Mortgage mess still takes victims as Walter plans bankruptcy

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Walter Investment Management Corp. was supposed to prosper by snapping up mortgage cast-offs from big banks at fire-sale prices. Instead, Walter is belatedly joining the list of companies burned by the U.S. housing crisis.

The mortgage servicer and lender faces a deadline Wednesday to get creditors on board with its bankruptcy plan, and needs at least two-thirds of its term-loan and bond holders to agree for its restructuring to take effect. About half had signed up by the end of last week, according to a statement Friday from the Fort Washington, Pa.-based company.

Walter's prepackaged Chapter 11 plan, which would be filed by late November, would cut the company's $2.1 billion corporate debt load by about $700 million, and ideally would include some recovery for holders of Walter's convertible notes and existing stock, according to the statement. Whether that will solve the company's problems is debatable, according to Bill Popper, an analyst at broker-dealer firm Clearview Trading Advisors.

"They overpaid for things, took on too much debt, and asset quality was poor," Popper said. "Whatever business model they were pursuing, they built it and people didn't come."

That said, Walter is worth more to creditors alive than dead because recoveries for banks in a liquidation would be so poor, Popper said. The restructuring gives Walter time to cut overhead, and regulators typically would prefer to see Walter survive so that services don't wind up concentrated back at the big banks, he said.

"The fundamentals of our core business remain solid," Chief Executive Officer Anthony Renzi said in the statement. Representatives for the company didn't respond to messages seeking comment.

Only the holding company will file for Chapter 11, while its operating entities, including Ditech Financial and Reverse Mortgage Solutions, will continue their ordinary operations. Walter has "ample liquidity to support its businesses and the costs of the restructuring," the company said, and the reorganization is expected to be completed by Jan. 31.

Who gets what

The plan offers new term loans for existing lenders, and $250 million of new second-lien notes due 2024 and $100 million of preferred stock that would convert into 73 percent of the common stock under agreed conversion terms for participating noteholders.

"It's a start, but that's not enough to move the ship," S&P Global Ratings analyst Steve Lynch said. "They still have a long way to go and a lot to do."

The company's two largest reported stockholders are Vadim Perelman, of Baker Street Capital Management, and hedge fund Birch Run Capital Advisors, according to data compiled by Bloomberg. The stock sold for 45 cents at Tuesday's close. Senior unsecured debt due in 2021 has lost more than 40% of its original value, and the convertible debt slid to about 11 cents on the dollar.

Walter took on the mortgage servicing that big banks botched after the housing bust of a decade ago, a task that included billing and collections for home loans and supervising foreclosures. At its height in 2013, revenue topped $1.5 billion. The company also acquired consumer lenders including Ditech, the online mortgage lender once owned by GMAC Inc. before that company went under during the financial crisis.

Losing ground

But Walter couldn't avoid the paperwork chaos and regulatory scrutiny that plagued banks, and the business got more expensive as nationwide foreclosures hit record levels. The company has had only three profitable years since 2009, and has had cumulative losses topping $900 million in the past three consecutive years.

Walter also faced subpoenas and investigations from U.S. agencies. The Department of Housing and Urban Development this year and the Justice Department were investigating Walter's Reverse Mortgage Solutions business, which focuses on elderly borrowers and was purchased by Walter in 2012. The company didn't comment at the time.

The same unit was fined late last year by the Consumer Financial Protection Bureau for falsely claiming that customers wouldn't be at risk of losing their home. Walter has since said that it planned to stop making new loans at its RMS business.

Bad horse

Renzi, 53, was hired just over a year ago to turn Walter around. He had been chief operating officer of Citigroup Inc.'s North America retail bank and an executive vice president of Freddie Mac.

"Management is pretty good, but if you have a bad horse, that doesn't necessarily mean a good jockey can help," Popper said. "There's no real alternative here to a financial restructuring. It's the operational restructuring that's hard."

Walter is advised by investment bank Houlihan Lokey, law firm Weil Gotshal & Manges, and financial adviser Alvarez & Marsal, according to the statement. Law firm Kirkland & Ellis and financial adviser FTI Consulting are providing counsel for the consenting term lenders, while law firm Milbank, Tweed, Hadley & McCloy and investment bank Moelis & Co. are advising the consenting senior noteholders. Representatives for the advisory firms didn't immediately have a comment or didn't immediately respond to inquiries.

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