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EX-32 - EX-32 - DITECH HOLDING Corpb83305exv32.htm
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EX-10.3 - EX-10.3 - DITECH HOLDING Corpb83305exv10w3.htm
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to                     
Commission file number: 001-13417
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter)
     
     
    Maryland
    (State or other Jurisdiction of Incorporation or Organization)
  13-3950486    
(I.R.S. Employer Identification No.)    
3000 Bayport Drive, Suite 1100
Tampa, FL 33607
(Address of principal executive offices) (Zip Code)
(813) 421-7600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 
                  o
Accelerated filer 
þ 
Non-accelerated filer o (Do not check if a smaller reporting
company)
Smaller reporting company 
o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
The registrant had 25,765,693 shares of common stock outstanding as of November 1, 2010.

 


 

WALTER INVESTMENT MANAGEMENT CORP.
FORM 10-Q
INDEX
     
    Page No.
   
  3
  3
  4
  5
  6
  7
  23
  36
  38
   
  39
  39
  39
  39
  39
  39
  39
  40
 EX-10.3
 EX-31.1
 EX-31.2
 EX-32

 


Table of Contents

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
                 
    September 30,     December 31,  
    2010     2009  
    (Unaudited)          
ASSETS
               
 
               
Cash and cash equivalents
  $ 40,199     $ 99,286  
Restricted cash and cash equivalents
    10,875       8,963  
Restricted cash of securitization trusts
    38,192       42,691  
Receivables, net
    3,524       3,052  
Residential loans, net of allowance for loan losses of $5,388 and $3,460, respectively
    355,212       333,636  
Residential loans of securitization trusts, net of allowance for loan losses of $10,893 and $14,201, respectively
    1,256,404       1,310,710  
Subordinate security
    1,820       1,801  
Real estate owned
    28,259       21,981  
Real estate owned of securitization trusts
    35,949       41,143  
Deferred debt issuance costs of securitization trusts
    17,360       18,450  
Other assets
    4,979       5,961  
 
           
Total assets
  $ 1,792,773     $ 1,887,674  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Accounts payable
  $ 590     $ 13,489  
Accounts payable of securitization trusts
    539       556  
Accrued expenses
    28,386       28,296  
Deferred income taxes, net
    118       173  
Mortgage-backed debt of securitization trusts
    1,183,636       1,267,454  
Accrued interest of securitization trusts
    8,129       8,755  
Other liabilities
    801       767  
 
           
Total liabilities
    1,222,199       1,319,490  
 
           
 
               
Commitments and contingencies (Note 16)
           
 
               
Stockholders’ equity:
               
Preferred stock, $0.01 par value per share:
               
Authorized — 10,000,000 shares
               
Issued and outstanding — 0 shares at September 30, 2010 and December 31, 2009
           
Common stock, $0.01 par value per share:
               
Authorized — 90,000,000 shares
               
Issued and outstanding — 25,758,716 and 25,642,889 shares at September 30, 2010 and December 31, 2009, respectively
    258       256  
Additional paid-in capital
    125,955       122,552  
Retained earnings
    442,981       443,433  
Accumulated other comprehensive income
    1,380       1,943  
 
           
Total stockholders’ equity
    570,574       568,184  
 
           
Total liabilities and stockholders’ equity
  $ 1,792,773     $ 1,887,674  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

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WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(in thousands, except share and per share data)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2010     2009     2010     2009  
Net interest income:
                               
Interest income
  $ 41,307     $ 43,019     $ 124,817     $ 133,525  
Less: Interest expense
    20,316       22,229       62,612       67,972  
 
                       
Total net interest income
    20,991       20,790       62,205       65,553  
Less: Provision for loan losses
    3,234       2,701       11,224       10,663  
 
                       
Total net interest income after provision for loan losses
    17,757       18,089       50,981       54,890  
 
                               
Non-interest income:
                               
Premium revenue
    1,778       2,025       6,636       8,086  
Other income, net
    437       1,263       2,213       2,066  
 
                       
Total non-interest income
    2,215       3,288       8,849       10,152  
 
                               
Non-interest expenses:
                               
Claims expense
    914       1,098       2,739       3,760  
Salaries and benefits
    5,708       5,441       18,547       15,254  
Legal and professional
    1,014       615       2,849       3,215  
Occupancy
    350       223       1,023       1,023  
Technology and communication
    681       687       2,082       2,236  
Depreciation and amortization
    59       105       243       336  
General and administrative
    2,868       3,219       8,131       8,286  
Gain on mortgage-backed debt extinguishment
    (1,680 )           (1,680 )      
(Gains) losses on real estate owned, net
    60       401       (1,293 )     548  
Related party — allocated corporate charges
                      853  
 
                       
Total non-interest expenses
    9,974       11,789       32,641       35,511  
 
                       
 
                               
Income before income taxes
    9,998       9,588       27,189       29,531  
Income tax expense (benefit)
    312       1,345       828       (75,725 )
 
                       
Net income
  $ 9,686     $ 8,243     $ 26,361     $ 105,256  
 
                       
 
                               
Basic earnings per common and common equivalent share
  $ 0.36     $ 0.40     $ 0.98     $ 5.16  
Diluted earnings per common and common equivalent share
  $ 0.36     $ 0.40     $ 0.98     $ 5.15  
 
                               
Total dividends declared per common and common equivalent share
  $ 0.50     $ 0.50     $ 1.00     $ 0.50  
 
                               
Weighted average common and common equivalent shares outstanding — basic
    26,474,001       20,586,199       26,411,018       20,299,435  
Weighted average common and common equivalent shares outstanding — diluted
    26,569,897       20,687,965       26,492,850       20,357,139  
The accompanying notes are an integral part of the consolidated financial statements.

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WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)

(in thousands, except share data)
                                                         
                                                    Accumulated  
                            Additional                     Other  
            Common Stock     Paid-In     Comprehensive     Retained     Comprehensive  
    Total     Shares     Amount     Capital     Income     Earnings     Income  
Balance at December 31, 2009
  $   568,184       25,642,889     $ 256     $ 122,552             $   443,433     $ 1,943  
 
                                                       
Comprehensive income:
                                                       
Net income
    26,361                             $ 26,361       26,361          
Other comprehensive income (loss), net of tax:
                                                       
Change in postretirement benefit plans, net of $20 tax effect
    (377 )                             (377 )             (377 )
Net unrealized gain on subordinate security, net of $0 tax effect
    19                               19               19  
Net amortization of realized gain on closed hedges, net of $0 tax effect
    (205 )                             (205 )             (205 )
 
                                                     
Comprehensive income
                                  $ 25,798                  
 
                                                     
 
                                                       
Dividends and dividend equivalents declared
    (26,813 )                                     (26,813 )        
Share-based compensation
    2,936                       2,936                          
Shares issued upon exercise of stock options and vesting of RSUs
    733       134,823       2       731                          
Repurchase and cancellation of common stock
    (264 )     (18,996 )             (264 )                        
                 
 
                                                       
Balance at September 30, 2010
  $ 570,574       25,758,716     $ 258     $ 125,955             $ 442,981     $ 1,380  
                 
The accompanying notes are an integral part of the consolidated financial statements.

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WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(in thousands)
                 
    For the Nine Months  
    Ended September 30,  
    2010     2009  
Operating activities:
               
Net income
  $ 26,361     $ 105,256  
 
               
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    11,224       10,663  
Amortization of residential loan discount to interest income
    (10,209 )     (11,637 )
Depreciation and amortization
    243       336  
Gain on mortgage-backed debt extinguishment
    (1,680 )      
(Gains) losses on real estate owned, net
    (1,293 )     548  
Proceeds from sale of mortgage securities classified as trading
          2,387  
Benefit from deferred income taxes
    (35 )     (64,344 )
Amortization of deferred debt issuance costs to interest expense
    796       892  
Share-based compensation
    2,936       886  
Other
    (363 )     (329 )
 
               
(Increase) decrease in assets, net of effect of reverse acquisition:
               
Receivables
    373       (4,826 )
Other
    379       (1,828 )
 
               
Increase (decrease) in liabilities, net of effect of reverse acquisition:
               
Accounts payable
    332       (1,076 )
Accrued expenses
    90       (926 )
Accrued interest
    (626 )     (731 )
 
           
Cash flows provided by operating activities
    28,528       35,271  
 
           
 
               
Investing activities:
               
Purchases of residential loans from third parties
    (40,740 )      
Principal payments received on residential loans
    77,072       91,533  
Additions to real estate owned
    (11,382 )     (7,345 )
Cash proceeds from sales of real estate owned
    6,129       8,782  
Additions to property and equipment, net
    360       (2,167 )
(Increase) decrease in restricted cash and cash equivalents
    2,587       (4,197 )
Cash acquired in Hanover reverse acquisition
          774  
 
           
Cash flows provided by investing activities
    34,026       87,380  
 
           
 
               
Financing activities:
               
Payments on mortgage-backed debt
    (62,179 )     (83,373 )
Mortgage-backed debt extinguishment
    (19,870 )      
Net activity with Walter Energy
          9,216  
Dividends to WIM interest-holders
          (16,000 )
Dividends and dividend equivalents paid
    (40,061 )     (10,373 )
Shares issued upon exercise of stock options and vesting of RSUs
    733       54  
Repurchase and cancellation of common stock
    (264 )      
 
           
Cash flows used in financing activities
    (121,641 )     (100,476 )
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    (59,087 )     22,175  
Cash and cash equivalents at the beginning of the period
    99,286       1,319  
 
           
Cash and cash equivalents at the end of the period
  $ 40,199     $ 23,494  
 
           
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
               
Real estate owned acquired through foreclosure
  $ 63,689     $ 64,305  
Residential loans originated to finance the sale of real estate owned
  $ 57,061     $ 42,715  
Residential loans acquired with advances from Walter Energy
  $     $ 2,504  
Dividends to Walter Energy
  $     $ 306,458  
Consummation of reverse acquisition with Hanover
  $     $ 2,186  
The accompanying notes are an integral part of the consolidated financial statements.

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WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
     The Company is a mortgage servicer and mortgage portfolio owner specializing in credit-challenged, non-conforming residential loans primarily in the southeastern United States, or U.S. The Company also operates ancillary mortgage advisory and insurance businesses. At September 30, 2010, the Company had four wholly owned, primary subsidiaries: Hanover Capital Partners 2, Ltd., doing business as Hanover Capital, Walter Mortgage Company, LLC, or WMC, Best Insurors, Inc., or Best, and Walter Investment Reinsurance Company, Ltd., or WIRC.
     The Company’s business, headquartered in Tampa, Florida, was established in 1958 as the financing segment of Walter Energy, Inc., formerly known as Walter Industries, Inc., or Walter Energy. Throughout the Company’s history, it purchased residential loans originated by Walter Energy’s homebuilding affiliate, Jim Walter Homes, Inc., or JWH, originated and purchased residential loans on its own behalf, and serviced these residential loans to maturity. Over the past 50 years, the Company has developed significant expertise in servicing credit-challenged accounts through its differentiated high-touch approach which involves significant face-to-face borrower contact by trained servicing personnel strategically located in the markets where its borrowers reside. As of September 30, 2010, the Company serviced approximately 33,500 individual residential loans.
     Throughout this Quarterly Report on Form 10-Q, references to “residential loans” refer to residential mortgage loans and residential retail instalment agreements and references to “borrowers” refer to borrowers under our residential mortgage loans and instalment obligors under our residential retail instalment agreements.
The Spin-off
     On September 30, 2008, Walter Energy outlined its plans to separate its Financing business from its core Natural Resources business through a spin-off to stockholders. Immediately prior to the spin-off, substantially all of the assets and liabilities related to the Financing business were contributed, through a series of transactions, to Walter Investment Management LLC, or WIM, in return for all of WIM’s membership units. See Note 3 for further information.
     The combined financial statements of WMC, Best and WIRC (collectively representing substantially all of Walter Energy’s Financing business prior to the spin-off) are considered the predecessor to WIM for accounting purposes. Under Walter Energy’s ownership, the Financing business operated through separate subsidiaries. A direct ownership relationship did not exist among the legal entities prior to the contribution to WIM.
The Merger
     On September 30, 2008, Walter Energy and WIM entered into a definitive agreement to merge WIM with Hanover Capital Mortgage Holdings, Inc., or Hanover, which agreement was amended and restated on February 17, 2009. On April 17, 2009, Hanover completed the transactions, or the Merger, contemplated by the Second Amended and Restated Agreement and Plan of Merger (as amended on April 17, 2009, or the Merger Agreement) by and among Hanover, Walter Energy, WIM, and JWH Holding Company, LLC, or JWHHC. The merged business, together with its consolidated subsidiaries, was renamed Walter Investment Management Corp. on April 17, 2009 and is referred to herein as “Walter Investment” or the “Company”. See Note 3 for further information.
2. Basis of Presentation
Interim Financial Reporting
     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. These unaudited interim financial statements should be read in conjunction with our audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
     Although Hanover was the surviving legal and tax entity in the Merger, for accounting purposes the Merger was treated as a reverse acquisition of the operations of Hanover and has been accounted for pursuant to the guidance concerning business combinations, with WIM as the accounting acquirer. As such, the pre-acquisition financial statements of WIM are treated as the historical financial statements of Walter Investment. The Hanover assets acquired and the liabilities assumed were recorded at the date of acquisition, April 17, 2009, at their respective fair values. The results of operations of Hanover were included in the consolidated statements of income for periods subsequent to

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the Merger.
     The consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. All significant intercompany balances have been eliminated in the consolidated financial statements.
     Although the Company did not operate as an independent, stand-alone entity prior to April 17, 2009, management believes the assumptions underlying the consolidated financial statements for the period through April 17, 2009 are reasonable. However, the consolidated financial statements included herein do not include all of the expenses that would have been incurred had the Company been a separate, stand-alone entity; however, the consolidated financial statements do include certain costs and expenses that had been allocated to the Company from Walter Energy for the nine months ended September 30, 2009. As such, the financial information does not necessarily reflect what would have been reflected had the Company been a separate, stand-alone entity during the period through April 17, 2009.
Recently Adopted Accounting Guidance
Transfers and Servicing
     In June 2009, the FASB issued new accounting guidance concerning the accounting for transfers of financial assets which amends the existing derecognition accounting and disclosure guidance. The guidance eliminates the exemption from consolidation for QSPEs, it also requires a transferor to evaluate all existing QSPEs to determine whether it must be consolidated in accordance with the accounting guidance concerning variable interest entities. The guidance was effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. The adoption of this guidance on January 1, 2010 did not have a significant impact on the Company’s consolidated financial statements.
Fair Value Measurements and Disclosures
     In January 2010, the FASB updated the accounting standards to require new disclosures for fair value measurements and to provide clarification for existing disclosure requirements. More specifically, this update requires (a) an entity to disclose separately the amounts of significant transfers in and out of levels 1 and 2 fair value measurements and to describe the reasons for the transfers and (b) information about purchases, sales, issuances, and settlements to be presented separately (i.e., present the activity on a gross basis rather than net) in the roll forward of fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure for fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The standard was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 12, 2010, and for interim periods within those fiscal years. The adoption of this guidance on January 1, 2010 did not have a significant impact on the Company’s disclosures. See Note 5 for the additional required disclosures. The portion of the accounting update that the Company has not yet adopted is not expected to have a material impact on the Company’s disclosures.
Subsequent Events
     In May 2009, the FASB issued guidelines on subsequent event accounting to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance was subsequently amended in February 2010 to no longer require disclosure of the date through which an entity has evaluated subsequent events. Other than the elimination of the requirement to disclose the date through which management has performed its evaluation of subsequent events (Note 17), the adoption of these guidelines had no impact on the Company’s consolidated financial statements.
Receivables
     In April 2010, the FASB updated the accounting standards to clarify that modifications of acquired loans that are accounted for within a pool would not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. The guidance will be effective for modifications of acquired loans exhibiting characteristics of credit impairment at the time of acquisition that are accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of this guidance on September 30, 2010 did not have a significant impact on the Company’s consolidated financial statements.
Recently Issued Accounting Guidance
Receivables
     In July 2010, the FASB updated the accounting standards to enhance disclosures about the credit quality of financing receivables and the allowance for credit losses, including disclosures regarding credit quality indicators, past due information, and modification of financing receivables. The guidance related to disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The guidance related to disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company is continuing to evaluate the impact that the guidance will have on the Company’s disclosures.

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Insurance Contracts
     In October 2010, the FASB updated the accounting standards to clarify which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and will be applied prospectively upon adoption. The Company is evaluating the impact that the guidance will have on the Company’s consolidated financial statements.
Reclassifications
     In order to provide comparability between periods presented, certain amounts have been reclassified from the previously reported consolidated financial statements to conform to the consolidated financial statement presentation of the current period.
3. Business Separation and Merger
     On September 30, 2008, Walter Energy outlined its plans to separate its Financing business from its core Natural Resources businesses through a spin-off to stockholders and subsequent Merger with Hanover. In furtherance of these plans, on September 30, 2008, Walter Energy and WIM entered into a definitive agreement to merge WIM with Hanover, which agreement was amended and restated on February 17, 2009. To effect the separation, WIM was formed on February 3, 2009, as a wholly-owned subsidiary of Walter Energy, having no independent assets or operations. Immediately prior to the spin-off, substantially all of the assets and liabilities related to the Financing business were contributed, through a series of transactions, to WIM in return for WIM’s membership unit.
     On April 17, 2009, the Company completed its separation from Walter Energy. In connection with the separation, WIM and Walter Energy executed the following transactions or agreements which involved no cash:
  Walter Energy distributed 100% of its interest in WIM to holders of Walter Energy’s common stock;
 
  All intercompany balances between WIM and Walter Energy were settled with the net balance recorded as a dividend to Walter Energy;
 
  In accordance with the Tax Separation Agreement, Walter Energy will, in general, be responsible for any and all taxes reported on any joint return through the date of the separation, which may also include WIM for periods prior to the separation. WIM will be responsible for any and all taxes reported on any WIM separate tax return and on any consolidated returns for Walter Investment subsequent to the separation;
 
  Walter Energy’s share-based awards held by WIM employees were converted to equivalent share-based awards of Walter Investment, with the number of shares and the exercise price being equitably adjusted to preserve the intrinsic value. The conversion was accounted for as a modification pursuant to the guidance concerning stock compensation.
     The assets and liabilities transferred to WIM from Walter Energy also included $26.6 million in cash, which was contributed to WIM by Walter Energy on April 17, 2009. Following the spin-off, WIM paid a taxable dividend consisting of cash of $16.0 million and additional equity interests to its members.
     The Merger occurred immediately following the spin-off and taxable dividend on April 17, 2009. The surviving company, Walter Investment, continues to operate as a publicly traded real estate investment trust, or REIT, subsequent to the Merger. After the spin-off and Merger, Walter Energy’s stockholders that became members of WIM as a result of the spin-off, and certain holders of options to acquire limited liability company interests of WIM, collectively owned 98.5% and stockholders of Hanover owned 1.5% of the shares of common stock of Walter Investment outstanding or reserved for issuance in settlement of restricted stock units of Walter Investment. As a result, the business combination has been accounted for as a reverse acquisition, with WIM considered the accounting acquirer. Walter Investment applied for, and was granted approval, to list its shares on the NYSE Amex. On April 20, 2009, the Company’s common stock began trading on the NYSE Amex under the symbol “WAC”.
     The purchase price for the acquisition was $2.2 million based on the fair value of Hanover (308,302 Hanover shares, which represented 1.5% of the shares of common stock at the time of the transaction, at $7.09, the closing stock price of Walter Investment) on April 17, 2009.
     The above purchase price has been allocated to the tangible assets acquired and liabilities assumed based on management’s estimates of their current fair values. Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the Merger, were expensed as incurred.

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     The purchase price was allocated as of April 17, 2009 as follows (in thousands):
         
Cash
  $ 774  
Receivables
    330  
Subordinate security
    1,600  
Residential loans in securitization trusts, net
    4,532  
Other assets
    388  
Accounts payable and accrued expenses
    (2,093 )
Mortgage-backed debt
    (2,666 )
Other liabilities
    (679 )
 
     
 
  $ 2,186  
 
     
     The amounts of revenue and net income of Hanover included in the Company’s consolidated income statement from the acquisition date to the period ending September 30, 2009 are as follows:
         
    For the Period  
    April 17, 2009  
    to September  
    30, 2009  
Total revenue
  $ 507  
Net loss
  $ (149 )
     The following unaudited pro forma information assumes that the Merger occurred on January 1, 2009. The unaudited pro forma supplemental results have been prepared based on estimates and assumptions, which management believes are reasonable but are not necessarily indicative of the consolidated financial position or results of income had the Merger occurred on January 1, 2009, nor of future results of income.
     The unaudited pro forma results for the nine months ended September 30, 2009 are as follows:
         
    For the Nine Months  
    Ended September  
    30, 2009  
Total revenue
  $ 144,071  
Net income
  $ 28,460  
     These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Hanover for operations that will not continue post-Merger, together with the consequential tax effects.
     Prior to the acquisition, the Company loaned Hanover funds under a revolving line of credit, as well as a loan and security agreement which were automatically terminated by operation of law upon consummation of the Merger.
4. Restricted Cash and Cash Equivalents
Restricted Cash and Cash Equivalents
     Restricted cash and cash equivalents totaled $10.9 million and $9.0 million at September 30, 2010 and December 31, 2009, respectively. Restricted cash and cash equivalents includes approximately $5.9 million at September 30, 2010 and December 31, 2009 held in an insurance trust account which secures payments under the Company’s reinsurance agreements. The funds in the insurance trust account include investments in money market funds. The remaining restricted cash and cash equivalents at September 30, 2010 and December 31, 2009 consists primarily of compensating balances.
Restricted Cash of Securitization Trusts
     Restricted cash of securitization trusts ($38.2 million and $42.7 million, at September 30, 2010 and December 31, 2009, respectively) relates primarily to funds collected on residential loans owned by the Company’s various securitization trusts (see Note 9), which are available only to pay expenses of the securitization trusts and principal and interest on indebtedness of the securitization trusts. This restricted cash also provides overcollateralization within the Company’s mortgage-backed debt arrangements. Restricted cash at September 30, 2010 and December 31, 2009 include short-term deposits in FDIC-insured accounts.
5. Fair Value
     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

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Basis or Measurement
     Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
     Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
     Level 3 Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
     The accounting guidance concerning fair value allows the Company to elect to measure certain items at fair value and report the changes in fair value through the statements of income. This election can only be made at certain specified dates and is irrevocable once made. The Company does not have a policy regarding specific assets or liabilities to elect to measure at fair value, but rather makes the election on an instrument by instrument basis as they are acquired or incurred. The Company has not made the fair value election for any financial assets or liabilities as of September 30, 2010.
     The Company determines fair value based upon quoted broker prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market rates commensurate with the credit quality and duration of the investment.
Items Measured at Fair Value on a Recurring Basis
     The subordinate security is measured in the consolidated financial statements at fair value on a recurring basis in accordance with the accounting guidance concerning debt and equity securities and is categorized in the table below based upon the lowest level of significant input to the valuation (in thousands):
                                 
    September 30, 2010  
    Quoted Prices in                      
    Active Markets             Significant        
    for Identical     Significant Other     Unobservable        
    Assets     Observable Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total  
Subordinate security
  $     $     $ 1,820     $ 1,820  
 
                       
Total
  $     $     $ 1,820     $ 1,820  
 
                       
     The subordinate security, acquired as part of the Merger, consists of a single, fixed-rate security backed by notes that are collateralized by manufactured housing. Approximately one-third of the notes include attached real estate on which the manufactured housing is located as additional collateral. The subordinate security has a coupon of 8.0% and a contractual maturity of 2038. The underlying notes were originated primarily in 2004 and 2005, have a weighted average coupon rate of 9.5% and a weighted average maturity of 18.9 years. The subordinate security has an overcollateralization level of 9.4% with a 1.2% annual loss rate.
     To estimate the fair value, the Company used a discounted cash flow approach. The significant inputs for the valuation model include the following:
  Yield: 18.5%
 
  Probability of default: 2.4%
 
  Loss severity: 63.4%
 
  Prepayment: 3.1%

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     The following table provides a reconciliation of the beginning and ending balances of the Company’s subordinate security which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2010 (in thousands):
                 
    As of and for  
    Three Months
Ended
    Nine Months
Ended
 
    September 30,     September 30,  
    2010     2010  
Beginning balance
  $ 1,823     $ 1,801  
Principal reductions
           
Total gains (losses):
               
Included in net income
           
Included in other comprehensive income
    (3 )     19  
Purchases, sales, issuances and settlements, net
           
Transfer into or out of Level 3 category
           
 
           
 
  $ 1,820     $ 1,820  
 
           
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
  $     $  
 
           
Items Measured at Fair Value on a Non-Recurring Basis
     At the time a residential loan becomes real estate owned, or REO, the Company records the property at the lower of its carrying amount or estimated fair value less estimated costs to sell. Upon foreclosure and through liquidation, the Company evaluates the property’s fair value as compared to its carrying amount and records a valuation adjustment when the carrying amount exceeds fair value. Any valuation adjustment at the time the loan becomes real estate owned is charged to the allowance for loan losses. Subsequent declines in value, as well as gains and losses on the sale of REO, are reported in (gains) losses on real estate owned, net in the consolidated statements of income.
     Carrying values, and the corresponding fair value adjustments for the nine and twelve months ended September 30, 2010 and December 31, 2009, respectively, for Level 3 assets and liabilities measured in the consolidated financial statements at fair value on a non-recurring basis are as follows (in thousands):
                                         
    Fair Value Measurements at Reporting Date Using        
            Quoted Prices in                    
    Real     Active Markets for     Significant Other     Significant        
    Estate     Identical Assets     Observable Inputs     Unobservable Inputs     Fair Value  
Fair Value at   Owned     (Level 1)     (Level 2)     (Level 3)     Adjustment  
Real estate owned:
                                       
September 30, 2010
  $   28,259     $     $     $ 28,259     $ (407 )
December 31, 2009
  $ 21,981     $     $     $ 21,981     $ (372 )
 
                                       
Real estate owned of securitization trusts:
                                       
September 30, 2010
  $ 35,949     $     $     $ 35,949     $ (1,152 )
December 31, 2009
  $ 41,143     $     $     $ 41,143     $ (1,310 )
     As of September 30, 2010, the fair value of the Company’s Level 3 REO was $28.3 million and $35.9 million for the unencumbered and securitized residential loan portfolios, respectively. These REO properties are generally located in rural areas and are primarily concentrated in Texas, Mississippi, Alabama, Florida, South Carolina and Georgia. The REO properties have a weighted average holding period of 11 months. To estimate the fair value, the Company utilized historical loss severity rates experienced on similar REO properties previously sold by the Company. The blended loss severity utilized at September 30, 2010 was 18.2%.

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Fair Value of Financial Instruments
     The following table presents the carrying values and estimated fair values of financial assets and liabilities that are required to be recorded or disclosed at fair value as of September 30, 2010 and December 31, 2009, respectively (in thousands):
                                 
    September 30, 2010     December 31, 2009  
    Carrying Amount     Estimated Fair Value     Carrying Amount     Estimated Fair Value  
Financial assets:
                               
Cash and cash equivalents
  $ 40,199     $ 40,199     $ 99,286     $ 99,286  
Restricted cash and cash equivalents
    10,875       10,875       8,963       8,963  
Restricted cash of securitization trusts
    38,192       38,192       42,691       42,691  
Receivables, net
    3,524       3,524       3,052       3,052  
Residential loans, net
    355,212       317,000       333,636       295,000  
Residential loans of securitization trusts, net
    1,256,404       1,168,000       1,310,710       1,238,000  
Subordinate security
    1,820       1,820       1,801       1,801  
Financial liabilities:
                               
Accounts payable
    590       590       13,489       13,489  
Accounts payable of securitization trusts
    539       539       556       556  
Accrued expenses
    28,386       28,386       28,296       28,296  
Mortgage-backed debt, net of deferred debt issuance costs, of securitization trusts
    1,166,276       1,082,000       1,249,004       1,147,000  
Accrued interest of securitization trusts
    8,129       8,129       8,755       8,755  
     For assets and liabilities measured in the consolidated financial statements on a historical cost basis, the estimated fair value shown in the above table is for disclosure purposes only. The following methods and assumptions were used to estimate fair value:
     Cash and cash equivalents, restricted cash and cash equivalents, receivables, accounts payable, accrued expenses, and accrued interest — The estimated fair value of these financial instruments approximates their carrying value due to their high liquidity or short-term nature.
     Residential loans — The fair value of residential loans is estimated by discounting the net cash flows estimated to be generated from the asset. The discounted cash flows were determined using assumptions such as, but not limited to, interest rates, prepayment speeds, default rates, loss severities, and a risk-adjusted market discount rate. The value of these assets is very sensitive to changes in interest rates.
     Subordinate security — The fair value of the subordinate security is measured in the consolidated financial statements at fair value on a recurring basis by discounting the net cash flows estimated to be generated from the asset. Unrealized gains and losses are reported in accumulated other comprehensive income. To the extent that the cost basis exceeds the fair value and the unrealized loss is considered to be other-than-temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss.
     Mortgage-backed debt, net of deferred debt issuance costs, of securitization trusts — The fair value of mortgage-backed debt of securitization trusts is determined by discounting the net cash outflows estimated to be used to repay the debt. These obligations are to be satisfied using the proceeds from the residential loans that secure these obligations and are non-recourse to the Company. The value of mortgage-backed debt is very sensitive to changes in interest rates.
6. Residential Loans
     Residential loans are held for investment and consist of unencumbered residential mortgage loans and residential retail instalment agreements, summarized in the table below (in thousands):
                 
    September 30, 2010     December 31, 2009  
Residential loans, principal balance
  401,311     $ 365,797  
Less: Yield adjustment, net (1)
    (40,711 )     (28,701 )
Less: Allowance for loan losses
    (5,388 )     (3,460 )
 
           
Residential loans, net (2)
  $ 355,212     $ 333,636  
 
           
 
(1)   Yield adjustment, net consists of deferred origination costs, premiums and discounts and other costs which are generally amortized over the life of the residential loan portfolio. Deferred origination costs at September 30, 2010 and December 31, 2009 were $2.6 million and $2.8 million, respectively. Premiums and discounts, net at September 30, 2010 and December 31, 2009 were $46.6 million and $35.9 million, respectively. Other costs, including accrued interest receivable, net of deferred gains and other costs, at September 30, 2010 and December 31, 2009 were $3.3 million and $4.4 million, respectively.
 
(2)   The weighted average life of the portfolio approximates 11 years based on assumptions for prepayment speeds, default rates and losses.

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     The following table summarizes the activity in the allowance for loan losses on residential loans, net (in thousands):
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
Balance, December 31
  $ 3,460     $ 3,418  
Provision charged to income
    1,291       1,174  
Less: Transfers to REO
    (1,367 )     (1,211 )
Less: Charge-offs, net of recoveries
          (8 )
 
           
Balance, March 31
    3,384       3,373  
Provision charged to income
    1,330       968  
Less: Transfers to REO
    (1,390 )     (874 )
Less: Charge-offs, net of recoveries
    (4 )     (29 )
 
           
Balance, June 30
    3,320       3,438  
Provision charged to income
    3,036       1,520  
Less: Transfers to REO
    (882 )     (1,370 )
Less: Charge-offs, net of recoveries
    (86 )     (81 )
 
           
Balance, September 30
  $ 5,388     $ 3,507  
 
           
     The amount of residential loans, net that had been put on nonaccrual status due to delinquent payments of 90 days past due or greater was $18.0 million and $21.4 million at September 30, 2010 and December 31, 2009, respectively. Residential loans are placed on non-accrual status when any portion of the principal or interest is 90 days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Residential loans are removed from non-accrual status when the amount financed and the associated interest are no longer over 90 days past due.
     The following table presents delinquencies as a percent of amounts outstanding on the principal balance of residential loans, net:
                 
    September 30, 2010     December 31, 2009  
31-60 days
    1.98 %     1.98 %
61-90 days
    1.18 %     1.53 %
91 days or more
    4.61 %     5.84 %
 
           
 
    7.77 %     9.35 %
 
           
Residential Loan Pool Acquisitions
     The Company acquired residential loans to be held for investment in the amount of $21.0 million and $40.7 million during the three and nine months ended September 30, 2010. These acquisitions were financed with proceeds from its secondary offering that closed on October 21, 2009, or 2009 Offering, and added $30.4 million and $54.6 million of unpaid principal to the residential loan portfolio for each period, respectively. The residential loans acquired included performing and non-performing, fixed and adjustable rate loans, on single-family, owner occupied and investor residences located within the Company’s existing southeastern United States geographic footprint. The Company evaluated the individual loans acquired for evidence of credit quality deterioration since origination and for which it is probable at the purchase date that the Company will be unable to collect all contractually required payments. There was no significant evidence of credit quality deterioration noted.
7. Residential Loans of Securitization Trusts
     Residential loans of securitization trusts consist of residential mortgage loans and residential retail instalment agreements that the Company has securitized in structures that are accounted for as financings. These securitizations are structured legally as sales, but for accounting purposes are treated as financings under the accounting guidance concerning transfers of financial assets, as amended. Accordingly, the loans in these securitizations remain on the balance sheet as residential loans. Given this treatment, retained interests are not created, and securitization mortgage-backed debt is reflected on the balance sheet as a liability. The assets of the securitization trusts are not available to satisfy claims of general creditors of the Company and the mortgage-backed debt issued by the securitization trusts is to be satisfied solely from the proceeds of the residential loans of securitization trusts and are non-recourse to the Company. The Company records interest income on residential loans of securitization trusts and interest expense on mortgage-backed debt issued in the securitizations over the life of the securitizations. Deferred debt issuance costs and discounts related to the mortgage-backed debt are amortized on a level yield basis over the estimated life of the mortgage-backed debt.

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     Residential loans of securitization trusts, net are summarized as follows (in thousands):
                 
    September 30, 2010     December 31, 2009  
Residential loans of securitization trusts, principal balance
  $   1,385,365     $ 1,454,062  
Less: Yield adjustment, net (1)
    (118,068 )     (129,151 )
Less: Allowance for loan losses
    (10,893 )     (14,201 )
 
           
Residential loans of securitization trusts, net (2)
  $ 1,256,404     $ 1,310,710  
 
           
 
(1)   Yield adjustment, net consists of deferred origination costs, premiums and discounts and other costs which are generally amortized over the life of the residential loan portfolio. Deferred origination costs at September 30, 2010 and December 31, 2009 were $8.2 million and $8.8 million, respectively. Premiums and discounts, net at September 30, 2010 and December 31, 2009 were $134.8 million and $145.8 million, respectively. Other costs, including accrued interest receivable, net of deferred gains and other costs, at September 30, 2010 and December 31, 2009 were $8.5 million and $7.8 million, respectively.
 
(2)   The weighted average life of the portfolio approximates 9 years based on assumptions for prepayment speeds, default rates and losses.
     The following table summarizes the activity in the allowance for loan losses on residential loans of securitization trusts, net (in thousands):
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
Balance, December 31
  $   14,201     $ 15,551  
Provision charged to income
    2,651       2,938  
Less: Transfers to REO
    (2,609 )     (3,127 )
Less: Charge-offs, net of recoveries
    (303 )     (253 )
 
           
Balance, March 31
    13,940       15,109  
Provision charged to income
    2,718       2,882  
Less: Transfers to REO
    (3,205 )     (3,016 )
Less: Charge-offs, net of recoveries
    (40 )     (106 )
 
           
Balance, June 30
    13,413       14,869  
Provision charged to income
    198       1,181  
Less: Transfers to REO
    (2,436 )     (1,327 )
Less: Charge-offs, net of recoveries
    (282 )     (441 )
 
           
Balance, September 30
  $ 10,893     $ 14,282  
 
           
     The amount of residential loans of securitization trusts, net that had been put on nonaccrual status due to delinquent payments of 90 days past due or greater was $27.5 million and $39.8 million at September 30, 2010 and December 31, 2009, respectively. Residential loans are placed on non-accrual status when any portion of the principal or interest is 90 days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Residential loans are removed from non-accrual status when the amount financed and the associated interest are no longer over 90 days past due.
     All of the Company’s residential loans of securitization trusts, net are pledged as collateral for the mortgage-backed debt (see Note 9). The Company’s only continued involvement with the residential loans of securitization trusts, net is retaining all of the residual interests in the securitization trusts and servicing the residential loans collateralizing the mortgage-backed debt. The Company is not contractually required to provide any financial support to the securitization trusts. The Company may, from time to time at its sole discretion, purchase certain assets from the securitization trusts to cure delinquency or loss triggers for the sole purpose of releasing excess overcollateralization to the Company. The Company does not expect to provide financial support to the securitization trusts based on current performance trends.
     The following table presents delinquencies as a percent of amounts outstanding on the principal balance of residential loans of securitization trusts:
                 
    September 30, 2010     December 31, 2009  
31-60 days
    1.07 %     1.17 %
61-90 days
    0.59 %     0.54 %
91 days or more
    1.99 %     2.74 %
 
           
 
    3.65 %     4.45 %
 
           

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8. Subordinate Security
     The Company’s subordinate security totaled $1.8 million at September 30, 2010 and December 31, 2009. The subordinate security was acquired as part of the Merger with Hanover. The subordinate security is summarized as follows (in thousands):
                 
    September 30, 2010     December 31, 2009  
Principal balance
  $ 3,812     $ 3,812  
Purchase price and other adjustments
    (2,200 )     (2,200 )
 
           
Amortized cost
  $ 1,612     $ 1,612  
 
           
Unrealized gain
    208       189  
 
           
Carrying value (fair value)
  $ 1,820     $ 1,801  
 
           
     Actual maturities on mortgage-backed securities are generally shorter than the stated contractual maturities because the actual maturities are affected by the contractual lives of the underlying notes, periodic payments of principal, and prepayments of principal. The contractual maturity of the subordinate security is 2038.
9. Mortgage-Backed Debt and Related Collateral of Securitization Trusts
Mortgage-Backed Debt
     Mortgage-backed debt consists of mortgage-backed and asset-backed notes and collateralized mortgage obligations issued by the Company to fund its residential loans via the securitization market. The securitization trusts beneficially owned by Walter Investment or its wholly owned subsidiary, Mid-State Capital, LLC, or Mid-State Capital, are the depositors under the Company’s outstanding mortgage-backed and asset-backed notes, or the Trust Notes, which consist of eight separate series of public debt offerings, and one private offering. Hanover Capital Grantor Trust, acquired from Hanover as part of the Merger, is a public debt offering. These borrowings provide financing for residential loans purchased by the Company.
     These ten trusts have an aggregate of $1.2 billion of outstanding debt, collateralized by $1.5 billion of assets, including residential loans, REO and restricted cash at September 30, 2010. All of the Company’s mortgage-backed debt is non-recourse and not cross-collateralized and, therefore, must be satisfied exclusively from the proceeds of the residential loans and REO held in each securitization trust. The Company services the collateral underlying the nine securitization trusts owned by Walter Investment and Mid-State Capital.
     During the three months ended September 30, 2010, the Company invested approximately $19.9 million to purchase a portion of the Company’s outstanding mortgage-backed debt through brokerage transactions. The purchases, which were accounted for as a retirement of debt, resulted in a gain on mortgage-backed debt extinguishment of approximately $1.7 million.
     The securitization trusts contain provisions that require the cash payments received from the underlying residential loans be applied to reduce the principal balance of the Trust Notes unless certain overcollateralization or other similar targets are satisfied. The securitization trusts also contain delinquency and loss triggers, that, if exceeded, require that any excess overcollateralization be paid to reduce the outstanding principal balance of the Trust Notes for that particular securitization at an accelerated pace. Assuming no servicer trigger events have occurred and the overcollateralization targets have been met, any excess cash is released to the Company either monthly or quarterly, in accordance with the terms of the respective underlying trust agreements. As of September 30, 2010, Mid-State Trust 2006-1, or Trust 2006-1, exceeded certain triggers and did not provide any significant levels of excess cash flow to the Company. The delinquency trigger for Mid-State Trust 2005-1, or Trust 2005-1, was cured during the three months ended June 30, 2010. The loss trigger for Trust X was cured during the three months ended March 31, 2010. With the exception of Trust 2006-1 which exceeded its delinquency trigger and the recently cured Trust 2005-1 and Trust X, none of the Company’s other securitization trusts have reached the levels of underperformance that would trigger a delay in cash releases.
     Borrower remittances received on the residential loan collateral are used to make payments on the mortgage-backed debt. The maturity of the mortgage-backed debt is directly affected by principal prepayments on the related residential loan collateral. As a result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. Certain of the Company’s mortgage-backed debt is also subject to redemption at the option of the Company according to specific terms of the respective indenture agreements.

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Collateral for Mortgage-Backed Debt
     The following table summarizes the carrying value of the collateral for the mortgage-backed debt as of September 30, 2010 and December 31, 2009, respectively (in thousands):
                 
    September 30, 2010     December 31, 2009  
Residential loans of securitization trusts, principal balance
  $ 1,385,365     $ 1,454,062  
Restricted cash of securitization trusts
    38,192       42,691  
Real estate owned of securitization trusts
    35,949       41,143  
 
           
Total mortgage-backed debt collateral of securitization trusts
  $ 1,459,506     $ 1,537,896  
 
           
10. Share-Based Compensation Plans
     The Company’s share-based compensation expense has been reflected in the consolidated statements of income in salaries and benefits expense.
Option Activity
     On January 4, 2010, certain executive officers of the Company were awarded a total of 118,651 nonqualified options, or the Executive Options, to acquire common stock of the Company pursuant to the 2009 Long Term Incentive Plan, or LTIP. The Executive Options granted to each executive officer of the Company will vest and become exercisable in equal installments on the first, second and third anniversary of the date of grant. The exercise price of $14.39 for each of the Executive Options was determined based on the mean of the high and low sales prices for a share of common stock of the Company as reported by the NYSE Amex on the date of grant.
     On January 22, 2010, an executive, in connection with his employment with the Company, was awarded a total of 90,000 nonqualified options to acquire common stock of the Company pursuant to the 2009 LTIP. The options granted will vest and become exercisable on the fourth anniversary of the award. The exercise price of $14.29 for each option was determined based on the mean of the high and low sales prices for a share of common stock of the Company as reported by the NYSE Amex on the date of grant.
     On March 3, 2010, the Company granted stock options to its new non-employee director who was awarded a total of 5,195 nonqualified options to acquire common stock of the Company pursuant to the 2009 LTIP. The options granted will vest and become exercisable in equal installments on the first, second and third anniversary of the date of grant. The exercise price of $14.79 for each option was determined based on the mean of the high and low sales prices for a share of common stock of the Company as reported by the NYSE Amex on the date of grant.
     On April 30, 2010, members of the Board of Directors of the Company were awarded a total of 20,672 nonqualified options to acquire common stock of the Company pursuant to the 2009 LTIP. The options granted to the members of the Board of Directors will vest and become exercisable in equal installments on the first, second and third anniversary of the date of grant. The exercise price of $18.36 for each of the options was determined based on the mean of the high and low sales prices for a share of common stock of the Company as reported by the NYSE Amex on the date of grant.
     The grant date fair value of the stock options granted during the nine months ended September 30, 2010 approximated $0.7 million.
Non-Vested Share Activity
     The Company’s non-vested share-based awards consist of restricted stock and restricted stock units.
     On January 4, 2010, certain executive officers of the Company were awarded a total of 100,548 restricted stock units, or the Executive RSUs, of the Company pursuant to the 2009 LTIP. The Executive RSUs granted to each executive officer of the Company will vest in equal installments on the first, second and third anniversary of the date of grant. The settlement date for these RSUs is January 22, 2013. Each executive receiving Executive RSUs will be entitled to receive cash payments equivalent to any dividend paid to the holders of common stock of the Company, but they will not be entitled to any voting rights otherwise associated with the common stock.
     On January 22, 2010, an executive, in connection with his employment with the Company, was awarded a total of 135,556 restricted stock units, or RSUs, of the Company under the 2009 LTIP. Of the RSUs granted, 110,000 will vest in equal installments on the first, second and third anniversary of the date of grant. The settlement date for these RSUs is January 22, 2013, and each such RSU vested on such date will be paid out with a single share of common stock of the Company. The remaining 25,556 RSUs granted will vest on the first anniversary of the date of grant. The settlement date for these RSUs is March 14, 2011, and each such RSU vested on such date will be paid out with a single share of common stock of the Company. The executive receiving the RSUs will be entitled to receive cash payments equivalent to any dividend paid to the holders of common stock of the Company, but they will not be entitled to any voting rights otherwise associated with the common stock.
     The grant date fair value of RSUs granted during the nine months ended September 30, 2010 approximated $3.4 million.

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11. Credit Agreements
     The Company’s syndicated credit agreement, revolving credit agreement and security agreement, and support letter of credit agreement mature on April 20, 2011. As of September 30, 2010, no funds have been drawn under any of the credit agreements and the Company is in compliance with all covenants.
12. Transactions with Walter Energy
     Following the spin-off, Walter Investment and Walter Energy have operated independently, and neither has any ownership interest in the other. In order to govern certain of the ongoing relationships between the Company and Walter Energy after the spin-off and to provide mechanisms for an orderly transition, the Company and Walter Energy entered into certain agreements, pursuant to which (a) the Company and Walter Energy provide certain services to each other, (b) the Company and Walter Energy will abide by certain non-compete and non-solicitation arrangements, and (c) the Company and Walter Energy will indemnify each other against certain liabilities arising from their respective businesses. The specified services that the Company and Walter Energy may provide each other, as requested, include tax and accounting services, certain human resources services, communications systems and support, and insurance/risk management. Each party will be compensated for services rendered, as set forth in the Transition Services Agreement. The Transition Services Agreement provides for terms not to exceed 24 months for the various services, with some of the terms capable of extension. See Note 3 for further information regarding the spin-off transaction.
13. Comprehensive Income and Accumulated Other Comprehensive Income
     The components of comprehensive income are as follows (in thousands):
                 
    Three Months Ended  
    September 30,  
    2010     2009  
Net income
  $ 9,686     $ 8,243  
Other comprehensive income (loss):
               
Change in postretirement benefit plans, net of $6 and $556 tax effect, respectively
    (125 )     206  
Net unrealized (loss) gain on subordinate security, net of $0 and $0 tax effect, respectively
    (3 )     157  
Net amortization of realized gain on closed hedges, net of $0 and $289 tax effect, respectively
    (81 )     217  
 
           
Comprehensive income
  $ 9,477     $ 8,823  
 
           
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
Net income
  $ 26,361     $ 105,256  
Other comprehensive income (loss):
               
Change in postretirement benefit plans, net of $20 and $556 tax effect, respectively
    (377 )     206  
Net unrealized gain on subordinate security, net of $0 and $0 tax effect, respectively
    19       157  
Net amortization of realized gain on closed hedges, net of $0 and $347 tax effect, respectively
    (205 )     117  
 
           
Comprehensive income
  $ 25,798     $ 105,736  
 
           

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     The components of accumulated other comprehensive income are as follows (in thousands):
                                 
    Excess of                    
    Additional     Net Unrealized              
    Postretirement     (Loss)     Net Amortization of        
    Employee Benefits     Gain on Subordinate     Realized Gain on        
    Liability     Security     Closed Hedges     Total  
Balance at December 31, 2009
  $ 1,117     $ 189     $ 637     $ 1,943  
Pre-tax amount
    (133 )     36       (64 )     (161 )
Tax benefit
    7                   7  
 
                       
Balance at March 31, 2010
    991       225       573       1,789  
Pre-tax amount
    (133 )     (14 )     (60 )     (207 )
Tax benefit
    7                   7  
 
                       
Balance at June 30, 2010
    865       211       513       1,589  
Pre-tax amount
    (131 )     (3 )     (81 )     (215 )
Tax benefit
    6                   6  
 
                       
Balance at September 30, 2010
  $ 740     $ 208     $ 432     $ 1,380  
 
                       
14. Common Stock and Earnings Per Share
     In accordance with the accounting guidance concerning earnings per share, or EPS, unvested share-based payment awards that include non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities. As a result, the awards are required to be included in the calculation of basic earnings per common share pursuant to the “two-class” method. For the Company, participating securities are comprised of certain unvested restricted stock and restricted stock units.
     Under the two-class method, net income is reduced by the amount of dividends declared in the period for common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income allocable to common shares by the weighted average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.

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     The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations shown on the face of the accompanying consolidated statements of income (in thousands, except per share data):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Basic earnings per share:
                               
Net income
  $ 9,686     $ 8,243     $ 26,361     $ 105,256  
Less: net income allocated to unvested restricted stock units
    (127 )     (66 )     (363 )     (427 )
 
                       
Net income available to common stockholders (numerator)
  $ 9,559     $ 8,177     $ 25,998     $ 104,829  
 
                       
Weighted average common shares
    25,734       19,890       25,699       19,881  
Add: vested restricted stock units
    740       696       712       418  
 
                       
Total weighted average common shares outstanding (denominator)
    26,474       20,586       26,411       20,299  
 
                       
Basic earnings per share
  $ 0.36     $ 0.40     $ 0.98     $ 5.16  
 
                       
Diluted earnings per share:
                               
Net income
  $ 9,686     $ 8,243     $ 26,361     $ 105,256  
Less: net income allocated to unvested restricted stock units
    (127 )     (66 )     (362 )     (426 )
 
                       
Net income available to common stockholders (numerator)
  $ 9,559     $ 8,177     $ 25,999     $ 104,830  
 
                       
Weighted average common shares
    25,734       19,890       25,699       19,881  
Add: Potentially dilutive stock options and restricted stock units
    836       798       794       476  
 
                       
Diluted weighted average common shares outstanding (denominator)
    26,570       20,688       26,493       20,357  
 
                       
Diluted earnings per share
  $ 0.36     $ 0.40     $ 0.98     $ 5.15  
 
                       
     The calculation of diluted earnings per share for the three and nine months ended September 30, 2010, does not include 0.1 million and 0.2 million shares, respectively, and does not include 0.3 million and 0.3 million shares for the same periods in 2009, respectively, because their effect would have been anti-dilutive.
15. Income Taxes
     During the three months ended September 30, 2010 and 2009, an estimated tax rate of 3.1% and 14.0%, respectively, was used to derive income tax expense of $0.3 million and $1.3 million, respectively, calculated on our income from operations, before taxes, of $10.0 million and $9.6 million, respectively.
     During the nine months ended September 30, 2010 and 2009, an estimated tax rate of 3.0% and (256.4)%, respectively, was used to derive income tax expense (benefit) of $0.8 million and $(75.7) million, respectively, calculated on our income from operations, before taxes, of $27.2 million and $29.5 million, respectively. The income tax rate for the nine months ended was due to the impact of the Company becoming qualified as a REIT in conjunction with the spin-off from Walter Energy and Merger with Hanover which resulted in only the Company’s TRSs being taxable entities.
     The Company recognizes tax benefits in accordance with the FASB guidance concerning uncertainty in income taxes. This guidance establishes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in the financial statements. As of September 30, 2010 and December 31, 2009, the total liability for unrecognized tax benefits was $7.7 million.
REIT Qualification
     The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. The Company’s continuing qualification as a REIT depends on its ability to meet the various requirements imposed by the Code, which relate to organizational structure, distribution levels, diversity of stock ownership and certain restrictions with regard to owned assets and categories of income. As a REIT, the Company will generally not be subject to United States, or U.S., federal corporate income tax on its taxable income that is currently distributed to stockholders. Even as a REIT, the Company may be subject to U.S. federal income and excise taxes in various situations, such as on the Company’s undistributed income.
     Certain of the Company’s operations or portions thereof, including mortgage advisory and insurance ancillary businesses, are conducted through taxable REIT subsidiaries, or TRSs. A TRS is a C-corporation that has not elected REIT status and, as such, is subject to U.S. federal corporate income tax. The Company’s TRSs facilitate its ability to offer certain services and conduct activities that generally cannot be offered directly by the REIT. The Company also will be required to pay a 100% tax on any net income on non-arm’s length transactions between the REIT and any of its TRSs.

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16. Commitments and Contingencies
Securities Sold with Recourse
     In October 1998, Hanover sold 15 adjustable-rate FNMA certificates and 19 fixed-rate FNMA certificates that the Company received in a swap for certain adjustable-rate and fixed-rate mortgage loans. These securities were sold with recourse. Accordingly, the Company retains credit risk with respect to the principal amount of these mortgage securities. As of September 30, 2010, the unpaid principal balance of the 14 remaining mortgage securities was approximately $1.5 million.
Income Tax Exposure
     A dispute exists with regard to federal income taxes owed by the Walter Energy consolidated group. The Company was part of the Walter Energy consolidated group prior to the spin-off and Merger. As such, the Company is jointly and severally liable with Walter Energy for any final taxes, interest and/or penalties owed by the Walter Energy consolidated group during the time that the Company was a part of the Walter Energy consolidated group. According to Walter Energy’s most recent public filing on Form 10-Q, they state that the IRS has filed a proof of claim for a substantial amount of taxes, interest and penalties with respect to fiscal years ended August 31, 1983 through May 31, 1994. The public filing goes on to disclose that the issues have been litigated in bankruptcy court and that an opinion was issued by the court in June 2010 as to the remaining disputed issues. The filing further states that the amounts initially asserted by the IRS do not reflect the subsequent resolution of various issues through settlements or concessions by the parties. Walter Energy believes that those portions of the claim which remain in dispute or are subject to appeal substantially overstate the amount of taxes allegedly owing. However, because of the complexity of the issues presented and the uncertainties associated with litigation, Walter Energy is unable to predict the outcome of the adversary proceeding. Finally, Walter Energy believes that all of its current and prior tax filing positions have substantial merit and intends to defend vigorously any tax claims asserted and that they believe that they have sufficient accruals to address any claims, including interest and penalties. Under the terms of the Tax Separation Agreement between the Company and Walter Energy dated April 17, 2009, Walter Energy is responsible for the payment of all federal income taxes (including any interest or penalties applicable thereto) of the consolidated group, which includes the aforementioned claims of the IRS. However, to the extent that Walter Energy is unable to pay any amounts owed, the Company could be responsible for any unpaid amounts.
     The Tax Separation Agreement also provides that Walter Energy is responsible for the preparation and filing of any tax returns for the consolidated group for the periods when the Company was part of the Walter Energy consolidated group. This arrangement may result in conflicts between Walter Energy and the Company. In addition, the spin-off of WIM from Walter Energy was intended to qualify as a tax-free spin-off under Section 355 of the Code. The Tax Separation Agreement provides generally that if the spin-off is determined not to be tax-free pursuant to Section 355 of the Code, any taxes imposed on Walter Energy or a Walter Energy shareholder as a result of such determination (“Distribution Taxes”) which are the result of the acts or omissions of Walter Energy or its affiliates, will be the responsibility of Walter Energy. However, should Distribution Taxes result from the acts or omissions of the Company or its affiliates, such Distribution Taxes will be the responsibility of the Company. The Tax Separation Agreement goes on to provide that Walter Energy and the Company shall be jointly liable, pursuant to a designated allocation formula, for any Distribution Taxes that are not specifically allocated to Walter Energy or the Company. To the extent that Walter Energy is unable or unwilling to pay any Distribution Taxes for which it is responsible under the Tax Separation Agreement, the Company could be liable for those taxes as a result of being a member of the Walter Energy consolidated group for the year in which the spin-off occurred. The Tax Separation Agreement also provides for payments from Walter Energy in the event that an additional taxable dividend is required to cure a REIT disqualification from the determination of a shortfall in the distribution of non-REIT earnings and profits made immediately following the spin-off. As with Distribution Taxes, the Company will be responsible for this dividend if Walter Energy is unable or unwilling to pay.
Other Tax Exposure
     On June 28, 2010, the Alabama Department of Revenue, or ADOR, preliminarily assessed financial institution excise tax of approximately $4.2 million, which includes interest and penalties, on a predecessor entity for the years 2004 through 2008. This tax is imposed on financial institutions doing business in the State of Alabama. The Company has contested the assessment and believes that the Company did not meet the definition of a financial institution doing business in the State of Alabama as defined by the Alabama Tax Code. As of September 30, 2010, ADOR has yet to respond to the Company’s appeal of the preliminary assessment.
Miscellaneous Litigation
     The Company is a party to a number of lawsuits arising in the ordinary course of its business. While the results of such litigation cannot be predicted with certainty, the Company believes that the final outcome of such litigation will not have a materially adverse effect on the Company’s financial condition, results of operations or cash flows.
17. Subsequent Events
Acquisition of Marix Servicing, LLC
     On August 25, 2010, the Company entered into a securities purchase agreement with Marathon Asset Management, L.P., or Marathon, and an individual seller to purchase 100% of the outstanding ownership interests of Marix Servicing, LLC, or Marix. The acquisition closed on November 2, 2010. Marix is a high-touch specialty mortgage servicer, based in Phoenix, Arizona, focused on default management, borrower outreach, loss mitigation, liquidation strategies, component servicing and specialty servicing.

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     The acquisition of Marix will be accounted for pursuant to the guidance concerning business combinations. The Marix assets acquired and liabilities assumed will be recorded at the date of acquisition (November 2, 2010) at their respective fair values. The results of operations of Marix will be included in the consolidated statements of income for periods subsequent to the acquisition.
     The purchase price for the acquisition consisted of a $50,000 cash payment at closing, and is subject to customary post-closing adjustments based upon changes in the working capital of Marix through the closing date. The terms of the agreement also allow for an earn-out if certain revenue targets are met, as well as the repayment of certain servicing advances to Marathon.
Mortgage-Backed Debt Extinguishment
     On November 1, 2010, the Company invested approximately $14.4 million to purchase a portion of the Company’s outstanding mortgage-backed debt through a brokerage transaction. The purchase, which was accounted for as a retirement of debt, resulted in a gain on mortgage-backed debt extinguishment of approximately $2.3 million.
Letters of Intent to Purchase Pools of Loans
     During October 2010, the Company entered into two separate letters of intent to purchase additional pools of performing and non-performing residential loans which, when settled, are expected to utilize up to $10.6 million of the proceeds from the Company’s 2009 Offering. These letters of intent are not binding on the seller or the Company and the proposed purchases may or may not close.
Dividend Declaration
     On November 2, 2010, the Company declared a dividend of $0.50 per share on its common stock to stockholders of record on November 12, 2010 which will be paid on November 24, 2010.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and in our results for the year ended December 31, 2009, filed in our Annual Report on Form 10-K on March 2, 2010. Historical results and trends which might appear should not be taken as indicative of future operations. Our results of operations and financial condition, as reflected in the accompanying statements and related footnotes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions, and other factors.
     Our website can be found at www.walterinvestment.com. We make available, free of charge through the investor relations section of our website, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, other documents and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We also make available, free of charge, access to our Corporate Governance Standards, charters for our Audit Committee, Compensation and Human Resources Committee, and Nominating and Corporate Governance Committee, and our Code of Conduct governing our directors, officers, and employees. Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any amendment to the Code of Conduct and any waiver applicable to any executive officer, director, or senior officer (as defined in the Code of Conduct). In addition, our website includes information concerning purchases and sales of our equity securities by our executive officers and directors, as well as disclosure relating to certain non-GAAP and financial measures (as defined by SEC Regulation G) that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.
     Our Investor Relations Department can be contacted at 3000 Bayport Drive, Suite 1100, Tampa, FL 33607, Attn: Investor Relations, telephone (813) 421-7694.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
     Certain statements in this report, including, without limitation, matters discussed under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. 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 in our Annual Report on Form 10-K filed on March 2, 2010 under the caption “Risk Factors” and in our other securities filings with the SEC.
     In particular (but not by way of limitation), the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in the forward-looking statements: local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends and developments in particular; the availability of suitable qualifying investments for the proceeds of our October 2009 secondary offering and risks associated with any such investments we may pursue; the availability of additional investment capital and suitable qualifying investments, and risks associated with the expansion of our business activities, including risks associated with expanding our business outside of our current geographic footprint and/or expanding the scope of our business to include activities not currently undertaken by our business; limitations imposed on our business due to our real estate investment trust, or REIT, status and our continued qualification as a REIT for federal income tax purposes; financing sources and availability, and future interest expense; fluctuations in interest rates and levels of mortgage prepayments; increases in costs and other general competitive factors; natural disasters and adverse weather conditions, especially to the extent they result in material payouts under insurance policies placed with our captive insurance subsidiary; changes in federal, state and local policies, laws and regulations affecting our business, including, without limitation, mortgage financing or servicing, changes to licensing requirements, and/or the rights and obligations of property owners, mortgagees and tenants; the effectiveness of risk management strategies; unexpected losses resulting from pending, threatened or unforeseen litigation or other third party claims against us; the ability or willingness of Walter Energy, Inc. and other counterparties to satisfy material obligations under agreements with us; our continued listing on the NYSE Amex; uninsured losses or losses in excess of insurance limits and the availability of adequate insurance coverage at reasonable costs; the integration of the former Hanover Capital Mortgage Holdings, Inc., or Hanover, business into that of Walter Investment Management, LLC and its affiliates as a result of the merger of the two companies, and the realization of anticipated synergies, cost savings and growth opportunities from the Merger; future performance generally; and other presently unidentified factors.
     In addition, on November 2, 2010, the Company closed on a securities purchase agreement to acquire 100% of the ownership interests of Marix Servicing, LLC, or Marix, a mortgage servicing business. Risks include, without limitation, losses incurred in the Marix business, our inability to reduce or eliminate such losses as quickly as anticipated, our ability to retain existing licenses in jurisdictions in which Marix does business, our inability to integrate the Marix business and/or to achieve anticipated synergies, and our inability to grow the Marix business as quickly as anticipated.

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     All forward looking statements set forth herein are qualified by these cautionary statements and are made only as of the date hereof. We undertake no obligation to update or revise the information contained herein, including without limitation any forward-looking statements whether as a result of new information, subsequent events or circumstances, or otherwise, unless otherwise required by law.
The Company
     We are a mortgage servicer and mortgage portfolio owner specializing in credit-challenged, non-conforming residential loans primarily in the southeastern United States, or U.S. We also operate ancillary mortgage advisory and insurance businesses. At September 30, 2010, we had four wholly owned, primary subsidiaries: Hanover Capital Partners 2, Ltd., doing business as Hanover Capital, Walter Mortgage Company, LLC, or WMC, Best Insurors, Inc., or Best, and Walter Investment Reinsurance Co., Ltd., or WIRC. We operate as an internally managed, publicly traded real estate investment trust, or REIT.
     Throughout this Quarterly Report on Form 10-Q, references to “residential loans” refer to residential mortgage loans and residential retail instalment agreements and references to “borrowers” refer to borrowers under our residential mortgage loans and instalment obligors under our residential retail instalment agreements.
Recent Developments
Residential Loan Pool Acquisitions
     We acquired residential loans to be held for investment in the amount of $21.0 million and $40.7 million during the three and nine months ended September 30, 2010. These acquisitions were financed with the proceeds from our secondary offering that closed on October 21, 2009, or 2009 Offering, and added $30.4 million and $54.6 million of unpaid principal to the residential loan portfolio for the periods, respectively. The residential loans acquired included performing and non-performing, fixed and adjustable rate loans, on single-family, owner occupied and investor residences located within the Company’s existing southeastern United States geographic footprint.
Acquisition of Marix Servicing, LLC
     On August 25, 2010, we announced that the Company had entered into a securities purchase agreement with Marathon Asset Management, L.P., or Marathon, and an individual seller to purchase Marix Servicing LLC, or Marix, a high-touch specialty mortgage servicer. The acquisition closed on November 2, 2010. Marix, based in Phoenix, Arizona, is focused on default management, borrower outreach, loss mitigation, liquidation strategies, component servicing and specialty servicing. Marix is a Standard &Poors Select Servicer and brings relationships with each of the government sponsored entities, as well as a management team which averages over 22 years of industry experience. The acquisition of Marix will enable the Company to expand the geographic footprint it is able to consider for acquisitions of pools of loans and servicing capabilities. It will also assist the Company with the extension of field servicing into key nationwide markets by providing existing infrastructure and revenue for leverage, while offering the Company a well developed information technology platform.
Mortgage-Backed Debt Extinguishment
     During the three months ended September 30, 2010, we invested approximately $19.9 million to purchase a portion of our outstanding mortgage-backed debt through brokerage transactions. Management currently intends the purchases to be temporary investments of excess cash. The purchases, which were accounted for as a retirement of debt, resulted in a gain on mortgage-backed debt extinguishment of approximately $1.7 million. In a similar transaction on November 1, 2010, we invested approximately $14.4 million as an additional purchase of our outstanding mortgage-backed debt. This purchase, which was also accounted for as a retirement of debt, resulted in a gain on mortgage-backed debt extinguishment of approximately $2.3 million.
Regulatory Trends
Focus on Foreclosure Practices
As a result of some highly publicized deficiencies in the mortgage foreclosure processes of several large banks and loan servicers, a number of States’ Attorneys General have begun inquiries into mortgage foreclosure processes in their states and several of our competitors announced the suspension of foreclosure proceedings in certain states pending review of their procedures. We have reviewed our processes and procedures and will continue to do so with both internal personnel and third party consultants. To date, we have not received any inquiries from States’ Attorneys General and we have not identified any non-compliance with existing mortgage processing laws and regulations. We cannot be certain that lawyers and other service providers retained by the Company to process mortgage foreclosures have complied in all respects with required processes in their respective jurisdiction; however, we intend to monitor their activities going forward. It is not known at this time whether any new laws or regulations affecting the mortgage foreclosure process will be put into place by federal, state or local governmental authorities, nor is it currently possible to determine what, if any effects they may have on our business; but should such laws or regulations be enacted, they could adversely affect the Company’s results of operations. For example, changes in required processes or laws that increase the time required to foreclose may reduce the Company’s net income and could adversely affect liquidity.
Financial Reform
Certain provisions of the Dodd-Frank Act, and other proposed reforms related thereto, may impact our ability to enter into future asset-backed securities transactions, however, the effect of any such actions on the asset-backed securities market is currently uncertain. While we are continuing to evaluate all aspects of the Dodd-Frank Act, such legislation and regulations promulgated pursuant to such legislation could materially and adversely affect the manner in which we conduct our businesses, result in heightened federal regulation and oversight of our business activities, and result in increased costs and potential litigation associated with our business activities.
Basis of Presentation
     The consolidated financial statements reflect the historical operations of the Financing business which was operated as part of Walter Energy prior to the spin-off. Under Walter Energy’s ownership, the Financing business operated through separate subsidiaries. A direct ownership relationship did not exist among the legal entities prior to the contribution to Walter Investment Management LLC, or WIM. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. All significant intercompany balances have been eliminated in the consolidated financial statements.
     Although we have operated as an independent, stand-alone entity only since April 17, 2009, management believes the assumptions underlying the consolidated financial statements as of September 30, 2009 are reasonable. However, the consolidated financial statements included herein do not include all of the expenses that would have been incurred had we been a separate, stand-alone entity, although, the consolidated financial statements do include certain costs and expenses that have been allocated to us from Walter Energy. As such, the financial information does not necessarily reflect or is not necessarily indicative of our consolidated financial position, results of operations and cash flows in the future, or what would have been reflected had we been a separate, stand-alone entity during the period presented prior to the Merger.
     Results of operations for the three and nine months ended September 30, 2010 and 2009 include the results of operations of legacy WIM.

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     The results of operations of legacy Hanover are included for the three and nine months ended September 30, 2010 as well as for the period from April 17, 2009 through September 30, 2009. Since the Merger constituted a reverse acquisition for accounting purposes, the pre-acquisition consolidated financial statements of WIM are treated as the historical financial statements of Walter Investment. The combined financial statements of WMC, Best and WIRC (collectively representing substantially all of Walter Energy’s Financing business prior to the Merger) are considered the predecessor to WIM for accounting purposes. The combined financial statements of WMC, Best and WIRC have become WIM’s historical financial statements for periods prior to the Merger.
Business Separation and Merger
     On September 30, 2008, Walter Energy outlined its plans to separate its Financing business from its core Natural Resources business through a spin-off to stockholders and subsequent Merger with Hanover. In furtherance of these plans, on September 30, 2008, Walter Energy and WIM entered into a definitive agreement to merge with Hanover, which agreement was amended and restated on February 17, 2009. Immediately prior to the spin-off, substantially all of the assets and liabilities related to the Financing business were contributed, through a series of transactions, to WIM in return for all of WIM’s membership units. On April 17, 2009, immediately following the spin-off from Walter Energy, WIM was merged with and into Hanover with Hanover continuing as the surviving corporation in the Merger. Following the Merger, Hanover was renamed Walter Investment Management Corp. After the spin-off and Merger, Walter Energy’s stockholders that became members of WIM as a result of the spin-off, and certain holders of options to acquire limited liability company interests of WIM, collectively owned 98.5% of the shares of common stock of the surviving corporation in the Merger, while stockholders of Hanover owned 1.5% of the shares of common stock of such corporation. As a result, the business combination has been accounted for as a reverse acquisition, with WIM considered the accounting acquirer. On April 20, 2009, our common stock began trading on the NYSE Amex under the symbol “WAC”.
     Although Hanover was the legal and tax surviving entity in the Merger, for accounting purposes the Merger was treated as a reverse acquisition of the operations of Hanover and has been accounted for pursuant to the guidance concerning business combinations, with WIM as the accounting acquirer. As such, the pre-acquisition financial statements of WIM are treated as the historical financial statements of Walter Investment. The Hanover assets acquired and the liabilities assumed were recorded at the date of acquisition, April 17, 2009, at their respective fair values. The results of operations of Hanover were included in the consolidated statements of income for periods subsequent to the Merger.
     On April 17, 2009, we completed our separation from Walter Energy. In connection with the separation, WIM and Walter Energy executed the following transactions or agreements which involved no cash:
  Walter Energy distributed 100% of its interest in WIM to holders of Walter Energy’s common stock;
 
  All intercompany balances between WIM and Walter Energy were settled with the net balance recorded as a dividend to Walter Energy;
 
  In accordance with the Tax Separation Agreement, Walter Energy will, in general, be responsible for any and all taxes reported on any joint return through the date of the separation, which may also include WIM for periods prior to the separation. WIM will be responsible for any and all taxes reported on any WIM separate tax return and on any consolidated returns for Walter Investment subsequent to the separation;
 
  Walter Energy’s share-based awards held by WIM employees were converted to equivalent share-based awards of Walter Investment, with the number of shares and the exercise price being equitably adjusted to preserve the intrinsic value. The conversion was accounted for as a modification under the provisions of the guidance concerning stock compensation.
     The assets and liabilities transferred to WIM from Walter Energy also included $26.6 million in cash, which was contributed to WIM by Walter Energy on April 17, 2009. Following the spin-off, WIM paid a taxable dividend consisting of cash of $16.0 million and additional equity interests to its members. The Merger occurred immediately following the spin-off and taxable dividend on April 17, 2009. The surviving company continues to operate as a publicly traded REIT subsequent to the Merger.
Critical Accounting Policies
     The significant accounting policies used in preparation of our consolidated financial statements are described in Note 2 of “Notes to Consolidated Financial Statements” for the year ended December 31, 2009 included in our Annual Report on Form 10-K filed with the SEC on March 2, 2010. There have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

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Results of Operations
Revenue by Portfolio Type
     For the three and nine months ended September 30, 2010, we reported net income of $9.7 million and $26.4 million, respectively, as compared to $8.2 million and $105.3 million for the same periods, respectively, in the prior year. The main components of the change in net income for the three and nine months ended September 30, 2010 and 2009 are detailed in the following table (in thousands):
                                                 
    Three Months Ended             Nine Months Ended        
    September 30,     Increase/     September 30,     Increase/  
    2010     2009     (Decrease)     2010     2009     (Decrease)  
Residential loans
                                               
Interest income
  $ 8,469     $ 8,076     $ 393     $ 24,247     $ 25,576     $ (1,329 )
Less: Interest expense
                                   
 
                                   
Net interest income
    8,469       8,076       393       24,247       25,576       (1,329 )
Less: Provision for loan losses (1)
    3,036       1,520       1,516       5,657       3,662       1,995  
 
                                   
Net interest income after provision for loan losses
    5,433       6,556       (1,123 )     18,590       21,914       (3,324 )
 
                                   
 
                                               
Residential loans of securitization trusts
                                               
Interest income
    32,838       34,943       (2,105 )     100,570       107,949       (7,379 )
Interest expense
    20,316       22,229       (1,913 )     62,612       67,972       (5,360 )
 
                                   
Net interest income
    12,522       12,714       (192 )     37,958       39,977       (2,019 )
Less: Provision for loan losses (1)
    198       1,181       (983 )     5,567       7,001       (1,434 )
 
                                   
Net interest income after provision for loan losses
    12,324       11,533       791       32,391       32,976       (585 )
 
                                   
 
                                               
Non-interest income
                                               
Premium revenue
    1,778       2,025       (247 )     6,636       8,086       (1,450 )
Other income, net
    437       1,263       (826 )     2,213       2,066       147  
 
                                   
Total
    2,215       3,288       (1,073 )     8,849       10,152       (1,303 )
 
                                               
 
                                   
Total revenues, net
    19,972       21,377       (1,405 )     59,830       65,042       (5,212 )
 
                                               
Total non-interest expenses
    9,974       11,789       (1,815 )     32,641       35,511       (2,870 )
 
                                   
 
                                               
Income before income taxes
    9,998       9,588       410       27,189       29,531       (2,342 )
Income tax expense (benefit)
    312       1,345       (1,033 )     828       (75,725 )     76,553  
 
 
                                   
Net income
  $ 9,686     $ 8,243     $ 1,443     $ 26,361     $ 105,256     $ (78,895 )
 
                                   
 
(1)   Excludes the impact of the REO sale from the securitized residential loan portfolio to the unencumbered residential loan portfolio that occurred in the three months ended March 31, 2010.
Net Interest Income
     Our results of operations for our portfolio during a given period typically reflect the net interest spread earned on our residential loan portfolio. The net interest spread is impacted by factors such as the interest rate our residential loans are earning and our cost of funds. Furthermore, the amount of discount on the residential loans will impact the net interest spread as such amounts will be amortized over the expected term of the residential loans and the amortization will be accelerated due to voluntary prepayments.

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     The following table summarizes the average balance, interest and weighted average yield on residential loan assets and mortgage-backed debt for the periods indicated.
                                                 
    For the Three Months Ended September 30,
    2010     2009
    Average             (3)     Average             (3)  
    Balance     Interest     Yield     Balance     Interest     Yield  
         
 
                                               
Assets
                                               
Residential loans
  $ 353,500     $ 8,469       9.58 %   $ 346,778     $ 8,076       9.32 %
Residential loans of securitization trusts
    1,276,693       32,838       10.29 %     1,362,263       34,943       10.26 %
                         
Total interest-earning assets
  $ 1,630,193     $ 41,307       10.14 %   $ 1,709,041     $ 43,019       10.07 %
                         
 
                                               
Liabilities
                                               
Mortgage-backed debt
  $ 1,204,022     $ 20,316       6.75 %   $ 1,305,969     $ 22,229       6.81 %
                         
Total interest-bearing liabilities
  $ 1,204,022     $ 20,316       6.75 %   $ 1,305,969     $ 22,229       6.81 %
                         
 
                                               
Net interest spread (1)(3)
          $ 20,991       3.39 %           $ 20,790       3.26 %
 
                                               
Net interest margin (2)(3)
                    5.15 %                     4.87 %
                                                 
    For the Nine Months Ended September 30,
    2010     2009
    Average             (3)     Average             (3)  
    Balance     Interest     Yield     Balance     Interest     Yield  
         
 
                                               
Assets
                                               
Residential loans
  $ 348,848     $ 24,247       9.27 %   $ 355,157     $ 25,576       9.60 %
Residential loans of securitization trusts
    1,296,104       100,570       10.35 %     1,387,442       107,949       10.37 %
                         
Total interest-earning assets
  $ 1,644,952     $ 124,817       10.12 %   $ 1,742,599     $ 133,525       10.22 %
                         
 
                                               
Liabilities
                                               
Mortgage-backed debt
  $ 1,225,545     $ 62,612       6.81 %   $ 1,332,428     $ 67,972       6.80 %
                         
Total interest-bearing liabilities
  $ 1,225,545     $ 62,612       6.81 %   $ 1,332,428     $ 67,972       6.80 %
                         
Net interest spread (1)(3)
          $ 62,205       3.31 %           $ 65,553       3.42 %
 
                                               
Net interest margin (2)(3)
                    5.04 %                     5.02 %
 
(1)   Net interest spread is calculated by subtracting the weighted average yield on interest-bearing liabilities from the weighted average yield on interest-earning assets.
 
(2)   Net interest margin is calculated by dividing the net interest spread by total average interest-earning assets.
 
(3)   Annualized.

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Net Interest Spread
     Net interest spread increased for the three months ended September 30, 2010 as compared to the same period in 2009, due primarily to a decrease in interest expense, lower levels of non-performing assets, and higher yields on the recently acquired residential loans, partially offset by a decrease in voluntary prepayments. The decrease in interest expense is due to lower average outstanding borrowings as a result of principal payments on the mortgage-backed debt, a $19.9 million mortgage-backed debt extinguishment combined with no new mortgage-backed debt issuances during the year. The average prepayment rate for the unencumbered portfolio was 3.5% for the three months ended September 30, 2010, as compared to 4.1% in the same period of 2009. The average prepayment rate for the securitized portfolio was 2.4% for the three months ended September 30, 2010, as compared to 3.2% in the same period of 2009.
     Net interest spread decreased for the nine months ended September 30, 2010 as compared to the same period in 2009, due primarily to declining portfolio balances as a result of principal repayments and foreclosures, a decrease in voluntary prepayments offset by decreased interest expense due to lower average outstanding borrowings as a result of principal payments on the mortgage-backed debt, a $19.9 million mortgage-backed debt extinguishment combined with no new mortgage-backed debt issuances during the year. The average prepayment rate for the unencumbered portfolio was 3.5% for the nine months ended September 30, 2010, as compared to 4.7% in the same period of 2009. The average prepayment rate for the securitized portfolio was 2.6% for the nine months ended September 30, 2010, as compared to 3.4% in the same period of 2009, respectively.
Net Interest Margin
     Net interest margin increased for the three and nine months ended September 30, 2010 as compared to the same periods in 2009 due to lower levels of non-performing assets and lower outstanding mortgage-backed debt balances, partially offset by a decrease in prepayment speeds.
Provision for Loan Losses
     The increase in the unencumbered residential loan provision for loan losses for the three and nine months ended September 30, 2010, as compared to the same periods in 2009 was primarily due to increased frequency of default and loss severities.
     The decrease in the securitized residential loan provision for loan losses for the three and nine months ended September 30, 2010, as compared to the same periods in 2009 was primarily due to reduced frequency of default and improved loss severities.
Non-Interest Income
     The decrease in non-interest income for the three months ended September 30, 2010, as compared to the same period in 2009 was primarily due to a $0.8 million gain in September 2009 resulting from the sale of our third-party insurance agency portfolio and lower mortgage advisory services revenue.
     The decrease in non-interest income for the nine months ended September 30, 2010, as compared to the same period in 2009 was primarily due to lower earned premiums from our insurance business and a $0.8 million gain in September 2009 resulting from the sale of our third-party insurance agency portfolio, partially offset by an improvement in taxes, insurance and other advances as a result of lower insurance advances and an increase in collections.
Non-Interest Expenses
     The decrease in non-interest expenses for the three months ended September 30, 2010, as compared to the same period in 2009 was primarily due to a $1.7 million gain on debt extinguishment, lower losses on REO due to improved loss severities, and a decrease in general and administrative expenses due to lower expenses related to securitization trusts, partially offset by an increase in salaries and benefits and legal and professional expenses due to growth initiatives.
     The decrease in non-interest expenses for the nine months ended September 30, 2010, as compared to the same period in 2009 was primarily due to a $1.7 million gain on debt extinguishment, gains on REO due to improved loss severities, a decrease in claims expense as a result of fewer active policies and prior year claims in our insurance business, a decrease in legal and professional expenses that related primarily to the spin-off and Merger as well as no longer incurring related party corporate charges from our former parent, partially offset by

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an increase in salaries and benefits. Salaries and benefits increased due to additional employees to support the stand-alone company, additional stock compensation expense, as well as severance costs incurred in 2010.
Income Taxes
     The change in income taxes for the nine months ended September 30, 2010, as compared to the same period in 2009 was due to the impact of our becoming qualified as a REIT in conjunction with the spin-off from Walter Energy and Merger with Hanover. Our continued qualification as a REIT may limit our income tax expense to the activities of our TRSs.
Additional Analysis of Residential Loan Portfolio
Allowance for Loan Losses
     The allowance for loan losses represents management’s estimate of probable incurred credit losses inherent in our residential loan portfolio as of the balance sheet date. The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses, is based on delinquency levels and trends, prior loan loss severity experience, and management’s judgment and assumptions regarding various matters, including the composition of the residential loan portfolio, the estimated value of the underlying real estate collateral, the level of the allowance in relation to total loans and to historical loss levels, national and local economic conditions, changes in unemployment levels and the impact that changes in interest rates have on a borrower’s ability to refinance their loan and to meet their repayment obligations. Management continuously evaluates these assumptions and various other relevant factors impacting credit quality and inherent losses when quantifying our exposure to credit losses and assessing the adequacy of our allowance for such losses as of each reporting date. The level of the allowance is adjusted based on the results of management’s analysis.
     Given continuing pressure on residential property values, especially in our southeastern U.S. market, continued high unemployment and a generally uncertain economic backdrop, we expect the allowance for loan losses to continue to remain elevated until such time as we experience a sustained improvement in the credit quality of the residential loan portfolio. The future growth of the allowance is highly correlated to unemployment levels and changes in home prices within our markets.
     While we consider the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary due to changes in economic conditions, delinquency levels, foreclosure rates, loss severity rates, and further declines in real estate values.
     The following table shows information about the allowance for losses by portfolio for the periods presented.
                                 
                    Net Losses and   Net Losses and
                    Charge-offs   Charge-offs as a %
    Allowance   Allowance as a % of   Deducted from the   of Average
    for Loan Losses   Residential Loans (1)   Allowance   Residential Loans (2)
    (in thousands)
Residential loans:
                               
September 30, 2010
  $   5,388       1.49 %   $   4,972 (3)     1.43 %(3)4)
December 31, 2009
  $ 3,460       1.03 %   $ 4,317       1.23 %
 
                               
Residential loans of securitization trusts:
                               
September 30, 2010
  $    10,893       0.86 %   $    11,833 (3)     0.91 %(3)(4)
December 31, 2009
  $ 14,201       1.07 %   $ 12,173       0.89 %
 
(1)   The allowance for loan loss ratio is calculated as period end allowance for loan losses divided by period end residential loans, by portfolio type, before the allowance for loan losses.
 
(2)   The charge-off ratio is calculated as annualized charge-offs, net of recoveries divided by average residential loans, by portfolio type, before the allowance for loan losses.
 
(3)   Annualized.
 
(4)   Excludes the impact of the REO sale from the securitized residential loan portfolio to the unencumbered residential loan portfolio in February 2010.

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     The following table summarizes activity in the allowance for loan losses in our residential loan portfolios, net for the nine months ended September 30, 2010 and 2009 (in thousands):
                                 
          Residential Loans  
    Residential Loans     of Securitization Trusts  
    Nine Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Balance, December 31
  $ 3,460     $ 3,418     $ 14,201     $ 15,551  
Provision charged to income
    1,291       1,174       2,651       2,938  
Less: Transfers to REO
    (1,367 )     (1,211 )     (2,609 )     (3,127 )
Less: Charge-offs, net of recoveries
          (8 )     (303 )     (253 )
 
                       
Balance, March 31
    3,384       3,373       13,940       15,109  
Provision charged to income
    1,330       968       2,718       2,882  
Less: Transfers to REO
    (1,390 )     (874 )     (3,205 )     (3,016 )
Less: Charge-offs, net of recoveries
    (4 )     (29 )     (40 )     (106 )
 
                       
Balance, June 30
    3,320       3,438       13,413       14,869  
Provision charged to income
    3,036       1,520       198       1,181  
Less: Transfers to REO
    (882 )     (1,370 )     (2,436 )     (1,327 )
Less: Charge-offs, net of recoveries
    (86 )     (81 )     (282 )     (441 )
 
                       
Balance, September 30
  $ 5,388     $ 3,507     $ 10,893     $ 14,282  
 
                       
Delinquency Information
     The following table presents information about delinquencies as a percent of amounts outstanding in our residential loan portfolios:
                                 
                    Residential Loans  
    Residential Loans     of Securitization Trusts  
    September 30,     December 31,     September 30,     December 31,  
    2010     2009     2010     2009  
Principal balance outstanding (in thousands)
  $ 401,311     $ 365,797     $ 1,385,365     $ 1,454,062  
 
31-60 days
    1.98 %     1.98 %     1.07 %     1.17 %
61-90 days
    1.18 %     1.53 %     0.59 %     0.54 %
91 days or more
    4.61 %     5.84 %     1.99 %     2.74 %
 
                       
 
    7.77 %     9.35 %     3.65 %     4.45 %
 
                       
     The following table presents information about delinquencies as a percent of the total number of loans outstanding in our residential loan portfolios:
                                 
                    Residential Loans  
    Residential Loans     of Securitization Trusts  
    September 30,     December 31,     September 30,     December 31,  
    2010     2009     2010     2009  
Total number of residential loans
    4,379       3,703       29,146       30,502  
 
31-60 days
    1.85 %     1.84 %     0.88 %     1.07 %
61-90 days
    1.03 %     1.51 %     0.47 %     0.47 %
91 days or more
    4.16 %     5.51 %     1.59 %     2.15 %
 
                       
 
    7.04 %     8.86 %     2.94 %     3.69 %
 
                       
     The past due or delinquency status is generally determined based on the contractual payment terms. The calculation of delinquencies excludes from delinquent amounts those accounts that are in bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the bankruptcy court approved mortgage payment obligations.

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     The following table summarizes our residential loans placed in non-accrual status due to delinquent payments of 90 days past due or greater:
                 
    September 30,   December 31,
    2010   2009
Residential loans
               
Number of loans
    182       204  
Balance (in millions)
  $ 18.0     $ 21.4  
Residential loans of securitization trusts
               
Number of loans
    464       656  
Balance (in millions)
  $ 27.5     $ 39.8  
Total
               
Number of loans
    646       860  
Balance (in millions)
  $   45.5     $   61.2  
Portfolio Characteristics
     The weighted average original loan-to-value, or LTV, dispersion of our portfolios is as follows:
                                 
                    Residential Loans  
    Residential Loans     of Securitization Trusts  
    September 30,     December 31,     September 30,     December 31,  
    2010     2009     2010     2009  
Weighted average LTV
    87.00 %     88.00 %     89.00 %     89.00 %
 
0.00 - 70.00
    3.37 %     3.91 %     0.92 %     0.95 %
70.01 - 80.00
    5.74 %     6.88 %     1.93 %     1.93 %
80.01 - 90.00(1)
    50.88 %     43.56 %     76.92 %     76.90 %
90.01 - 100.00
    40.01 %     45.65 %     20.23 %     20.22 %
 
                       
Total
    100.00 %     100.00 %     100.00 %     100.00 %
 
                       
 
(1)   For those residential loans in the portfolio prior to electronic tracking of original LTVs, the maximum LTV was 90%, or 10% equity. Thus, these residential loans have been included in the 80.01 to 90.00 LTV category.
     Original LTVs do not include additional value contributed by the borrower to complete the home for any loans originated by Jim Walter Homes, Inc. or WMC. This additional value typically was created by the installation and completion of wall and floor coverings, landscaping, driveways and utility connections in more recent periods.
     Current LTVs are not readily determinable given the rural geographic distribution of our portfolio which precludes us from obtaining reliable comparable sales information to utilize in valuing the collateral.
     The weighted average FICO score dispersion of the loans in our residential loan portfolios, refreshed as of December 31, 2009, is as follows:
                                 
                    Residential Loans  
    Residential Loans     of Securitization Trusts  
    September 30,     December 31,     September 30,     December 31,  
    2010     2009     2010     2009  
Weighted average FICO
    573       566       587       583  
 
<=600
    60.81 %     62.77 %     53.30 %     54.90 %
601 - 640
    12.86 %     11.07 %     14.17 %     13.97 %
641 - 680
    8.50 %     6.84 %     9.46 %     8.85 %
681 - 720
    4.92 %     4.55 %     4.76 %     4.99 %
721 - 760
    2.24 %     2.42 %     2.84 %     2.94 %
761-800
    1.91 %     2.01 %     2.58 %     2.46 %
>=801
    0.59 %     0.84 %     1.05 %     0.99 %
Unknown or unavailable
    8.17 %     9.50 %     11.84 %     10.90 %
 
                       
Total
    100.00 %     100.00 %     100.00 %     100.00 %
 
                       

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     Our residential loans are concentrated in the following states:
                                 
                    Residential Loans  
    Residential Loans     of Securitization Trusts  
    September 30,     December 31,     September 30,     December 31,  
    2010     2009     2010     2009  
Texas
    37.12 %     33.85 %     34.33 %     33.92 %
Mississippi
    11.55 %     12.86 %     16.16 %     16.11 %
Alabama
    8.79 %     10.25 %     8.33 %     8.31 %
Louisiana
    7.17 %     8.00 %     6.12 %     6.15 %
Florida
    10.30 %     9.38 %     5.19 %     5.25 %
South Carolina
    5.92 %     6.73 %     5.65 %     5.63 %
Other (1)
    19.15 %     18.93 %     24.22 %     24.63 %
 
                       
Total
    100.00 %     100.00 %     100.00 %     100.00 %
 
                       
 
(1)   Other consists of loans in 25 states, individually representing a concentration of less than 5%.
     Our residential loans outstanding as of September 30, 2010 were originated in the following periods:
                 
            Residential Loans
of Securitization
 
    Residential Loans     Trusts  
Year 2010 Origination
    4.33 %     3.00 %
Year 2009 Origination
    5.76 %     2.99 %
Year 2008 Origination
    32.84 %     1.91 %
Year 2007 Origination
    52.94 %     1.60 %
Year 2006 Origination
    2.11 %     13.24 %
Year 2005 Origination
    0.19 %     9.97 %
Year 2004 Origination and earlier
    1.83 %     67.29 %
 
           
Total
    100.00 %     100.00 %
 
           
Real Estate Owned
     The following table presents information about foreclosed property (dollars in thousands):
                                 
          Real Estate Owned Related to the  
    Real Estate Owned Related to the     Residential Loans of  
    Residential Loan Portfolio     Securitization Trusts  
    Units     Balance     Units     Balance  
Balance, December 31, 2009
    271     $ 21,981       760     $ 41,143  
Foreclosures and other additions, at fair value
    256       22,285       754       40,071  
Purchases from the securitized residential loan portfolio
    72       3,882              
Sales to the residential loan portfolio
                (72 )     (3,882 )
Sales to third parties and other dispositions
    (251 )     (19,482 )     (795 )     (40,231 )
Fair value adjustment
          (407 )           (1,152 )
 
                       
Balance, September 30, 2010
    348     $ 28,259       647     $ 35,949  
 
                       
     During February 2010, we purchased, at our discretion, 72 Mid-State Trust X, or Trust X, REO accounts in order to cure the loss trigger. We purchased these accounts for approximately $3.9 million which was the economic value of the accounts as defined by the Trust agreement. As a result of this transaction, on February 16, 2010 we received a $4.2 million release of excess overcollateralization and we continue to receive monthly cash releases from Trust X. Of the 72 REO properties, 37 have subsequently been sold with the Company providing the financing. The purchased REO accounts are now included in either the unencumbered residential loan or REO balances.
Liquidity and Capital Resources
Overview
     Our principal sources of funds are our existing cash balances, monthly principal and interest payments we receive from our unencumbered residential loan portfolio, cash releases from our securitized residential loan portfolio, proceeds from our 2009 Offering and other financing activities. An additional source of liquidity is the mortgage-backed debt that we recently purchased in the open market. We currently intend the purchases to be a temporary investment of excess cash. As needed, we may recover this liquidity by either selling the bonds or using the bonds as collateral for a repurchase facility. We generally use our liquidity for our operating costs, to make additional investments, and to make dividend payments.

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     Our securitization trusts are consolidated for financial reporting purposes under GAAP. Our results of operations and cash flows include the activity of these Trusts. The cash proceeds from the repayment of the collateral held in securitization trusts are owned by the Trusts and serve to only repay the obligations of the Trusts unless certain overcollateralization or other similar targets are satisfied. Principal and interest on the mortgage-backed debt of the Trusts can only be paid if there are sufficient cash flows from the underlying collateral. As of September 30, 2010, total debt decreased $83.8 million as compared to December 31, 2009.
     The securitization trusts contain delinquency and loss triggers, that, if exceeded, result in any excess overcollateralization going to pay down our outstanding mortgage-backed and asset-backed notes for that particular securitization at an accelerated pace. Assuming no servicer trigger events have occurred and the overcollateralization targets have been met, any excess cash flow is released to the Company either monthly or quarterly, in accordance with the terms of the respective underlying trust agreements. As of September 30, 2010, Mid-State Trust 2006-1, or Trust 2006-1,exceeded its delinquency trigger and did not provide any excess cash flow to us. The delinquency trigger for Mid-State Trust 2005-1, or Trust 2005-1, was cured during the three months ended June 30, 2010. The loss trigger for Trust X was cured during the three months ended March 31, 2010. With the exception of Trust 2006-1 which exceeded its trigger and the recently cured Trust 2005-1 and Trust X, none of our other securitization trusts have reached the levels of underperformance that would trigger a delay in cash releases.
     We believe that, based on current forecasts and anticipated market conditions, funding generated from the residential loans and the proceeds from our 2009 Offering will be sufficient to meet operating needs, to invest in residential loans, to make planned capital expenditures and to pay cash dividends as required for our qualification as a REIT. However, our operating cash flows and liquidity are significantly influenced by numerous factors, including the general economy, interest rates and, in particular, conditions in the mortgage markets.
Mortgage-Backed Debt
     We have historically funded our residential loans through the securitization market. As of September 30, 2010, we had nine separate non-recourse securitization trusts where we service the underlying collateral and one non-recourse securitization trust for which we do not service the underlying collateral. These ten trusts have an aggregate of $1.2 billion of outstanding debt, collateralized by residential loans (principal balance), REO and restricted cash of $1.5 billion. All of our mortgage-backed debt is non-recourse and not cross-collateralized and, therefore, must be satisfied exclusively from the proceeds of the residential loans and REO held in each securitization trust. As we retained the residual interests in the securitizations and significantly direct the activities of the securitization trusts, we have consolidated the securitization entities and treat the residential loans as our assets and the related mortgage-backed debt as our debt.
     Borrower remittances received on the residential loan collateral held in securitization trusts are used to make payments on the mortgage-backed debt. The maturity of the mortgage-backed debt is directly affected by principal prepayments on the related residential loan collateral. As a result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. Certain of our mortgage-backed debt are also subject to redemption according to specific terms of the respective indenture agreements.
Credit Agreements
     In April 2009, we entered into a syndicated credit agreement, a revolving credit agreement and security agreement, and a support letter of credit agreement. All three of these agreements mature on April 20, 2011. As of September 30, 2010, no funds have been drawn under any of the credit agreements and we are in compliance with all covenants.

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Sources and Uses of Cash
     One of the financial metrics on which we focus is our sources and uses of cash. As a supplement to the Consolidated Statements of Cash Flows included in this Quarterly Report on Form 10-Q, we provide the table below which sets forth, for the periods indicated, our sources and uses of cash (in millions). The cash balance at the beginning and ending of each period of 2010 and 2009 are GAAP amounts and the sources and uses of cash are organized in a manner consistent with how management monitors the cash flows of our business. The presentation of our sources and uses of cash for the table below is derived by aggregating and netting all items within our GAAP Consolidated Statements of Cash Flows for the respective periods. The table excludes the gross cash flows generated by our securitization trusts as those amounts are generally not available to us. The table does include the cash releases distributed to us as a result of our investment in the residual interests of the securitization trusts.
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
Beginning cash and cash equivalents balance
  $ 99.3     $ 1.3  
 
Principal sources of cash:
               
Cash collections from the unencumbered portfolio
    37.3       43.3  
Cash releases from the securitized portfolio
    38.7       24.6  
Net cash flow from ancillary businesses
    7.7       9.1  
 
           
 
    83.7       77.0  
 
               
Other sources of cash:
               
Cash received from Walter Energy
          16.4  
Other
    0.1       2.8  
 
 
           
Total sources of cash
    83.8       96.2  
 
               
Principal uses of cash:
               
Acquisition of REO from the securitized portfolio
    (3.9 )      
Operating expenses paid
    (30.4 )     (37.3 )
 
           
 
    (34.3 )     (37.3 )
 
               
Other uses of cash:
               
Dividends paid
    (40.1 )     (10.4 )
Loan pool acquisitions
    (40.7 )      
Mortgage-backed debt extinguishment
    (19.9 )      
Cash paid to Walter Energy
          (15.3 )
Capital expenditures, net
    0.3       (2.2 )
Other
    (8.2 )     (8.8 )
 
               
 
           
Total uses of cash
    (142.9 )     (74.0 )
 
           
 
               
Net (uses) sources of cash
    (59.1 )     22.2  
 
           
Ending cash and cash equivalents balance
  $ 40.2     $ 23.5  
 
           
     Our principal business cash flows are those associated with managing our portfolio and totaled $49.4 million for the nine months ended September 30, 2010, up $9.7 million from the nine months ended September 30, 2009, due to an increase of cash releases from our

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securitized portfolio of $14.1 million and a decrease of $6.9 million of cash operating expenses primarily due to lower insurance premiums and non-recurring expenses incurred in 2009 as well as $1.9 million of one-time spin-off costs incurred in the nine months ended September 30, 2009. This was partially offset by a decrease of cash collections from our unencumbered residential loan portfolio of $6.0 million primarily due to the declining balance nature of our portfolio partially offset by our recent acquisitions, a decline in the level of voluntary prepayments, and a $1.4 million decrease in cash provided by our ancillary businesses.
     Cash of $3.9 million was used to acquire REO from Trust X within the securitized residential loan portfolio. The cash utilized to acquire REO from Trust X resulted in subsequent monthly cash releases totaling $14.1 million through September 30, 2010, from Trust X with the remaining overcollateralization expected to be released in early 2011. The release of overcollateralization was a direct result of the loss trigger being cured. Once the overcollateralization from Trust X has been released and assuming that the loss trigger remains cured, Trust X cash releases will consist of servicing fees and residual cash flows, similar to our other securitization trusts.
     Cash releases from the securitized portfolio consist of servicing fees and residual cash flows from residential loans held as securitized collateral within the securitization trusts after distributions are made to bondholders of the securitized mortgage-backed debt to the extent required credit enhancements are maintained and the delinquency and loss triggers are not exceeded. These cash flows represent the difference between principal and interest payments received on the underlying residential loans reduced by principal payments, including accelerated payments, if any, on the securitized mortgage-backed debt; interest paid on the securitized mortgage-backed debt; actual losses, net of any gains incurred upon disposition of REO; and the maintenance of overcollateralization requirements.
     Our net other cash use totaled $108.5 million for the nine months ended September 30, 2010, up $91.0 million from the nine months ended September 30, 2009, primarily due to a $29.7 million increase in dividends paid to stockholders, the $40.7 million acquisition of loan pools, and $19.9 million used to purchase our outstanding mortgage-backed debt, partially offset by the termination of transactions with Walter Energy as a result of our spin-off.
     During the nine months ended September 30, 2010, we deployed $40.7 million of the proceeds from our 2009 Offering to purchase four pools of residential loans. We intend to invest the remainder of the proceeds from our 2009 Offering in our targeted asset classes. We expect our future sources of cash will continue to be generated from our existing residential loan portfolios, as well as from future acquisitions of residential loans and servicing revenues from Marix subsequent to the acquisition. If conditions in the securitization market improve, we may securitize in the future. Additionally, we expect that our future cash operating expenses will be relatively consistent with annualized fourth quarter 2009 actual results excluding Marix operating costs.
     The following table sets forth, for the periods indicated, selected consolidated cash flow information (in thousands):
                 
    For the Nine Months  
    Ended September 30,  
    2010     2009  
Cash flows provided by operating activities
  $ 28,528     $ 35,271  
Cash flows provided by investing activities
    34,026       87,380  
Cash flows used in financing activities
    (121,641 )     (100,476 )
 
           
Net increase (decrease) in cash and cash equivalents
  $ (59,087 )   $ 22,175  
 
           
     Operating activities. Net cash provided by operating activities was $28.5 million for the nine months ended September 30, 2010 as compared to $35.3 million for the same period in 2009. During the nine months ended September 30, 2010 and 2009, the primary sources of cash in operating activities were the income generated from our portfolio and our ancillary businesses.
     Investing activities. Net cash provided by investing activities was $34.0 million for the nine months ended September 30, 2010 as compared to $87.4 million for the same period in 2009. For the nine months ended September 30, 2010 and 2009, the primary source of cash from investing activities was provided by principal payments received on our residential loans, which was partially offset by the acquisition of pools of residential loans in the 2010 period.
     Financing activities. Net cash used in financing activities was $121.6 million for the nine months ended September 30, 2010 as compared to $100.5 million for the same period in 2009. For the nine months ended September 30, 2010 and 2009, the primary uses of cash in financing activities were principal payments on our mortgage-backed debt as well as the payment of dividends to our stockholders. Additionally, we utilized $19.9 million of cash to purchase our outstanding mortgage-backed debt.
Off-Balance Sheet Arrangements
     As of September 30, 2010, we retained credit risk on 14 remaining mortgage securities totaling $1.5 million that were sold with recourse by Hanover in a prior year. Accordingly, we are responsible for credit losses, if any, with respect to these securities.
     We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and have not

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entered into any derivative contracts or synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Dividends
     As a REIT, we are required to have declared dividends amounting to at least 90% of our net taxable income (excluding net capital gain) for each year by the time our U.S. federal tax return is filed. Therefore, a REIT generally passes through substantially all of its earnings to stockholders without paying U.S. federal income tax at the corporate level.
     As of September 30, 2010, we expect to pay dividends to our stockholders of all or substantially all of our earnings in each year to qualify for the tax benefits accorded to a REIT under the Code. All distributions will be made at the discretion of our Board of Directors and will depend on our operating results, estimates of taxable earnings, cash flows and liquidity, maintenance of REIT qualification and such other factors as the Board of Directors deems relevant.
     On November 2, 2010, we declared a dividend of $0.50 per share on our common stock to stockholders of record on November 14, 2010 which will be paid on November 24, 2010.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Qualitative Information on Market Risk
     We seek to manage the risks inherent in our business — including but not limited to credit risk, interest rate risk, prepayment risk, liquidity risk, real estate risk and inflation risk — in a prudent manner designed to enhance our earnings and dividends and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks.
Credit Risk
     Credit risk is the risk that we will not fully collect the principal we have invested in residential loans due to borrower defaults. Our portfolio as of September 30, 2010 consisted of securitized residential loans with a principal balance of $1.4 billion and approximately $0.4 billion of unencumbered residential loans.
     The residential loans are predominantly credit-challenged, non-conforming loans with a weighted average LTV ratio at origination or acquisition of approximately 89% and a weighted average borrower credit score of 584. While we feel that our underwriting and due diligence of these loans will help to mitigate the risk of significant borrower default on these loans, we cannot assure you that all borrowers will continue to satisfy their payment obligations under these loans, thereby avoiding default.
     The $1.5 billion of residential loans and other collateral of securitization trusts are permanently financed with $1.2 billion of mortgage-backed debt leaving us with a net credit exposure of $275.9 million, which approximates our residual interest in the securitization trusts.
     When we purchase residential loans, the credit underwriting process will vary depending on the pool characteristics, including loan seasoning or age, LTV ratios, payment histories and counterparty representations and warranties. We will perform a due diligence review of potential acquisitions which may include a review of the residential loan documentation, appraisal reports and credit underwriting. Generally, an updated property valuation is obtained.
Interest Rate Risk
     Interest rate risk is the risk of changing interest rates in the market place. Our primary interest rate risk exposures relate to the interest rates on mortgage-backed debt of the Trusts and the yields on our residential loan portfolios and prepayments thereof.
     Our fixed-rate residential loan portfolio had $1.8 billion of unpaid principal as of September 30, 2010 and December 31, 2009, and fixed-rate mortgage-backed debt was $1.2 billion and $1.3 billion as of September 30, 2010 and December 31, 2009, respectively. The fixed rate nature of these instruments and their offsetting positions effectively mitigate significant interest rate risk exposure from these instruments. If interest rates decrease, we may be exposed to higher prepayment speeds. This could result in a modest increase in short-term profitability. However, it could adversely impact long-term profitability as a result of a shrinking portfolio. Changes in interest rates may impact the fair value of these financial instruments.
Prepayment Risk
     Prepayment risk is the risk that borrowers will pay more than their required monthly mortgage payment including payoffs of residential loans. When borrowers repay the principal on their residential loans before maturity, or faster than their scheduled amortization, the effect is to shorten the period over which interest is earned, and therefore, increases the yield for residential loans purchased at a discount to their then current balance, as with the majority of our portfolio. Conversely, residential loans purchased at a premium to their then current balance exhibit lower yields due to faster prepayments. Historically, when market interest rates declined, borrowers had a tendency to refinance their residential loans, thereby increasing prepayments. However, with tightening credit standards, the current low interest rate environment has not yet resulted in higher prepayments. Increases in residential loan prepayment rates could result in GAAP earnings volatility including substantial variation from quarter to quarter.

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     We monitor prepayment risk through periodic reviews of the impact of a variety of prepayment scenarios on revenues, net earnings, dividends, and cash flow.
Liquidity Risk
     Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay mortgage-backed debt of the Trusts, fund and maintain the portfolio, pay dividends to our stockholders and other general business needs. We recognize the need to have funds available to operate our business. It is our policy to have adequate liquidity at all times.
     Our principal sources of liquidity are the mortgage-backed debt of the Trusts we have issued to finance our residential loans held in securitization trusts, the principal and interest payments received from unencumbered residential loans, cash releases from our securitized loan portfolio, cash proceeds from our 2009 Offering and other financing activities. We expect these sources of funds will be sufficient to meet our liquidity requirements.
     Our unencumbered and securitized mortgage loans are accounted for as held-for-investment and reported at amortized cost. Thus, changes in the fair value of the residential loans do not have an impact on our liquidity. However, the delinquency and loss triggers discussed previously may impact our liquidity. Our obligations consist solely of mortgage-backed debt issued by our securitization trusts. Changes in fair value of mortgage-backed debt generally have no impact on our liquidity. Mortgage-backed debt issued by the securitization trusts are reported at amortized cost as are the residential loans collateralizing the debt.
Real Estate Risk
     We own assets secured by real property and own property directly as a result of foreclosures. Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
Inflation Risk
     Virtually all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors influence our performance far more so than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP. Our activities and balance sheets are measured with reference to historical cost or fair value without considering inflation.
Effect of Government Initiatives on Market Risk
     As a result of ongoing challenges facing the United States economy, new laws and regulations have been and may continue to be proposed that impact the financial services industry. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act, was enacted and signed into law. The Act includes, among other things, provisions establishing a Bureau of Consumer Financial Protection, which will have broad authority to develop and implement rules regarding most consumer financial products, including provisions addressing mortgage reform as well as provisions affecting corporate governance and executive compensation at all publicly-traded companies. The Act also requires securitizers of asset-backed securities to retain an economic interest (generally 5%) in the credit risk of the securitized asset. Many aspects of the law are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact to our Company or the financial services industry.
Quantitative Information on Market Risk
     Our future earnings are sensitive to a number of market risk factors; changes in these factors may have a variety of secondary effects that, in turn, will also impact our earnings. To supplement this discussion on the market risk we face, the following table incorporates information that may be useful in analyzing certain market risks.

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     The table presents principal cash flows by year of repayment. The timing of principal cash flows includes assumptions on the prepayment speeds of assets based on their recent performance and future prepayment expectations. Our future results depend greatly on the credit performance of the underlying loans (this table assumes no credit losses).
                                                                         
    Principal Amounts Maturing and Effective Rates During Period     At September 30, 2010  
                                                    Principal              
(dollars in thousands)   Q4 2010     2011     2012     2013     2014     Thereafter     Value     Book Value     Fair Value  
Residential loans
                                                                       
Principal
  $ 4,373     $ 19,590     $ 20,473     $ 19,431     $ 18,476     $ 318,968     $ 401,311     $ 355,212     $ 317,000  
 
                                                                       
Residential loans of securitization trusts
                                                                       
Principal
    22,970       92,923       91,383       87,549       82,970       1,007,570       1,385,365       1,256,404       1,168,000  
 
                                                                       
Mortgage-backed debt
                                                                       
Principal
    25,092       96,957       95,608       91,721       88,182       786,655       1,184,215       1,183,636       1,082,000  
     Approximately 99% of residential loans have fixed interest rates. Residential loans with adjustable interest rates comprise only $7.0 million of the unencumbered loans and $18.4 million of the securitized loans. Similarly, all of our mortgage-backed debt of securitization trusts is fixed rate. The weighted average coupon is 9.1% for residential loans, 9.1% for residential loans of securitization trusts and 6.6% for mortgage-backed debt.
Item 4. Controls and Procedures
     (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings.
     (b) Changes in Internal Controls. There have been no changes in our internal control over financial reporting during our third quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
     See Part II, Item 1, “Legal Proceedings,” of our Quarterly Report on Form 10-Q for the three months ended March 31, 2010 filed on May 5, 2010.
     See also the item under Note 16 entitled “Other Tax Exposure”.
Item 1A. Risk Factors
     For risk factors, see Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2009 filed on March 2, 2010. Our risk factors have not changed materially since December 31, 2009 except for the addition of the risk factors below.
Risks Associated With Recent Adverse Developments in the Mortgage Finance and Credit Markets and the Enactment of the Dodd-Frank Act
Recent scrutiny has been placed on mortgage foreclosure processes due to some highly publicized deficiencies in such processes by others and we cannot be certain that new regulations will not be put in place which could adversely affect our performance.
As a result of some highly publicized deficiencies in the mortgage foreclosure processes of several large banks and loan servicers, a number of States’ Attorneys General have begun inquiries into mortgage foreclosure processes in their states and several of our competitors announced the suspension of foreclosure proceedings in certain states pending review of their procedures. We have reviewed our processes and procedures and will continue to do so with both internal personnel and third party consultants. To date, we have not received any inquiries from States’ Attorneys General and we have not identified any non-compliance with existing mortgage processing laws and regulations. We cannot be certain that lawyers and other service providers retained by the Company to process mortgage foreclosures have complied in all respects with required processes in their respective jurisdiction; however, we intend to monitor their activities going forward. It is not known at this time whether any new laws or regulations affecting the mortgage foreclosure process will be put into place by federal, state or local governmental authorities, nor is it currently possible to determine what, if any effects they may have on our business; but should such laws or regulations be enacted, they could adversely affect the Company’s results of operations. For example, changes in required processes or laws that increase the time required to foreclose may reduce the Company’s net income and could adversely affect liquidity.
The Dodd-Frank Act contains provisions related to asset-backed securities that may adversely impact our business
Certain provisions of the Dodd-Frank Act, and other proposed reforms related thereto, may impact our ability to enter into future asset-backed securities transactions, however, the effect of any such actions on the asset-backed securities market is currently uncertain. While we are continuing to evaluate all aspects of the Dodd-Frank Act, such legislation and regulations promulgated pursuant to such legislation could materially and adversely affect the manner in which we conduct our businesses, result in heightened federal regulation and oversight of our business activities, and result in increased costs and potential litigation associated with our business activities.
Risks Related to Our Business
We may not realize the growth opportunities expected from our acquisition and the integration of Marix Servicing, LLC’s business with our business could prove difficult
     On November 2, 2010, the Company closed on its acquisition of 100% of the ownership interests of Marix Servicing, LLC, or Marix. At the time of the purchase, Marix was operating at a loss. While the Company plans to take actions to reduce costs and increase revenues in the business, as well as to take advantage of synergies between the Company’s operations and those of Marix, and we believe that such actions will be successful in mitigating or eliminating such losses, there can be no assurance that such measures will succeed in whole or in part or be achieved in the anticipated time frame.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     (a) Not applicable.
     (b) Not applicable.
     (c) Not applicable.
Item 3. Defaults Upon Senior Securities
     None.
Item 4. Removed and Reserved
Item 5. Other Information
     None.
Item 6. Exhibits
     The exhibits listed on the Exhibit Index, which appears immediately following the signature page below, are included or incorporated by reference herein.

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Signatures
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
WALTER INVESTMENT MANAGEMENT CORP.
 
   
By:   /s/ Mark J. O'Brien      
  Mark J. O'Brien     
  Chief Executive Officer (Principal Executive Officer)     
 
Dated: November 3, 2010
         
     
By:   /s/ Kimberly A. Perez      
  Kimberly A. Perez     
  Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)     
 
Dated: November 3, 2010

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INDEX TO EXHIBITS
             
Exhibit No   Notes   Description
2.1
    (1 )   Second Amended and Restated Agreement and Plan of Merger dated as of February 6, 2009, among Registrant, Walter Industries, Inc., JWH Holding Company, LLC, and Walter Investment Management LLC.
 
           
2.2
    (1 )   Amendment to the Second Amended and Restated Agreement and Plan of Merger, entered into as of February 17, 2009 between Registrant, Walter Industries, Inc., JWH Holding Company, LLC and Walter Investment Management LLC
 
           
3.1
    (2 )   Articles of Amendment and Restatement of Registrant effective April 17, 2009.
 
           
3.2
    (2 )   By-Laws of Registrant, effective April 17, 2009.
 
           
10.1
    (3 )   Securities Purchase Agreement dated August 25, 2010 by and between the Registrant, Marathon Asset Management, L.P., Michael O’Hanlon and Marix Servicing, L.L.C.
 
           
10.2
    (4 )   Amendments to (a) Revolving Credit and Security Agreement and (b) L/C Support Agreement each dated September 23, 2010 by and between the Registrant and Walter Energy, Inc.
 
           
10.3
    (5 )   Supplement No. 1 dated October 28, 2010 to the Indenture dated November 2, 2006 relating to certain asset back notes by and between Mid-State Capital Corporation 2006-1 Trust as Issuer and The Bank of New York Mellon (formerly known as The Bank of New York) as Indenture Trustee
 
           
31.1
    (5 )   Certification by Mark J. O’Brien pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
           
31.2
    (5 )   Certification by Kimberly A. Perez pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
           
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    (5 )   Certification by Mark J. O’Brien and Kimberly A. Perez pursuant to 18 U.S.C. Section 1352, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
Note   Notes to Exhibit Index
(1)
  Incorporated herein by reference to the Annexes to the proxy statement/ prospectus forming a part of Amendment No. 4 to the Registrant’s Registration Statement on Form S-4, Registration No. 333-155091, as filed with the Securities and Exchange Commission on February 17, 2009.
 
   
(2)
  Incorporated herein by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 21, 2009.
 
   
(3)
  Incorporated herein by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25, 2010.
 
   
(4)
  Incorporated herein by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2010.
 
   
(5)
  Filed herewith

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