FORT WASHINGTON, Pa., Aug. 9, 2018 /PRNewswire/ -- Ditech Holding Corporation (NYSE: DHCP) today announced a net loss for the quarter ended June 30, 2018 of $40.5 million, compared to a net loss of $94.3 million for the quarter ended June 30, 2017. Adjusted Loss was $46.9 million in the current quarter as compared to an Adjusted Loss of $19.8 million in the prior year quarter.
The current quarter also included MSR valuation gains of $31.6 million, as compared to MSR valuation losses of $34.8 million in the corresponding prior year quarter. Net non-cash reverse fair value losses increased $13.6 million in the three months ended June 30, 2018 as compared to the same period of 2017 due primarily to valuation model assumption adjustments for buyout loans and changes in market pricing during 2018.
"In the second quarter, we made progress refining our strategy and executing initiatives aimed at improving operational efficiencies, enhancing our customer experience and growing market share. We worked to introduce new technology solutions, including a digital point-of-sale system, and evaluated options to introduce additional robotics and automation capabilities to our originations and servicing segments. We also began to execute on a strategy to improve execution and pricing within our originations segment and strengthened our ability to identify opportunities in our existing portfolio to help us address adverse market conditions," said Tom Marano, Chief Executive Officer and President. "Our second quarter performance did not meet our expectations, and we are continuing to take actions that we believe will help the Company return to sustained profitability."
Total revenues for the second quarter of 2018 were $198.5 million, a decrease of $10.3 million as compared to the prior year quarter, primarily due to decreases of $27.3 million in net gains on sale of loans, $10.0 million in interest income and $9.6 million in net fair value gains (losses) on reverse loans and related HMBS obligations, partially offset by an increase of $38.8 million in net servicing revenue and fees. The decrease in net gains on sales of loans was primarily due to an overall lower volume of locked loans. The increase to net servicing revenue and fees was driven by the change in fair value of servicing rights related to changes in valuation inputs and other assumptions, partially offset by lower servicing fees due primarily to the reduction in our owned MSR portfolio and continued runoff of the overall servicing portfolio.
Total expenses for the second quarter of 2018 were $251.7 million, a decrease of $40.9 million as compared to the prior year quarter. This decrease was primarily driven by a decrease in salaries and benefits of $18.3 million and a decrease in general and administrative expenses totaling $17.2 million. The decrease in general and administrative expenses resulted primarily from decreases of $6.9 million in legal fees related to litigation and regulatory costs, $5.4 million in costs related to our debt restructure initiative in 2017, $3.9 million in advance loss provision due to lower Fannie Mae escrow requirements, $2.6 million in purchased services, $2.1 million in professional fees and $1.5 million in curtailment-related accruals, offset in part by $6.2 million in amortization of the Clean-up Call Agreement inducement fee in 2018 and $5.2 million in higher loan servicing expense due primarily to higher VA buydowns and loans moving into foreclosure related to a seasoning portfolio. In addition, we had a decrease of $4.9 million resulting from accretion recorded during the second quarter of 2018 related to fresh start accounting adjustments for advances, which is not comparable to the second quarter of 2017. The decline in salaries and benefits expenses was due primarily to a decrease in compensation and benefits from lower average headcount driven by site closures and various organizational changes.
The Company is dependent on its ability to secure market financing from third parties on acceptable terms and to renew, replace or resize existing financing facilities as they expire. Continued growth in reverse Ginnie Mae buyout loan activity in the Reverse Mortgage segment will require us to continue to seek additional financing or to otherwise sell or securitize reverse Ginnie Mae buyout assets.
Results for the Company's segments are presented below. Effective January 1, 2018, the Company no longer allocates corporate overhead, including depreciation and amortization, to its operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
The Servicing segment serviced approximately 1.5 million accounts with a UPB of $178.4 billion as of June 30, 2018.
The Servicing segment reported pre-tax income of $50.5 million for the second quarter of 2018, an increase of $84.4 million compared to the prior year quarter. During the second quarter of 2018, the segment generated revenue of $148.1 million, an increase of $30.6 million as compared to the prior year quarter, primarily due to $70.2 million in favorable fair value changes to our MSR, partially offset by $30.6 million in lower servicing fees due primarily to the reduction in our owned MSR portfolio and continued runoff of the overall servicing portfolio.
Total expenses in the Servicing segment for the second quarter of 2018 were $100.8 million, a decrease of $49.9 million as compared to the prior year quarter, driven by $19.3 million in lower general and administrative expenses and $15.3 million in lower salaries and benefits. The decrease in general and administrative expenses was primarily due to decreases of $6.3 million in legal fees related to litigation and regulatory costs, $3.9 million in advance loss provision due to lower Fannie Mae escrow requirements, $2.2 million in professional fees due to transitioning bankruptcy work in-house, $1.9 million in float interest expense due to the sale of MSR, and $1.6 million in certain purchased services related to a smaller portfolio, offset in part by $5.2 million in higher loan servicing expense due in part to higher VA buydowns and loans moving into foreclosure related to a seasoning portfolio. In addition, we had a decrease of $4.9 million resulting from accretion recorded during the second quarter of 2018 related to fresh start accounting adjustments for advances, which is not comparable to the second quarter of 2017. The decline in salaries and benefits resulted primarily from a lower average headcount and a decrease in severance related to restructuring initiatives in 2017. Current quarter expenses included $4.8 million of interest expense and $3.2 million of depreciation and amortization.
Adjusted earnings improved $8.2 million for the second quarter of 2018 as compared to the prior year quarter due to lower general and administrative expenses, salaries and benefits and realization of expected cash flows, offset in part by lower servicing fees and interest income on loans.
The Originations segment funded total UPB volume of $2.6 billion for the second quarter of 2018, a decrease of $1.6 billion as compared to the prior year quarter. The recapture rate(1) was 17% for the current quarter.
The Originations segment reported $8.4 million of pre-tax loss for the second quarter of 2018 as compared to pre-tax income of $23.8 million for the second quarter of 2017, which represents a decrease of $32.2 million. During the second quarter of 2018, this segment generated revenue of $47.8 million, a decrease of $32.7 million from the prior year quarter. Net gains on sales of loans decreased $28.5 million as compared to the prior year quarter, primarily due to an overall lower volume of locked loans as well as a lower day one margin due to pricing decreases in both the consumer and correspondent channels.
Total expenses in the Originations segment for the second quarter of 2018 were $56.3 million, a decrease of $0.5 million compared to the prior year quarter. Current quarter interest expense was $7.5 million and depreciation and amortization was $4.4 million.
Adjusted earnings declined by $30.5 million for the second quarter of 2018 as compared to the prior year quarter due to the revenue decline previously discussed.
The Reverse Mortgage segment serviced 98,895 accounts with a UPB of $18.8 billion at June 30, 2018, which includes UPB of $9.0 billion related to on-balance sheet loans and real estate owned. During the quarter, the business securitized $65.6 million of previously unfunded commitments and related fees.
The Reverse Mortgage segment reported $29.6 million of pre-tax loss for the second quarter of 2018 as compared to pre-tax loss of $13.6 million in the prior year quarter. During the second quarter of 2018, this segment generated revenue of $5.8 million, a decrease of $9.6 million from the prior year quarter. Net non-cash fair value losses increased $13.6 million due primarily to the valuation model assumption adjustments for buyout loans and changes in market pricing during 2018. Net interest income on reverse loans and HMBS related obligations increased $6.3 million primarily due to an increase in buyouts. In addition, we had a $1.0 million decline in servicing revenue and fees.
Total expenses in the Reverse Mortgage segment for the second quarter of 2018 were $35.4 million, an increase of $6.4 million from the prior year quarter. The increase in total expenses was driven by a $9.7 million increase in interest expense due primarily to higher average borrowings on master repurchase agreements as a result of higher buyout loan levels, and a higher average cost of debt related to the interest rate on the Exit Warehouse Facilities.
Pre-tax loss increased $16.0 million to $29.6 million and adjusted loss worsened by $2.7 million to a loss of $3.9 million for the second quarter of 2018 as compared to the prior year quarter primarily due to higher interest expense and a decrease in net fair value gains on reverse loans and related HMBS obligations, partially offset by the decline in salaries and benefits.
The Corporate and Other Non-Reportable segment reported $52.7 million of pre-tax loss for the second quarter of 2018, a decrease in loss of $16.3 million as compared to the prior year quarter. Other net fair value gains (losses) increased $11.9 million driven by an increase in the LIBOR rate for loans and bonds related to the Non-Residual Trusts during 2018 and negative assumption change impacts in the conditional default rate during 2017. Additionally, there were other gains of $7.2 million in connection with our counterparty under the Clean-up Call Agreement having fulfilled its obligation for the mandatory clean-up call of one of the remaining Non-Residual Trusts, resulting in the subsequent deconsolidation of the trust. This gain is offset by the amortization of the inducement fee recorded in general and administrative expenses during the period.
Interest expense decreased $3.1 million for the second quarter of 2018 as compared to the prior year quarter primarily as a result of the extinguishment of the Senior Notes and Convertible Notes in connection with the Chapter 11 bankruptcy, offset in part by higher interest rates on post-bankruptcy debt.
Ditech Holding Corporation is an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. Based in Fort Washington, Pennsylvania, we have approximately 3,600 employees and service a diverse loan portfolio. For more information about Ditech Holding Corporation, please visit our website at www.ditechholding.com. The information on our website is not a part of this release.
This press release and the accompanying reconciliations include non-GAAP financial measures. For a description of these non-GAAP financial measures, including the reasons management uses each measure, and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP, please see the reconciliations as well as "Non-GAAP Financial Measures" at the end of this press release.
The terms "Ditech Holding," the "Company," "we," "us" and "our" as used throughout this report refer to Ditech Holding Corporation (Successor) and its consolidated subsidiaries after the Effective Date, and/or Walter Investment Management Corp. (Predecessor) and its consolidated subsidiaries prior to the Effective Date. We use certain acronyms and terms throughout this release that are defined in the Glossary of Terms in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.
(1) Recapture rate represents the percent of voluntary UPB payoffs during the period refinanced into new loans by Ditech. This metric excludes payoffs on non-marketable portfolios, payoffs under $20K UPB, or payoffs prior to 60 days after boarding.
Certain statements in this press release constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as "believes," "anticipates," "expects," "intends," "plans," "projects," "estimates," "assumes," "may," "should," "will," "seeks," "targets," or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance, nor should any conclusions be drawn or assumptions be made as to any potential outcome of any changes in our strategy. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described below and in more detail under the caption "Risk Factors" in our filings with the SEC.
our ability to achieve our strategic initiatives, particularly our ability to: enter into new subservicing arrangements; improve servicing performance; successfully develop our originations capabilities; and execute and realize planned operational improvements and efficiencies;
risks and potential costs associated with technology and cybersecurity, including: the risks of technology failures and of cyber-attacks against us or our vendors; our ability to adequately respond to actual or attempted cyber-attacks; and our ability to implement adequate internal security measures and protect confidential borrower information;
We manage our company in three reportable segments: Servicing, Originations and Reverse Mortgage. We evaluate the performance of our business segments through the following measures: income (loss) before income taxes and Adjusted Earnings (Loss). Management considers Adjusted Earnings (Loss) to be important in the evaluation of our business segments and of the company as a whole, as well as for allocating capital resources to our segments. Adjusted Earnings (Loss) is a supplemental metric utilized by management to assess the underlying key drivers and operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance. Adjusted Earnings (Loss) is not a presentation made in accordance with GAAP and our use of this measure and terms may vary from other companies in our industry.
Adjusted Earnings (Loss) is defined as income (loss) before income taxes, plus changes in fair value due to changes in valuation inputs and other assumptions; goodwill and intangible assets impairment, if any; a portion of the provision for curtailment expense, net of expected third-party recoveries, if applicable; share-based compensation expense or benefit; non-cash interest expense; exit costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily including severance, gain or loss on extinguishment of debt, the net impact of the Residual and Non-Residual Trusts, transaction costs, reorganization items and certain non-recurring costs, as applicable. Adjusted Earnings (Loss) excludes unrealized changes in fair value of MSR that are based on projections of expected future cash flows and prepayments. Adjusted Earnings (Loss) includes both cash and non-cash gains from mortgage loan origination activities. Non-cash gains are net of non-cash charges or reserves provided. Adjusted Earnings (Loss) includes cash generated from reverse mortgage origination activities for the periods during which we were originating reverse mortgages. Adjusted Earnings (Loss) may from time to time also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors with a supplemental means of evaluating our operating performance.
Adjusted Earnings (Loss) should not be considered as an alternative to (i) net income (loss) or any other performance measures determined in accordance with GAAP or (ii) operating cash flows determined in accordance with GAAP. Adjusted Earnings (Loss) has important limitations as an analytical tool, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. Some of the limitations of this metric are:
Adjusted Earnings (Loss) does not reflect cash expenditures for long-term assets and other items that have been and will be incurred, future requirements for capital expenditures or contractual commitments;
Adjusted Earnings (Loss) does not reflect changes in, or cash requirements for, our working capital needs;
Adjusted Earnings (Loss) does not reflect certain tax payments that represent reductions in cash available to us;
Adjusted Earnings (Loss) does not reflect non-cash compensation that is and will remain a key element of our overall long-term incentive compensation package;
Adjusted Earnings (Loss) does not reflect the change in fair value due to changes in valuation inputs and other assumptions;
Because of these limitations, Adjusted Earnings (Loss) should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted Earnings (Loss) only as a supplement.
Effective January 1, 2018, the Company no longer allocates corporate overhead, including depreciation and amortization, to its operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
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