Walter Investment Management Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 8.12 | About: Walter Investment (WAC)

Walter Investment Management (NYSE:WAC)

Q3 2012 Earnings Call

November 08, 2012 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

Denmar John Dixon - Vice Chairman, Executive Vice President and Director

Analysts

Thomas LeTrent - FBR Capital Markets & Co., Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

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

Douglas Harter - Crédit Suisse AG, Research Division

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

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

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

James J. Fowler - Harvest Capital Strategies LLC

Operator

Welcome, and thank you for standing by. [Operator Instructions] I would now like to turn the meeting over to Ms. Whitney Finch. Thank you. You may begin.

Whitney K. Finch

Thank you, Lisa. Good morning, and thank you for joining us for Walter Investment Management Corp.'s Earnings Conference Call for the quarter ended September 30, 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 ended September 30, 2012, as well as our current business outlook. Let me remind you that comments on this 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 in these statements. Please refer to our SEC filings for a full discussion of the risk factors that may affect any forward-looking statements. Except for any obligations to disclose material information under federal securities laws, we undertake no obligation to release publicly any revisions to forward-looking statements to reflect events or circumstances after this conference call.

We will discuss non-GAAP financial measures during the 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. The third quarter of 2012 was an extremely busy and successful quarter for Walter Investment. We announced the acquisition of Reverse Mortgage Solutions, the best-in-class origination and servicing platform in the reverse mortgage space on September 4 and have since completed the transaction. We are quite pleased to be adding the deeply experienced management team from RMS, along with the premier technology in reverse mortgage space to our organization. We think this positions Walter Investment to capitalize on the substantial growth opportunities in the reverse sector.

During the quarter, we were awarded our second delinquency flow contract on November 1, and we boarded our first transfer of over 13,000 accounts with a UPB in excess of $2 billion under this program. We anticipate that together with the delinquency flow program we announced in June, the flow programs will add an average of approximately 10,000 units per month over their term, a significant advantage to our operators as they plan for future business, and sufficient to offset our existing disappearance.

In October, we launched a number of capital-raising initiatives targeted to increase the company's financial flexibility, lower our cost of capital and leave us well positioned to capture our fair share of the accelerating opportunities in the mortgage sector. We successfully completed the concurrent common stock and convertible senior subordinated notes offering, upsizing the common stock offering from 4.5 million shares to 6 million shares, and pricing the convertible notes at the better ends of the range. The common stock offering generated net proceeds to the company of $276.1 million, which were used to partially fund the acquisition of RMS and will be used to improve liquidity for anticipated growth opportunities, as well as for general corporate purposes.

The convertible notes offering generated net proceeds of $280.4 million, which were used to pay down the existing second lien term loan facility and related fees, expenses and premiums. We have also begun the process of arranging a senior secured first lien term loan facility in the aggregate principal amount of up to $600 million and a senior secured revolving credit facility in the aggregate principal amount of $100 million. We intend to use the proceeds of these borrowings to repay all indebtedness outstanding under the current facilities, to pay related transaction costs and expenses and for working capital, as well as for potential growth opportunities and general corporate purposes. The financing is progressing very well in the market at this time.

On October 24, we were jointly awarded, with Ocwen Loan Servicing, the highest and best bid for the mortgage servicing and originations and capital market platform assets of ResCap. We bid 400 -- excuse me, $540 million to acquire a Fannie Mae MSR with approximately $50.4 billion of UPB at August 31, 2012, approximately $183 million of advances associated with that MSR and the ResCap originations and capital markets platform. We anticipate the MSR will be acquired at very attractive levels as the note -- excuse me, and note that the associated returns exceed our initial thresholds. We also expect the final purchase price of the MSR and advances to be adjusted prior to close, as the UPB on the MSR and related advances decline due to natural runoff.

The originations and capital market platforms are perhaps the most exciting piece of this transaction for us. The origination platform is currently producing significant levels of retention and recapture business for the ResCap portfolio. And it is our expectation that we will be able to leverage these capabilities for our existing portfolio, in addition to the Fannie Mae portfolio acquired through this transaction and other portfolios as they are added from our pipeline. These capabilities will significantly enhance our existing origination efforts and allow us to reach increased scale more quickly and efficiently.

Finally, we continue to deliver solid financial and operational results, which in combination with our continued business development efforts and a ramp in our origination business, support our expectations that 2012 pro forma adjusted EBITDA will be at or above the midpoint of the range previously provided guidance of $225 million to $240 million.

I'd like to ask Charles to review some financial and operational highlights for the quarter, and then Denmar will provide you with an overview of the market and some additional color on our business development opportunities and activity. After that, I'll make a few brief remarks to conclude our presentation before we open the floor to questions. Charles?

Charles E. Cauthen

Thanks, Mark. As Mark mentioned, we have continued to produce the same strong financial and operational performance in the third quarter that we have throughout 2012. I'll also note that this is the first quarter in which we have comparable year-over-year financials, and those financials included strong year-over-year financial performances as compared to the third quarter of last year.

Total revenue of $160.8 million was $8.8 million higher than the $151.9 million earned in the third quarter of 2011. This increase in total revenue continues to be driven principally by our Servicing segment, which generated higher contractual servicing and ancillary fees on business boarded in late 2011 and through this year. We continue to earn an attractive level of incentive and performance-based revenues, although the mix was more towards activity and performance-based fees this quarter as compared to higher incentive fees earned earlier this year and in last year.

Results for the third quarter included pro forma adjusted EBITDA of $60.3 million, $6.9 million higher than the year-ago period, largely as a result of the increased Servicing revenues generated on new portfolios boarded. These results were in-line with our expectations for the quarter and on pace with expectations for the full year. Core earnings for the quarter was $22.1 million after-tax or $0.75 per diluted share, compared to $16.7 million or $0.59 per diluted share in the third quarter of 2011. The $8.6 million increase in pretax core earnings primarily reflects increased margin from new business additions, which more than offset portfolio runoff.

GAAP net income was $6.4 million or $0.21 per fully diluted share, versus a net loss of $65.5 million or $2.30 per fully diluted share in the prior-year period. The results for last year included a charge to tax expense for $63.5 million related to Walter no longer qualifying as a REIT.

Looking at our segments. The Servicing segment generated revenue of $96.9 million in the third quarter. That included $71.1 million of servicing fees, $15.7 million of incentive and performance-based fees and $9.7 million of ancillary and other fees. Growth of servicing fees of $5.5 million, ancillary fees -- ancillary and other fees of $3.6 million, as compared with the prior-year period, is demonstrative of the overall growth in the Servicing portfolio.

A slight decline in incentive and performance-based fees of $1.2 million was driven by lower incentive fees, offset by higher success-based activity and performance and modification fees. The Servicing segment's core earnings before income taxes for the third quarter was $36.7 million, with the improvement as compared to last year driven by margin growth from net new business additions.

During the third quarter, the ARM segment generated revenue of $9.8 million and core earnings before taxes of $4.2 million. That compares to revenues of $7.1 million and pretax core earnings of $2.7 million in the third quarter of 2011. Gross collections for the segment increased by 35% and margins improved by 5 percentage points on improved collections productivity as compared to the prior year.

The Insurance segment generated revenue of $17.4 million in the quarter, roughly $1.9 million lower than last year. The decrease reflected runoff from the Walter Reinsurance business, combined with fewer setups of lender-placed policies in the manufactured housing portfolio, offset by higher lender-placed policies underwritten on the first lien residential real estate portfolio. Insurance segment core earnings before taxes was $9.9 million for the quarter, compared to $9.1 million in the third quarter last year.

The Loans and Residuals segment, which includes the legacy Walter Investment-owned portfolio, generated net interest income of $14.9 million in the third quarter of 2012. That was $1.5 million below the $16.4 million generated in the third quarter of last year. That decrease reflects the lower average balances outstanding as the portfolio is in runoff and a slightly lower average yield due to an increase in 90-plus day delinquencies.

Segment pretax core earnings were roughly comparable, though, at $4.4 million from the third quarter this year compared to $4.8 million last year. The performance of the Walter Investment legacy portfolio remains strong, with REO inventory continuing to decline as compared to the year-ago period, offsetting a normal seasonal increase in delinquencies.

We ended the quarter with liquidity of $128.2 million, including cash of $38.5 million and availability on our revolver of $89.7 million. All of this was before any of the capital markets activity we did in October, obviously. The company made payments of $21.6 million to reduce outstanding corporate indebtedness during the quarter, bringing total reduction in corporate debt, since the acquisition of Green Tree, to $111 million. That's reduced our leverage ratio from 3.93x at the time of acquisition to 2.98x at September 30, 2012.

As Mark mentioned earlier, our efforts to replace our existing first lien term loan are progressing well. Once completed, and in combination with the other capital activities we've already undertaken in October, we believe we'll be well positioned to capitalize on the growth opportunities in our sector. The issuance of the convertible senior subordinated notes to replace our second lien term debt and the expected upsides of the first lien term loan, significantly increase our financial flexibility, reduce our net cost of capital and improve our liquidity position.

We remain focused on delivering strong and consistent financial results from our business, as evidenced by our continued stable EBITDA margins, which were 38% in this quarter. These margins demonstrate how we focus on driving operational excellence from our scalable platform and from the strong performance of our people. And we'll continue to apply both of those to the new business we board going forward.

I'd now like to turn it over to Denmar to provide some color on the current market conditions and acquisitions as well as our pipeline and outlook.

Denmar John Dixon

Thank you, Charles. We continue to see an elevated level of activity in our sector. The base drivers, which we have noted previously, including compliance, regulatory pressure, operational issues, capital, et cetera, continue to significantly influence activity in the market. Market clearing pricing for assets remains attractive and capital, in many forms, is available to execute on our growth strategy.

Our active pipeline remains robust, and we continue to convert on transactions as they move through our business development process. Since the second quarter, the active pipeline has experienced accelerated growth of nearly 67% as the pace of activity within the sector has increased, growing from $300 billion to $500 billion. Included in the larger active pipeline is our exclusive pipeline, which has more than now quadrupled from last quarter's $20 billion to over $110 billion as of today. Over 40% of the business development opportunities in this portion of the pipeline are subservicing transfers, with the remainder likely to transfer through sales of MSR.

Included in this exclusive pipeline is the $50 billion Fannie Mae MSR portfolio we were awarded as part of our joint bid with Ocwen on the ResCap portfolio. We would expect to finalize a high percentage of the exclusive pipeline opportunities in the next 30 to 60 days. I want to take 1 minute and just reiterate our definition of the pipeline that we clarified in the documents in our equity offering. Our pipeline is situated when we identify an asset or portfolio that would fit on our platform and we have made contact with the owner or seller of that platform and gotten a response back and are working that activity in some form or fashion from the earliest stage through the end. So we wanted to make sure we clarify that our pipeline, versus some of the larger numbers that you've seen in the market of $1.5 trillion to $2 trillion, which is the gross amount of servicing we see transferring, our pipeline specifically identifies those assets that we feel could be a good fit on our platform and that we are working through the business development process.

Next, we are extremely pleased to have forged a partnership with Ocwen for the ResCap bid. Through this partnership, we were able to capitalize on each organization's inherent strengths, enabling us to submit the best bid for the entire portfolio, with each partner successful in obtaining the product best suited to their platform and model. The Fannie Mae MSR with a UPB of approximately $50 billion as of August 31, was acquired at very attractive levels, which exceeded our internal return thresholds.

As attractive as the Fannie Mae MSR is to us, the originations and capital markets platform is equally as attractive. The opportunity to acquire a highly regarded originations platform, with a strong management team, is a home run from our perspective. The platform significantly increases our footprint in the originations market and accelerates our capabilities, allowing us to capitalize on the current favorable market dynamics.

We are currently working with the ResCap management team to position the business to be a significant contributor to our results. We would expect that very soon after closing, the originations business will contribute to earnings at a meaningful level while obtaining market level returns. It's our expectations that the originations business will generate significant returns on our investment, in addition to extending the duration of our servicing portfolios.

We continue to view the broader market as a tremendous opportunity set and remain convinced that our unique value proposition to owners of credit and scale and the breadth of our platform will allow us to garner more than our fair share of this business. We are very protective of our margins, and we'll continue to be opportunistic, thoughtful and patient in our assessment of each transaction in the market and in our pipeline. Our goal is not just to grow, but to grow profitably, ensuring that each transaction we win is solidly accretive to our goals.

I'll now hand the discussion back to Mark.

Mark J. O'Brien

Thank you, Denmar. 2012 has already been a very successful year for our company as we have made significant progress on a number of our strategic goals: extending the forward platform into the reverse mortgage space through the acquisition of RMS; boarding 2 delinquency flow programs which will profitably offset our normalized portfolio runoff; winning exclusive status on a significant volume of potential subservicing opportunities; acquiring a significant Fannie Mae MSR from ResCap; expanding our originations footprint through the ResCap acquisition; and undertaking the capital initiatives necessary to ensure that we have adequate financial flexibility to pursue the accelerating growth opportunities in our sector, all the while remaining focused on delivering strong operational and financial performance. Our patience in pursuing product that is the right fit for us positions us very well, not only for next year, but for many years to come, as we look forward to continuing to drive increased value for our shareholders.

This concludes our prepared remarks, and we will now open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Paul Miller with FBR.

Thomas LeTrent - FBR Capital Markets & Co., Research Division

This is actually Thomas on behalf of Paul. Quick question on the flow program. I know you got the second part of it up this quarter, which is good. We just wanted to get any additional thoughts you guys have on future opportunities there, because I'm assuming that those are still not included in your pipeline.

Denmar John Dixon

Yes, Thomas, this is Denmar. Again, we don't really include the core flow programs in the base pipeline. But I would say we are very, very excited about the opportunities, both in the delinquent flow space that we're prosecuting as part of the business development effort now and then also on some new origination flow that could fit the platform pretty well. So definitely an area that Patty Cook's business development team is putting a lot of time into, and we are optimistic about converting more of those programs in the future.

Thomas LeTrent - FBR Capital Markets & Co., Research Division

Okay. Great. And then one follow-up question, I guess, would be, if you guys have thought about when you might provide guidance for 2013?

Charles E. Cauthen

We're still open on that. We're in the middle of our planning process right now for next year. And as we move through that process with our senior management team and our board, we'll have a better idea about how we'll go about that for next year.

Denmar John Dixon

Want to get a few things buttoned up too with the ResCap transaction and RMS coming on board, et cetera.

Operator

Our next question comes from Mike Grondahl with Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

One more question on the flow business, that 10,000 a month, how long do you think that lasts? Kind of, what's your best guess?

Denmar John Dixon

Yes, Mike, I'd answer it probably 2 ways. I think the contract is going to average a year or so, but the pool that, that flow is generating from would provide flow for a period of time longer than that. So our view is that the flow agreements and programs will likely extend longer based on what's in the pools subject to our being successful in performance, which we feel very confident about.

Charles E. Cauthen

Yes, just to clarify, they have a stated term of about a year, but they do provide for renewals of those terms. And as Denmar said, those are designed to, with the expectation that they will extend based off of good performance.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And could you talk a little bit about how broad your discussions are with various big banks, like the top 5? And kind of why you feel so comfortable pricing stays real rational?

Denmar John Dixon

Well, I think we've been pretty consistent that the supply of transactions in the market is at a very high level for the foreseeable future, $1.5 trillion to $2 trillion level. I think if you look at our pipeline, that $500 billion and the pipeline of some of our peers, they are significant numbers. And I think the slide we used on the, maybe the last call or for the offerings, looking at the amount of capacity today in the market and those with scale, us and the 3 or 4 others, versus what's coming, would tell you that there should be some rational -- rationality in the market, if you will, on asset values. So we feel pretty confident that the balance, if you will, between capital coming in, which is a positive for the market, versus the supply, is at a place where we still see attractive opportunities.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Okay. And then just lastly. Denmar, you said something about your pipeline $60 billion, and then you said something about 30 to 60 days. Could you just clarify what you said? You kind of broke up.

Denmar John Dixon

Okay. Sorry about that. Yes, so on our, what we call our exclusive pipeline, right, where we're in exclusive negotiations or discussions with our clients, which is now $110 billion with the ResCap $50 billion, we would expect to convert a high portion of that in the next 30, 60, 90 max kind of days as we conclude diligence, contract negotiations, et cetera. I would caution that some of that could get announced based on the nature of the transaction. Some of it, more the subservicing-type deals, tend not to get announced and you'll get updated on. And then the boardings could be spread out on a timeline longer than that 30, 60, 90 days, based on the nature of the transactions. But we expect to kind of conclude the deal, if you will, in that timeframe.

Operator

Our next question comes from Brad Ball with Evercore.

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

Can you help us frame the origination opportunity with the ResCap platform? What kind of retention recapture rates were they producing, would you expect to be able to produce? And will that be recaptured on the $50 billion of Fannie MSRs? Or would you actually be able to recapture your own book? Just help us think about that going forward.

Denmar John Dixon

Yes, good question, Brad. I think I'd frame it up this way. They have been, in our estimation, at or above kind of the industry levels you've seen in the market on the retention work they've been doing across the ResCap portfolio. It was one of the points that really attracted us to their platform. They are very, very good at that. So we would deploy that platform against, not only the $50 billion that we purchased, but our existing book. And remember, the book that we acquired through the subservicing arrangement last year is a very HARP-rich portfolio. So they would give us immediate lift on that portfolio and also just retention on the portfolio in general. And then to be clear, I think they do have a retail originations component to their business, and we did acquire the software IP, et cetera, around the correspondent business. So as I mentioned earlier in the call, we're working with the management team to really size that business and set it up, to really maximize what it can do and the contribution it can provide for Walter. And we couldn't be more excited than we are right now with everything we've seen, now that we've been able to not only interact in a sale process, but dig in with the management team on a go-forward basis.

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

Okay. But you don't want to give us a targeted retention rate at this point?

Denmar John Dixon

Not at this point, but we'll try and give you some more detail as soon as things get a little bit tighter.

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

How about the mix of recapture versus retail? Can you give us that sense?

Denmar John Dixon

It would originally probably be significantly higher on the recapture and retention. They've got on the retail side, I think, right about 150 or so loan officers now. But Brian Libman has been working with their team. We've all been working with the team, but Brian's been kind of running point on looking at the component and sizing it vis-à-vis the market opportunity and really trying to make sure that we maximize the value that we obtained with that purchase.

Mark J. O'Brien

But to be clear, the low hanging fruit and certainly the early prize is the recapture of the HARP-eligible products that we have. Clearly, that adds to the duration of our servicing portfolio and produces some current period profits that are fairly attractive.

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

Great. And then just separately, on the $50 billion Fannie MSRs, what's the contractual fee on that? What's that look like in terms of delinquencies, performing, et cetera?

Charles E. Cauthen

Yes, it has the contractual fee of about 27 basis points, a delinquency of something less than 10%. It's a less credit-sensitive MSR than, for example, the other Fannie business that we already service. And I think our expectation would be that, that would generate revenues in the 28 to 32 basis point range, and we would expect to stay in-line with our traditional margin rates, with the addition of adding the other business that we're adding.

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

Got it. And then just my last question. Can you just give us an update on where you are with exploring co-investing partners, capital-light strategies? With the big pipeline that you mentioned, would you try to do that with someone buying a portion of the excess MSR?

Denmar John Dixon

Yes, so it's Denmar. I would say we continue to have very detailed conversations with capital partners on all facets, really, of the business and the pipeline that we're looking at. We also continue to make progress on our own capital-heavy entity, if you will. So I think we remain, with a lot of conviction, in the camp, that we've got to keep our options open. And I would say that capital providers are still very interested in the opportunity presented by MSR today, and we are making sure that we are accessing all potential options as we think about each and every deal we do.

Operator

Our next question comes from Douglas Harter with Crédit Suisse.

Douglas Harter - Crédit Suisse AG, Research Division

I was wondering, and just to follow up on that conversation about the capital providers for MSRs, can you talk about sort of how the cost of that has trended since we've seen some of those first transactions?

Denmar John Dixon

Yes, I think we've, again, been fairly consistent that we've kind of saw capital coming to the market. And I think if you look back as short as a year ago, the yields that were being discussed were probably more high-teens into 20% as kind of the base levels that people wanted to see in that market. And while I think there are still players who would like to see those yields, that on average, they've trended down some. So I think it's very much a portfolio-by-portfolio discussion, and it's certainly a fund-by-fund or capital provider by capital provider discussion. But I would say the trend overall has been that the yields or the cost of that capital has tightened over the last year.

Douglas Harter - Crédit Suisse AG, Research Division

Great. And then just a reminder, if you could remind us what kind of your return on capital targets are when you buy a portfolio? As you said, the ResCap deal will exceed that. Just if you could remind us what those targets are.

Denmar John Dixon

Well, we can't do that, Doug, because we don't provide them. Given that a big part of the business is bidding for these assets in the financial trade, we want to keep the targets a little close to the vest so that we don't help out any of the competitors along the way.

Operator

Our next question comes from Henry Coffey with Sterne Agee.

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

Kind of just to continue with this discussion, when you look at your -- the ResCap -- potential ResCap acquisition, we're assuming that, that you'll get news on that on November 19 and that's what moves that one into the definitive box?

Denmar John Dixon

That's correct.

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

And will we then likely to see some sort of purchase -- purchaser -- published purchaser agreement on [indiscernible] after that? Or does that come up before that?

Denmar John Dixon

Well, there's an agreement. Yes, you'll see an 8-K after the 19th, I guess.

Charles E. Cauthen

No. The 8-K will go out today with the -- but it won't be approved by the Bankers Court till the 19th.

Denmar John Dixon

Right. Sorry about that. So yes. So think about, Henry, the timeline being approval on the 19th and then looking to close first quarter, earlier the better.

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

And then in terms of this issue of financing MSRs, you made allusion to a "capital-heavy" vehicle. Is this something that you would line up in early 2013, given the timing of the closing of the ResCap transaction? Or is this going to be more of an ongoing project?

Denmar John Dixon

No, it's something we've been working on. So I think it's coming more towards the tail end of this process. So as we continue to make progress, I would hope that we'd get something done more in the near term than extending it well into '13.

Charles E. Cauthen

Yes, Henry, just to add to that. I think we've been consistent in saying that we like having multiple options. And so we'll continue to pursue partners who provide the capital and, as well as the capital-heavy vehicle Denmar's talking about and all those alternatives, and address for each opportunity, including the ResCap MSR, what provides the best financing option for us.

Denmar John Dixon

Yes, I think it's as the market becomes more educated, it always is the case that each MSR subservicing opportunity, et cetera, each tape is a different tape, and there's different buyers for each tape. What fits your platform, where you think you can add more than just the market value to it by extending duration, et cetera. And then their capital providers have a different view of what fits their book. So to Charles' point, I think we are committed to keeping multiple options open and maximizing the fit between what we're buying in our platform and the capital that's helping us to do that. That's really, we think, going to be additive over time.

Mark J. O'Brien

Henry, but it's not lost on us that ResCap is a known quantity, that portfolio, the MSR is known, and that gives us an advantage in how we want to place or where we want to source that capital for that particular transaction. That's a...

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

But given -- I'm just looking at your press release, given your plans on the -- to extend the first lien facility plus the cash on hand, is it fair to assume that you could probably close ResCap with existing resources in place?

Mark J. O'Brien

It certainly gives us optionality.

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

And then just one last question. One of your peers was out discussing Bank of America the other day, and just from listening -- they've got about $1 trillion of loans they service for others. About half of that is "not Bank of America customers." And one of your peers was out discussing the possibility that they may try to accelerate a resolution there. Is that anything you could comment on? Do you think that is logical, relative to what the industry is expecting over the next few months in terms of new opportunities?

Denmar John Dixon

Yes, we don't comment on any single opportunities. You saw us not really comment through ResCap until we had to at the end. So I wouldn't speak specifically about any one opportunity. I think we've said, as we've talked about the market in the past, that BofA is a very good client of ours, has been very open about the legacy bank and their desire to run down that book of business. And I think they've been pretty consistent in doing that to date. So I think that's probably where we would put the comments out.

Operator

Our next question comes from Kevin Barker with Compass Point.

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

Could you give us a little color on the extra fees that you could possibly earn on the ResCap portfolio? And give us a little bit understanding how much it's going to cost you to service the nonperforming assets from ResCap?

Charles E. Cauthen

Yes, I would just give a little flavor on the fees on that one. I would say we'll have the opportunity to earn what is normal and typical for services there, in terms of ancillary fees, late fees, prepay fees, all those types of ancillary fees. We'll have opportunity from the insurance book of business and so forth. We'll have all those opportunities. We will not likely -- we are not expecting or anticipating that we will have incentive opportunities like we frequently do on that portfolio, simply because it's a purchased MSR from that. It is, as we've said, while it has some delinquencies in them and there's certainly going to be some opportunity to improve performance on those, it is a less credit-sensitive portfolio than the current Fannie Mae portfolio. So I would say that's the main difference between the 2 right there. In terms of the cost, I said we obviously are continuing to develop the operational plans for how we bring that book on board and the timing of that, dependent upon the closing date, for example. And -- but beyond that, I would just say that, that business, as it is mixed with our existing book and the other new business we're adding, we expect to continue to deliver the kind of EBITDA margins that we've been delivering.

Mark J. O'Brien

At the risk of stating the obvious, a current pool is less costly to service than a delinquent pool.

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

On the flow programs, you're -- you've been running a lot of delinquency flow programs right now, and it's great for fees upfront. And it should last for the next couple of years. But longer term, are you looking to set up origination flow programs? And have you made any progress on that?

Denmar John Dixon

Yes, so I think we are looking to do it. We have made progress. And I think really the explanation on the delinquency flow programs, I'd step back to some commentary we had when we first discussed those. So if you think about us getting delinquents that were identified at say, 43 days, letters went out, they're transferred to us, really on the day that they're 60-day delinquent, Green Tree has a fantastic record of rolling 60-day delinquents back to current. So on average, that's 30%, 35% and more in some months. So to the extent that we can take that flow of delinquents and roll some percentage of that back to current, we're actually developing a longer duration MSR, if you will, in the process. And we hope to be very successful, given the core competencies of Green Tree in doing that. So I would say even the delinquency flow programs are going to build some more permanent MSR. Now the back half of that goes 60 to 90 and through the process is going to have a shorter duration but a bigger cash or dollar per loan fee opportunity as it makes its way through the process. On the forward flow programs, I think they are attractive, as Charles has mentioned a couple of times now, in just balancing the book out over time, so that we can staff operations, et cetera, and leverage the fixed cost. So I think some mix of both is important to us. And then obviously, given the core competency of the portfolio -- the platform, I'm sorry, the flow programs -- more credit-sensitive type product would probably be a little better fit for the platform. But you can imagine that there will be a mix on a go-forward basis.

Operator

Our next question comes from Bose George with KBW.

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

Actually this is Ryan O'Steen on for Bose. To the extent that you're able to -- I was hoping to dig in a little bit to the cost side of the origination platform. Can you give any thoughts on potential charges? How many people could be coming over? And just how to think about the normalized cost basis there?

Charles E. Cauthen

Yes, I will just say -- I can't give any specifics on that. We're continuing to develop our plans for bringing that book -- that business on board. As a follow out to that, we'll be -- we'll determine how much, if any, charges there are associated with that. We don't expect them to be major, major charges or material charges. As far as ongoing costs, we expect it will be kind of what the market is typically. There's nothing particularly different or unique about the cost structure at ResCap that would be outside the market. As you know, those -- that business has a highly variable cost structure, and that's the way they're designed to be and that's the way they have to be.

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

Do you have any estimate of the employees that could be coming over?

Mark J. O'Brien

They have an awful lot of employees. As Denmar said earlier, we are building the business plan to fit the market that we're currently in and are -- what we believe are the most profitable channels. And we're not through with that exercise yet.

Denmar John Dixon

Currently, the count was somewhere in the 700, 800-ish.

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

Okay. That's helpful. On the $50 billion Fannie Mae MSR, do you have any estimate of how much could be HARP-eligible?

Mark J. O'Brien

Actually, we have a view on that. We are refining that view. It is a sensitive -- a very current program, kind of a general statement, it's a HARP-rich mine.

Operator

Our next question comes from Jim Fowler with Harvest Capital.

James J. Fowler - Harvest Capital Strategies LLC

In your Servicing segment, you had a significant reduction in expenses versus the second quarter, along the lines of about $15 million. Can you comment on the driver of that reduction in expenses? And excluding the additional expenses related to the ResCap, is -- for the legacy business that you just -- that you have today, is that -- is the third quarter expense base a good expense base from which to model going forward?

Charles E. Cauthen

Just generally on the expense base, that there were not a large amount of ResCap-related expenses in the third quarter. So that was -- there's nothing that particularly needs to be normalized for that. We had some reduction in expense in the quarter related to some reimbursements of some servicing expenses from prior quarters that we had gotten, that was really only about $2 million impact to the quarter. And so, then also beyond that, you always have to remember that we did actually go down in UPB in the quarter, and we vary our cost structure with that slightly. We will be able to vary that cost back up as we add ResCap and other business to that. So beyond those things, there was nothing particularly unique or outstanding with regards to the quarterly expense rates.

James J. Fowler - Harvest Capital Strategies LLC

Great. If I could just ask one more question on pipeline.

Charles E. Cauthen

One more thing, Jim, I want to do -- do want to mention there too, as I forgot to mention, is that portfolio performance is an impact to cost too. And as we continue to drive delinquencies down and improve the performance of the portfolios we service, that lowers our cost structure also.

James J. Fowler - Harvest Capital Strategies LLC

Great. So it sounds like on a normalized UPB basis, the expense base in the second quarter was higher related to items, but particularly some expense related to ResCap due diligence and the like, and that the third quarter is more reflective of a normalized expense base for the portfolio that will change relative to UPB and delinquency improvements, et cetera? Is that fair?

Charles E. Cauthen

Yes, I think that's fair.

James J. Fowler - Harvest Capital Strategies LLC

One quick question on pipeline. So in your filing document for the transaction, you had quoted a $500 billion pipeline and you had a fairly specific number of, I think, $70 million in there that would lead one to conclude that potentially MetLife would have been in that portfolio along with ResCap. So I was kind of thinking that when you put a pipeline out today, it would be potentially $380 billion excluding both Met and ResCap. It's -- you've reiterated the $500 billion again. So it sounds to me that either MetLife was in and it's been replaced, or MetLife wasn't in. I'm just wondering if you might comment on the current pipeline, particularly as it pertains to and whether that map seems reasonable to you. But -- and also on the pipeline, on MetLife-type of servicing and how attractive you might find it. By that I mean, very current, very newly originated, very, certainly, low-cost but also more of a payment processing type of servicing portfolio. Is that part of your current pipeline and with those opportunities? So when we think $500 billion, we should be thinking more loss content potential, more incentive fee content potential, that sort of thing?

Denmar John Dixon

So let me try and take them one at a time. So I would say this, Jim, the -- we will not comment on specific pieces of the active pipeline, okay? No sense helping anybody out in that vein, not meaning our investors, but our competitors. So we don't comment on what's in the active pipeline. But on your numbers on the $500 billion, it was $500 billion and stayed $500 billion, but it did have some adds and subtracts, okay? ResCap didn't come out because ResCap is in there in the exclusive category at this point in time. And it won't come out until we close the deal, okay? So we would adjust the $500 billion number for ResCap when we've actually closed that transaction. On the idea of what portfolios could be attractive to us, and you'll have to help me if I missed a question in the flow there, I was trying to write them down. There is a mix of product in the pipeline. I think clearly, the driver is more around credit-sensitive assets, especially those with an owner of credit that lead to a lot of the subservicing that I think we kind of called out as a reasonable sized piece of the overall pipeline and certainly a good-sized piece of our exclusive pipeline. But a mix in the book of MSR and servicing, if you will, is a good thing for the business. And I think I would be very specific to say, we look at each deal vis-à-vis our returns and capacity, et cetera, on the platform and make a decision. And the right way to think about it is when you price out a transaction, you price it out on the math and the return versus your capacity, versus the inherent risk in that transaction, if it comes with any retain liability, rep and warrant, et cetera, that all matters to us. And a given transaction, while it may not be the most obvious fit on the platform, a pure prime at the right price could be very attractive. So I think what you should be thinking about is that we take each one individually, and I think we've been very consistent in saying we get to see most everything, if not everything, in the market. We price it. We think about it. And if we can earn what we think are above-average returns, we'll work it.

Charles E. Cauthen

One thing I'd like to emphasize on that comment is even the less credit-sensitive portfolios, the opportunities for MSRs that are less credit sensitive, it makes a difference whether we're sitting across the table from the credit owner on those or not. Because we think we are much more competitive, we are value-add and we can win deals even on less credit-sensitive loan portfolios if we're sitting across the table from the credit owner on those rather than just a third-party servicer.

Operator

And at this time, there are no further questions.

Mark J. O'Brien

Being there are no further questions, we thank everybody for joining us today, and we thank you for your interest and participation. Good day.

Operator

Thank you. That does conclude today's conference, and you may disconnect at this time.

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