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SEC Filings

DITECH HOLDING CORP filed this Form 10-K on 04/16/2019
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We believe that our maximum repurchase exposure under such contracts is the origination UPB of all mortgage loans we have sold or securitized. At December 31, 2018, our maximum exposure to repurchases due to potential breaches of representations and warranties was $67.8 billion and was based on the original UPB of loans sold from the beginning of 2013 through the year ended December 31, 2018, adjusted for voluntary payments made by the borrower on loans for which we perform servicing. To recognize the potential mortgage loan repurchase or indemnification losses, we have recorded a reserve of $12.7 million at December 31, 2018. In 2018, we incurred losses of $2.3 million related to such indemnification and repurchase activity. If our mortgage loan originations increase in the future, our indemnification and repurchase requests may also increase. During periods of elevated mortgage payment delinquency rates and declining housing prices, originators have experienced, and may in the future continue to experience, an increase in loan repurchase and indemnification claims due to actual or alleged breaches of representations and warranties in connection with the sale or servicing of mortgage loans. The estimate of our loan repurchase and indemnification liability is subjective and based upon our projections of the future incidence of loan repurchase and indemnification claims, as well as loss severities. Losses incurred in connection with loan repurchase and indemnification claims may be in excess of our estimates (including our estimate of liabilities we will assume in an acquisition and factor into our purchase price). Our reserve for indemnification and repurchase obligations may increase in the future. If we are required to make indemnification payments with respect to, and/or repurchase, mortgage loans that we originate and sell or securitize in amounts that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.
From time to time, the FHFA proposes revisions to the GSEs' standard representation and warranty framework, under which the GSEs require lenders to repurchase mortgage loans under certain circumstances. For example, in January 2013, the FHFA sought to relieve lenders of obligations to repurchase loans that had clean payment histories for 36 months. In May 2014, the FHFA and the GSEs announced additional clarifications. We cannot predict how recent or future changes to the GSEs' representation and warranty framework will impact our business, liquidity, financial condition and results of operations.
We service and securitize reverse loans and, until early 2017, originated reverse loans, which subjects us to risks and could have a material adverse effect on our business, liquidity, financial condition and results of operations.
The principal reverse loan product we originated and currently service is the HECM, an FHA-insured loan that must comply with FHA and other regulatory requirements. The reverse loan business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. A reverse loan (e.g., a HECM) is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. We depend on our ability to securitize reverse loans, subsequent draws, mortgage insurance premiums and servicing fees, and our liquidity and profitability would be adversely affected if our ability to access the securitization market were to be limited or if the margins we earn in connection with such securitizations were to be reduced. Defaults on reverse loans leading to foreclosures may occur if borrowers fail to meet maintenance obligations, fail to pay taxes or home insurance premiums, fail to meet occupancy requirements or the last remaining borrower passes away. An increase in foreclosure rates may increase our cost of servicing. We may become subject to negative publicity in the event that defaults on reverse mortgages lead to foreclosures or evictions of homeowners.
As a reverse loan servicer, we are responsible for funding any credit drawdowns by borrowers in a timely manner, remitting to credit owners interest accrued, paying for interest shortfalls, and funding advances such as taxes and home insurance premiums. During any period in which a borrower is not making required real estate tax and property insurance premium payments, we may be required under servicing agreements to advance our own funds to pay property taxes, insurance premiums, legal expenses and other protective advances. We also may be required to advance funds to maintain, repair and market real estate properties. In certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed. In addition, in the event a reverse loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the reverse loan is repaid or refinanced or liquidation occurs. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could adversely affect our business, financial condition or results of operations. Advances are typically recovered upon weekly or monthly reimbursement or from securitization in the market. We could receive requests for advances in excess of amounts we are able to fund, which could materially and adversely affect our liquidity. All of the above factors could have a material adverse effect on our business, liquidity, financial condition and results of operations.
Our reverse mortgage business has been unprofitable and we expect losses to continue in this segment.
Our reverse mortgage business generated significant losses before income tax in each of the periods in 2017 and 2018. We expect to continue to generate losses in that segment. We service a substantial portfolio of reverse loans and expect to incur continued losses on that servicing activity. We expect these losses will be driven by the costs of servicing defaulted reverse loans that are a part of our securitized portfolio, including appraisal-based claims, shortfalls between the debenture rate we receive on defaulted loans and the note rate we must continue to pay, property preservation expenses, curtailment costs and other servicing costs. To mitigate the expected losses in the reverse segment, in 2017 we ceased originating new reverse mortgages, having concluded that the cost of expanding the originations business was no longer justified based on probabilities of successfully growing that business to scale. We will continue to fund undrawn amounts available to borrowers of reverse loans we have made.