should then receive more specific information regarding the inquiry. As we've consistently stated, we are very proud of the servicing standards we maintain, our excellent servicer ratings and track record of compliance. As we are provided more detail, we will address the facts on an expeditious manner and look to resolve the matter.

Now let me turn to the topic of our portfolio replenishment. As is evidenced by my comments on the target market and pipeline and our performance in the originations unit, we maintain strong sources of replenishment and growth. We have long maintained our confidence in our ability to grow Walter on a sustainable basis over time. Truly, our track record supports our view. We have outlined on Slide 8 a simple illustrative overview how we, as management, address the replenishment opportunity. The key takeaway is that by utilizing the multiple channels available to us, we can replenish the net disappearance and associated AEBITDA in the book in a cost- and capital-efficient manner. The opportunity to partner with Walter Capital Opportunities on future transactions further drives the capital efficiency. As a brief update on Walter Capital, final contracts are near completion, and we are targeting the initial sale of excess to Walter Capital late in the first quarter.

Now turning to our updated outlook. You will note that, through our annual business planning exercise, we have updated our outlook to include a 2014 range of adjusted EBITDA of $650 million to $725 million and a range of 2014 core earnings of $5.25 to $6.25. In addition, we provided a breakout by segment of the AEBITDA ranges and provided a Key Drivers Page in the Appendix to help in your analysis.

The summary of the outlook is we have slightly increased the expected AEBITDA range, reflecting strong new business activity in the Servicing and ARM businesses and reduced the expected contribution from the Originations and Reverse businesses to reflect the current market environment. I would note that about 25% of the difference from the previous core earnings outlook reflects amortization of fair value gains taken in 2013, and a portion of the balance relates to the business mix contribution shift to Servicing and ARM.

I would also like to note that we provided guidance at this time last year of approximately $5 and then increased it to $5.69 in the second quarter. Adjusted to reflect for the accounting change and excluding all fair value impacts, the guidance would've been approximately $7 or $7.69 to reflect the increase versus the actual $7.09, excluding all fair value adjusted -- adjustments that we produced. Given the transformational nature of the year and the market environment, we are very proud of those results.

Keys areas of focus for us in 2014 will be centered around 4 strategic themes: first, driving consistent growth in the servicing book by converting from the pipeline and benefiting from our organic originations flow; next, growing our valuable asset management revenue stream. 2014 is expected to be a strong transition year for asset management as we expect to realize performance fees from our managed fund and ramp the fee stream from Walter Capital and other projects. Third, accelerating the opportunity resident in our Reverse Mortgage business. We remain very positive on the power and positioning of our franchise and the opportunity that market represents for us. Finally, maintaining our focus on maximizing the embedded HARP opportunity in our portfolios while we continue to transition and build out our retail and correspondent channels. Successfully executing on these initiatives will accelerate the ability to deliver higher value and recurring revenue streams as a greater percentage of our overall earnings.

With that, I'll turn it back to Mark.

Mark J. O'Brien

Thank you, Denmar. In summary, Walter achieved very strong execution against our strategic initiatives in a transformational year. The sector fundamentals remain positive, and we have a high value-added platform that is uniquely positioned to capitalize on opportunities in our changing sector. We remain very focused on maximizing value for our shareholders and stakeholders as we execute against our planned initiatives.

This concludes the prepared remarks. We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is from Vik Agrawal from Wells Fargo.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

I wanted to know a little bit about -- I looked at your Servicing adds for -- your, on Page 16, of $85 billion to $115 billion.

Denmar John Dixon

Vik, I'm sorry. Can you speak up a little bit? We're having a little trouble hearing you.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

So on Slide 16, you have $85 billion to $115 billion in your -- in new business adds. What if -- given the regulatory environment now, if we don't see that come to fruition, how do you -- how would you shift your strategy?

Denmar John Dixon

Okay. Well, first, I would note that $60 billion of that $85 billion to $115 billion is resident in the transactions we announced at the end of '13, and we actually have economically closed on and are waiting for final approvals from the GSEs. So the additional amount of -- that would be in the plan is over and above the $60 billion that we've already announced. I think, as was the case last year, with those boardings, we're looking at trying to put together float programs and new additions from the pipeline that we can do in stacked order on the back of those transactions. So no change in strategy based on what we know today. If, in fact, some of the GSE approvals might slow or approvals in a certain area may slow, we have a multi-product platform, and we would look to products where we saw a little -- a clearer runway.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Okay. And how much flow do you have contractually for '14?

Denmar John Dixon

For '14, we don't include flow in our pipeline because most flow is actually purchased forward MSR. So we have not -- as Walter Capital isn't yet formed, we haven't signed up for distinct flow programs. We are seeing all of the sales in the market and accessing those sales on an opportunistic basis, but I think we feel pretty comfortable that we could do $5 billion to $10 billion pretty easily next year.

Operator

Our next question is from Douglas Harter from Crédit Suisse.

Douglas Harter - Crédit Suisse AG, Research Division

I was hoping you could -- just on the CFPB issue, are they solely focused on activities from 2010, or have they been requesting information on prior -- or more recent activities as well?

Denmar John Dixon

Doug, I think we've disclosed pretty much all the detail we have. We provided an awful lot of documentation to them. We've gotten a high-level feedback that they're looking at several areas around the various consumer laws. Past that, we don't have much specificity.

Douglas Harter - Crédit Suisse AG, Research Division

Okay. So just to be clear, from the disclosure, I've seen it seems like they're focusing only on that 2010 time frame. Is that a correct reading?

Mark J. O'Brien

I don't think we can speak to where their focus is because we simply don't know.

Denmar John Dixon

Yes. I think, Doug, it's important that we get the actual detail and see it and think about it, analyze it and respond appropriately. And until we get that, it's hard for us to speculate.

Douglas Harter - Crédit Suisse AG, Research Division

Okay. And switching to tax, you talked about the cash balance that you have, coupled with WCO about to come online. Can you talk about how you would prioritize using that cash in 2014?

Denmar John Dixon

Absolutely. So -- look, we still think the pipeline provides a very robust opportunity to grow the business at very attractive returns, so a portion of that cash is earmarked for some of the announced transactions we have. The rest is available for future transactions and is obviously levered by Walter Capital. So we go through a very specific investment decision, if you will, to think about our opportunities which are really resident in converting from the pipeline, retaining originated MSR, and then we look at debt paydown, et cetera, in order. So we're trying to make a good investment decision every time we commit capital.

Operator

Our next question is from Bose George from ABW (sic) [KBW].

Unknown Analyst

This is [indiscernible] in for Bose right now. Just one a quick question for you guys. As you see, the regulatory environment taking place right now, with the FPB in your case, and some of your competitors dealing with other regulatory concerns? Where do you guys see the cost of service going in the long term in the market?

Denmar John Dixon

I don't think we see an increase in cost of service really coming go forward. Certainly, there could be small incremental pieces. I think the takeaway is we've been through a very significant period over the last 3 years of increased servicing protocols and oversight and audits, et cetera, so I think the bulk of that is really behind us. I think the new CFPB guidelines went into effect on January 10. We've done all the work to be compliant with those as we service accounts. So while the environment is topical today, one of the outcomes, I don't think that we see as a big negative would be further increased servicing costs.

Operator

Our next question is from Daniel Furtado from Jefferies.

Daniel Furtado - Jefferies LLC, Research Division

I'm just trying to understand the reason for the reduction in the EPS guidance.

Denmar John Dixon

Okay. Let me take you back through that. So basically, what we did is we increased slightly our AEBITDA range, okay? Then, in updating the plan -- because we gave the first guidance, I think the call was in August. So as the market unfolded, we updated our plan, presented and approved it through the board. Number one, the fair value increases we took throughout '13 increased amortization in the '14 plan by I think $20 million or so or roughly $0.25 a share. And then when we looked at the business contributions and the mix of AEBITDA as we presented in the range, when you increase the servicing book, for instance, that comes with some amortization versus content produced from the reverse and forward business, which we moderated some based on the current outlook for those businesses. So when you look at the business mix shift that resulted in the AEBITDA range, that accounted for the other portion.

Daniel Furtado - Jefferies LLC, Research Division

Okay. So, in essence higher amortization cost this year, coupled with lower expected originations on both the forward and reverse businesses?

Denmar John Dixon

Yes.

Daniel Furtado - Jefferies LLC, Research Division

Okay, okay. And can you talk to us about, obviously not in specifics, but just generally speaking, pricing on potential deals? I mean, have you seen a shift in pricing? I think one of the thoughts out there is that with the increase in regulatory scrutiny, you could see deal prices come a little bit lower -- the cost of new assets come a little bit lower. Are you seeing anything like that, or is that just an incorrect way to think about what's happening?

Denmar John Dixon

Yes. I think there's some discussion about that. We'll see. A lot of the prime flow is probably not as affected, but the pipeline, I think, will be. And we've been saying for several quarters now that we believe the ability to gain an approval, whether it be on a private-label deal through the trustees or through the GSEs or Ginnie Mae, is a very valuable asset, and we spend a lot of money to ensure that we're at the top of the list for those approvals. And therefore, it has value. So I am cautiously optimistic that the value of certainty of execution of the transaction will improve pricing for us some. So I think we'll see how that unfolds. It's not what, I would say, built into the plan in any big way, but it certainly would be some upside.

Operator

Our next question is from Henry Coffey from Sterne Agee.

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

Two questions. One, fairly my new -- and I think you just kind of pointed to it. Even though you've been raising your AEBITDA guidance, your EPS guidance is lower in part just due to the double MSR issue. Is there -- given the complexity of mortgage accounting, is there anything that would prevent you from going back to a lower cost of market basis? I know [indiscernible] does this, Freddie Mac does it, and it would seem to make life simpler for everybody.

Kimberly A. Perez

Yes, Henry, this is Kim. You can elect fair value on individual pools or you can have a kind of a global policy. But at the end of the day, once you elect a fair value for a pool, you are stuck with fair value for that pool. So for the book of business we have today that we've elected fair value for, there -- we are forevermore on fair value.

Denmar John Dixon

Henry, I would add 2 things because I think it's very important that we note this because there's been a lot of discussions, and I am totally in your camp that the mortgage accounting is complex and fair value just adds some to that. There's no easy win. Low comm [ph] has its time and place. And then in a different market, it doesn't help you very much either. But what really is the point that I think people need to focus on is the slide we put in about replenishment, right? The amortization, academically, is looking to -- at what cost can you replenish the runoff you're experiencing in your portfolio, and that's exactly why we highlighted on the slides that, through the multiple sources we have, with the financing structures kind of in place, that to replenish the same amount or relatively same amount of AEBITDA that's been running off, it would cost us this year about $140 million, I think it was, of cash use from Walter to replenish that. And obviously, amounts above that would grow the portfolio. And I think viewed in context with our strong cash generation of $450 million plus, that's the ratio that we pay a lot of attention to.

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

So -- no, I agree. I mean, this is more of a -- can you make life simpler for foggy old analyst question. And yes, once you finally get into it, when you look at the cash flows, you see the favorable side of it. On another issue, and I know this is a sensitive topic, but if we just -- if we limited our life to just reading headlines on Bloomberg, we would suddenly come to the conclusion that the special services are now viewed as the problem, not the solution. Can you kind of give us a sense of from top to bottom, from the CFPB to the DFS all the way down to the individual counterparties you work with, how you think the regulatory environment is shaping out? And -- I mean, specifically, what is it that the CFPB is seeking from you all and how do your counterparties look at this dialogue right now?

Denmar John Dixon

Okay. Well, let me take the CFPB first. We've kind of given you all the detail I've got on that. I would say, aside from that specific inquiry, I think we all know what their mission is, is to look out for consumers and make sure they're treated fairly over time. And we have alignment with that. I think the comments that I made that we think our platform actually aligns very closely with where the regulatory environment and the oversight environment and actually, the environment that our clients who are regulated by some of the same and some different regulators and then the GSEs as a client are all headed toward, which is we've got to have a quality servicing shop, it's got to be compliant, we've to take care of our consumers. And we make the note that we have a differentiated platform, 85-ish percent of what we do, we do for Fannie Mae. Fannie Mae has an incredibly comprehensive rating system, their star system. We are a 4-star rated, and the top 4-star rated servicer for Fannie Mae. So our #1 client, who has 5 or 7 people in our shop, all day, every day, and gets provided extensive information on everything we do, believes we do a very good job at servicing assets that they've guaranteed. So I think, as I said in my comments, this -- the period we're going through is part of the maturation of the sector. I think those that aren't getting it right are going to need to get it right. I think those that are getting it right will come through this stronger. And in the short-to-mid or midterm, they actually prove, as I said, to increase the barriers of entry, and those that can clear the hurdles will benefit.

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

Could you give us a sense -- do you have a ratio of like loan -- how many loans have you modified versus foreclosures that you had to process as some measure of, let's call it, consumer friendliness or...

Mark J. O'Brien

Henry, I think that's a bad definition of consumer friendliness. And I think for us to speculate what that would be, not appropriate.

Denmar John Dixon

We have to look at each and every case individually and make the right decision. And keep in mind, in many cases, we're not the ultimate decision maker. We're the processor, we go to the investor, we get our instructions then we move on. But certainly, we think we're doing a strong job in our servicing quality.

Operator

Our next question is from Mike Grondahl from Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Yes, a couple of questions, guys. The first one, just sort of in your general discussion with sellers over the last 90 days, have you seen any of them change their minds about selling? And then are the dialogues still active?

Denmar John Dixon

Yes, I would say the dialogues are very active. I have not seen one change their mind about their core strategy. I think the dialogue has improved with several because of our track record and rating. So as I said, your kind of ability to get deals done is important you. I think they are very aware of the current environment. And remember, each one of these approvals we go to -- go for, we go hand-in-hand. So we have very much a partnership interested -- interest in getting these transactions done, and we work very closely with our clients to try and ensure that we're successful.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then you may have said, but I could have missed. Of the $85 billion to $115 billion new Servicing business additions for 2014, has any of that been announced so far or is it all incremental?

Denmar John Dixon

No. The $60 billion-ish that we announced through the late third quarter or fourth quarter of '12 is all included in that number. So in -- I mean, I'm sorry, '13. So since we didn't have that in the '13 budget and it actually doesn't kind of kick in until '14, $60 billion of that number is represented by the transactions we announced late last year.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. So you already have that part of it done, okay. And then just lastly, if you look at servicing originations in reverse, if you were to handicap, which 1 of 2 might be the most challenging in 2014? What do you think it would be?

Denmar John Dixon

Well, based on our start of 2014, it's a challenge across the board that I think we're up to. And I think we've been consistently -- the servicing, ARM, insurance businesses, are all recurring revenue, much easier to predict based on the portfolio costs, et cetera. So by far, I think those revenue streams are the base, if you will, for the guidance. And then on the forward originations side, that business, we all know moderates or moves around with interest rates, and I've not been the best predictor of rates over time, but we feel like if they stay along the forward curve, we feel pretty good about our guidance, especially since we are probably less sensitive in some respects to what's going on in the overall market because a big piece, as you can see from our key drivers, is still coming from the retention channel and the HARP opportunity embedded in our existing portfolios and those that we're boarding. So that will be a little more stable, if you will, than just being in the purchased money market in a big way. And I think you'll see from our drivers, we did back down some our view on both margins and volume for the retail channel to reflect current positions. The reverse business, on average, should be a steady business -- steadier business and had been for a long time. Last year was a very transitional year, and I think we've now found the bottom, if you will, and we'll work through an upside for 2014. So taken as a whole, certainly, Servicing is the base; Originations, a little less volatile than most because of the embedded retention opportunity that we still have; and Reverse, on the uptick. And then, obviously, I should have spent another minute on it. Our loans in residual segment is a very steady source of cash flow. And for asset management this year, a very important and one we're very excited about, transition year, where we're actually coming to the end of a managed portfolio that we had very successful performance on so far. And if we're able to finish the monetization, we'll realize significant performance fees for managing that transaction and will transition into the management fee and hopefully, performance fees that come with our external management contract with Walter Capital Opportunity. And that's a high-value, predictable revenue stream.

Operator

Our next question is from Kevin Barker from Compass Point.

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

So in your guidance, you assume $85 billion to $115 billion of servicing portfolio acquisitions at 10 to 15 basis points, and some of that is starting to board here in the beginning of '14. Could you explain like the timing of that and then the additional acquisitions you expect on that portfolio?

Denmar John Dixon

Yes. So we don't speak to any one, as you know, Kevin, until they're done, right? We've got a lot of client confidentiality we pay very close attention to. But we're in very good discussions, and I think you could expect that the bigger transactions announced, those economics obviously kick in at the beginning of the year and early in the year. And then we've layered in the additional new business throughout the year, understanding that we're not all going to board it on top of each other. So we've -- and the reason there's a range is we've feathered the transactions in on reasonable boarding schedules throughout the remainder of the year.

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

So that assumes an additional, what, $25 billion to about $50 billion of servicing portfolio acquisitions in 2014?

Denmar John Dixon

Yes.

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

Okay. And then are you implying some ramp expenses associated with those acquisitions and...

Denmar John Dixon

They, too, will be built into the outlook.

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

And then how do you plan to finance these acquisitions?

Denmar John Dixon

The plans is, as we've outlined, we've got cash on hand, and we've got access through Walter Capital Opportunity financing through excess spread, and the combination of those 2 would cover the needs we have for the acquisitions that are in the plan.

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

Okay. And then in the guidance, you mentioned $13 billion to $17 billion originations through the correspondent channel at 10 to 20 basis points of margin. Why would it make sense to do loans at that level of margin given the risk that's out there from additional regulation and the potential for movements from interest rates or possibly elevated CPRs? What would be the reason that -- to continue to do those types of originations rather than, you know, sit on the sidelines?

Denmar John Dixon

It's a good question. I mean, we look at the correspondent channel as a very opportunistic channel, right? If we're able to generate the volumes that we've shown in the drivers at that 10 to 20 basis points, we maintain a pretty high level of quality control with the entities that we're buying those loans from. So we -- it's not quite us originating on our own, but it's very close to it given the quality control. And if we're doing it at those levels, we're basically manufacturing MSR at a slight discount to where we can buy it in the market. And so long as that relationship remains true, then we would like to do -- grow and be very successful in the correspondent channel to the extent that, that reverses, then it is a channel that you can manage down very quickly on variable expense, so we will pull back in corresponded and you'll probably see a resulting increase in our flow purchases because that's a more efficient use of our capital to replenish the book.

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

Okay. And then what type of CPR would you expect on your originations, or are you embedding when you capitalize an MSR? And what type of CPR are you expecting through 2014?

Denmar John Dixon

Yes, we'll hit '14 first. So I think our gross disappearance on '14 is around a 16-ish net would probably come in around the 13% level. Since most of our recapture is coming from the GSE portfolio, we do run some off from the MH and second liens and other that we don't recapture. And then I don't have the model in front of me, but I think CPRs on newly originated loans today are low. I mean, it's single digits. I think it's mid to high single digits, but I can check that for you.

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

So are you capitalizing MSRs at that level, assuming that's the high single-digit CPR?

Denmar John Dixon

That's the CPR that's being input into the model that, along with the other 27 assumptions we make in the model, is driving our view of fair market value and the capitalization rate, which I think we said for the year -- for the quarter was around 136 -- 110 basis points on the base and 26 basis points of excess.

Operator

Our next question is from Paul Miller of FBR.

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

I don't know if you addressed this yet, but on your Reverse Mortgage portfolio, it lost money in the quarter. Can you add some color to that? Was it just some write-downs?

Kimberly A. Perez

Yes, this is Kim. We had some higher-level of expenses associated with trying to ensure that all the proper servicing protocols are in place. And then we did also have slightly lower volume during the fourth quarter. Those were the primary drivers.

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

Were the -- so is that -- can we -- is that more onetime expenses to get the servicing up?

Kimberly A. Perez

Yes, we do anticipate our run rate of expenses in that business to come down substantially as we move forward into 2014 and beyond.

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

And then on the insurance side, I know -- there are some changes coming with Fannie and Freddie, right? Will that impact at all your Insurance segment?

Denmar John Dixon

Yes. So I think we've said in the past with the mortgagee letters that came out from Fannie and Freddie, there will be an impact. It impacts about 50% of the business, I think, in '14 since they don't kick in until June, it's about $15 million. And we are looking hard at ways to monetize or capture that value in ways that comply with their new rules.

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

That $15 million, is that revenue or profits?

Denmar John Dixon

That's kind of AEBITDA.

Operator

And we do have time for one final question. Our final question today is from Brad Ball from Ever Core.

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

Yes, just to clarify. The awaiting approvals from the GSEs related to EverBank and other acquisitions, is that the total $60 billion that you're waiting on approval there?

Denmar John Dixon

Yes. I think the EverBank and the one big depository transaction we announced for about $30 billion makes up the bulk of that. I think we actually got approval for one smaller. So maybe it's $50 billion, some of the $60 billion.

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

Okay. And is it unusual from a time frame standpoint that you're awaiting these approvals? Do you expect them to come through, or is there a delay of any kind?

Denmar John Dixon

Yes. I think we always seem to be a little slower than we had hoped to be, whether it was 2 years ago, this year, last year. The delay I think, as we said, there's been some added oversight. FHFA is now looking at the transactions in addition to Fannie and Freddie, and we have the benefit of, I think, of being the first through their new process. So that's taking them some time, and we're working diligently with them to get it done. We would expect to get those approvals done, and we're working hard to make that happen.

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

And the 4-star rating that you mentioned in the release and on the call here, that should give you some confidence that these approvals will come, that they're not likely to block the transactions in any way?

Denmar John Dixon

Look, I can't speak for what they're going to do, right? They're going to make that decision, but I think it was important that, in the midst of all the media highlights that came out and the stories that came out -- I think it was Tim Mayopoulos on Fannie Mae's earnings call, someone asked a question about their view of specialty servicers. And I think he was -- remains positive. That's been an initiative for them, over time, to utilize specialty servicers. I think their OIG, in late 2012, looked into the program and the conclusion was it could greatly benefit taxpayers and borrowers. And I don't -- I haven't heard anything that would say their view has changed there, and I think our performance would support the fact that we are adding a lot of value to the process as we speak.

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

Okay, great. And then, separately, Kim talked about the core servicing profitability margin of 11 basis points and talked about 2 to 4 basis points of potential improvement. I actually missed that. What would be the driver of that 2 to 4 basis point improvement, and would you expect to see that in 2014?

Denmar John Dixon

Yes, you might see some. I think what we were trying to call out is, really, for 2013 and 2014 to some extent, because HARP is still heavily in play, it impacts the Servicing profitability because there are certain costs that get allocated to the Servicing segment where the actual revenue and profit resides in the Originations segment. So if you take -- we've said since we bought the big portfolios, that portfolios, as they mature from year 1 to year 2, they're boarded, you clean them up. Delinquencies come down, cost of service comes down. So just the maturation of those portfolios should improve the profitability on those portfolios. And keep in mind, we took on 1 million accounts last year that are all in their first year. And then as some of the HARP-related expense, higher compensating interests, call center expense to move leads over to the originator, as that diminishes and end, we implement efficiency programs, we'd expect to see the 2 to 4 basis points. So on the existing portfolio, you'll see that lift. The drill will be repeated some. As we add new portfolios, they'll be a little less profitable in the first year, little more in the second and so on.

Mark J. O'Brien

Gentleman, it appears that we've run out of time. We want to thank you, all, for your interest and your support, and we will conclude at the call at this time. Thank you, operator.

Denmar John Dixon

Thank you.

Operator

Thank you. And this does conclude today's conference. You may disconnect at this time.

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