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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-13417

Walter Investment Management Corp.

(Exact name of registrant as specified in its charter)

Maryland		13-3950486
(State or other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		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		Smaller reporting company o
				(Do not check if a smaller reporting company)

     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 25,801,754 shares of common stock outstanding as of May 3, 2011.

 

 

WALTER INVESTMENT MANAGEMENT CORP.

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010		3
Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (unaudited)		4
Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2011 (unaudited)		5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)		6
Notes to Consolidated Financial Statements (unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		35
Item 4. Controls and Procedures		37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		38
Item 1A. Risk Factors		38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3. Defaults Upon Senior Securities		40
Item 4. (Removed and Reserved)		40
Item 5. Other Information		40
Item 6. Exhibits		41
Signatures		42
EX-31.1
EX-31.2
EX-32

PART 1. FINANCIAL INFORMATION

WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

		March 31,				December 31,
		2011				2010
ASSETS
Cash and cash equivalents		$	58,390			$	114,352
Restricted cash and cash equivalents			53,658				52,289
Receivables, net			2,018				2,643
Servicing advances and receivables, net			9,779				11,223
Residential loans, net of allowance for loan losses of $14,920 and $15,907, respectively			1,652,361				1,621,485
Subordinate security			1,843				1,820
Real estate owned			58,659				67,629
Deferred debt issuance costs			19,132				19,424
Deferred income tax asset, net			237				221
Other assets			3,927				4,404
Total assets		$	1,860,004			$	1,895,490
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and other accrued liabilities		$	32,112			$	33,640
Dividend payable			—				13,431
Mortgage-backed debt			1,260,500				1,281,555
Servicing advance facility			—				3,254
Accrued interest			7,910				8,122
Total liabilities			1,300,522				1,340,002
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value per share:
Authorized - 10,000,000 shares
Issued and outstanding - 0 shares at March 31, 2011 and December 31, 2010, respectively			—				—
Common stock, $0.01 par value per share:
Authorized - 90,000,000 shares
Issued and outstanding - 25,801,754 and 25,785,693 shares at March 31, 2011 and December 31, 2010, respectively			258				258
Additional paid-in capital			127,777				127,143
Retained earnings			430,326				426,836
Accumulated other comprehensive income			1,121				1,251
Total stockholders’ equity			559,482				555,488
Total liabilities and stockholders’ equity		$	1,860,004			$	1,895,490

     The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, or securitization trusts, which are included in the Consolidated Balance Sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated securitization trusts. The liabilities in the table below include third-party liabilities of the consolidated securitization trusts only, and for which, creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.

		March 31,				December 31,
		2011				2010
ASSETS OF THE CONSOLIDATED SECURITIZATION TRUSTS THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF THE CONSOLIDATED SECURITIZATION TRUSTS:
Restricted cash and cash equivalents		$	43,149			$	42,859
Residential loans, net			1,503,247				1,527,830
Real estate owned			33,569				38,234
Deferred debt issuance costs			19,132				19,424
Total assets		$	1,599,097			$	1,628,347
LIABILITIES OF THE CONSOLIDATED SECURITIZATION TRUSTS FOR WHICH CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY:
Accounts payable and other accrued liabilities		$	458			$	471
Mortgage-backed debt			1,260,500				1,281,555
Accrued interest			7,910				8,122
Total liabilities and stockholders’ equity		$	1,268,868			$	1,290,148

The accompanying notes are an integral part of the consolidated financial statements.

WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES

(Unaudited)
(in thousands, except share and per share data)

		For the Three Months Ended
		March 31,
		2011				2010
Net interest income:
Interest income		$	41,355			$	41,628
Less: Interest expense			20,392				21,003
Total net interest income			20,963				20,625
Less: Provision for loan losses			625				1,455
Total net interest income after provision for loan losses			20,338				19,170
Non-interest income:
Premium revenue			2,032				2,691
Servicing revenue and fees			2,937				—
Other income, net			699				760
Total non-interest income			5,668				3,451
Non-interest expenses:
Claims expense			877				912
Salaries and benefits			9,139				6,981
Legal and professional			4,031				968
Occupancy			450				345
Technology and communication			988				728
Depreciation and amortization			180				91
General and administrative			3,891				2,618
Real estate owned expenses, net			2,817				1,735
Total non-interest expenses			22,373				14,378
Income before income taxes			3,633				8,243
Income tax expense			143				131
Net income		$	3,490			$	8,112
Basic earnings per common and common equivalent share		$	0.13			$	0.30
Diluted earnings per common and common equivalent share		$	0.13			$	0.30
Total dividends declared per common and common equivalent share		$	—			$	—
Weighted average common and common equivalent shares outstanding — basic			26,596,187				26,343,279
Weighted average common and common equivalent shares outstanding — diluted			26,730,792				26,403,281

The accompanying notes are an integral part of the consolidated financial statements.

WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES

(Unaudited)
(in thousands, except share data)

																										Accumulated
						Member Unit/ Common								Additional												Other
						Stock								Paid-In				Comprehensive				Retained				Comprehensive
		Total				Shares				Amount				Capital				Income				Earnings				Income
Balance at December 31, 2010		$	555,488				25,785,693			$	258			$	127,143							$	426,836			$	1,251
Comprehensive income:
Net income			3,490															$	3,490				3,490
Other comprehensive income (loss), net of tax:
Change in postretirement (loss) plans, net of $14 tax effect			(108	)															(108	)							(108	)
Net unrealized gain on subordinate security, net of $0 tax effect			23																23								23
Net amortization of realized gain on closed hedges, net of $0 tax effect			(45	)															(45	)							(45	)
Comprehensive income																		$	3,360
Share-based compensation			557												557
Shares issued upon exercise of stock options and vesting of RSUs			77				16,061				—				77
Balance at March 31, 2011		$	559,482				25,801,754			$	258			$	127,777							$	430,326			$	1,121

The accompanying notes are an integral part of the consolidated financial statements.

WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES

(Unaudited)
(in thousands)

		For the Three Months
		Ended March 31,
		2011				2010
Operating activities:
Net income		$	3,490			$	8,112
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1				1,327
Amortization of residential loan discount to interest income			(3,363	)			(3,235	)
Depreciation and amortization			180				91
Change in contingent earn-out payment liability			(338	)			—
(Gains) losses on real estate owned, net			629				(433	)
Benefit from deferred income taxes			(3	)			(5	)
Amortization of deferred debt issuance costs to interest expense			311				259
Share-based compensation			557				1,172
Other			(184	)			(124	)
Decrease in assets:
Receivables			1,993				1,108
Servicing advances and receivables, net			1,444				—
Other			299				805
Decrease in liabilities:
Accounts payable and other accrued liabilities			(1,215	)			(2,623	)
Accrued interest			(212	)			(200	)
Cash flows provided by operating activities			3,589				6,254
Investing activities:
Purchases of residential loans			(44,794	)			—
Principal payments received on residential loans			23,497				24,736
Cash proceeds from sales of real estate owned, net			756				1,190
Additions to property and equipment, net			(2	)			(8	)
(Increase) decrease in restricted cash and cash equivalents			(1,369	)			1,429
Cash flows (used in) provided by investing activities			(21,912	)			27,347
Financing activities:
Payments on mortgage-backed debt			(19,693	)			(23,085	)
Mortgage-backed debt extinguishment			(1,338	)			—
Servicing advance facility, net			(3,254	)			—
Shares issued upon exercise of stock options and vesting of RSUs			77				12
Dividends and dividend equivalents paid			(13,431	)			(13,248	)
Repurchase and cancellation of common stock			—				(264	)
Cash flows used in financing activities			(37,639	)			(36,585	)
Net decrease in cash and cash equivalents			(55,962	)			(2,984	)
Cash and cash equivalents at the beginning of the period			114,352				99,286
Cash and cash equivalents at the end of the period		$	58,390			$	96,302
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Real estate owned acquired through foreclosure		$	13,534			$	20,009
Residential loans originated to finance the sale of real estate owned		$	21,068			$	20,608

The accompanying notes are an integral part of the consolidated financial statements.

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 originates, purchases, and provides property insurance for residential loans. The Company also provides ancillary mortgage advisory services. At March 31, 2011, the Company had five 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, Walter Investment Reinsurance Company, Ltd., or WIRC, and Marix Servicing LLC, or Marix.

     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. The Company has continued these servicing activities since spinning off from Walter Energy in 2009. In 2010, the Company began acquiring pools of residential loans. 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 March 31, 2011, the Company serviced approximately 34,000 individual residential loans for its owned portfolio and approximately 6,100 for other investors.

     Throughout this Quarterly Report on Form 10-Q, references to “residential loans” refer to residential mortgage loans and residential retail installment agreements and references to “borrowers” refer to borrowers under our residential mortgage loans and installment obligors under our residential retail installment agreements.

The Acquisition of Marix Servicing, LLC

     On August 25, 2010, the Company entered into a definitive agreement with Marathon Asset Management, L.P., or Marathon, and an individual seller to purchase 100% of the outstanding ownership interests of Marix. The acquisition was effective as of November 1, 2010. 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 month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. 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, 2010.

     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.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

     In January 2010, the FASB issued an accounting standards update to require new disclosures for fair value measurements and to provide clarification for existing disclosure requirements of which certain disclosure provisions were deferred to fiscal periods beginning after December 15, 2010, and interim periods within those fiscal years. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information

about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). The adoption of this guidance on January 1, 2011, did not have a significant impact on the Company’s disclosures.

Recently Issued

     In December 2010, the FASB issued an accounting standard update focused on the disclosure of supplementary pro-forma information in business combinations. The purpose of the update was to eliminate diversity in practice surrounding the interpretation of select revenue and expense pro-forma disclosures. The update provides guidance as to the acquisition date that should be selected when preparing the pro-forma disclosures; in the event that comparative financial statements are presented, the acquisition date assumed for the pro-forma disclosure shall be the first day of the preceding comparative year. The adoption of this standard was effective January 1, 2011, and will be applied in the quarter that the proposed acquisition of GTCS Holdings, LLC is consummated.

     In January 2011, the FASB issued an accounting standard that related to the disclosures of troubled debt restructurings. The amendments in this standard deferred the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completes their project clarifying the guidance for determining what constitutes a troubled debt restructuring. As the provisions of this standard only defer the effective date of disclosure requirements related to troubled debt restructurings, the adoption of this standard will have no impact on the Company’s disclosures.

     In April 2011, the FASB issued an accounting standard to provide additional guidance related to troubled debt restructuring. The standard provides guidance in determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibits creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in this standard also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings. The provisions of this guidance are effective for the Company’s reporting period ending September 30, 2011. The adoption of this standard is not expected to have a material impact 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. The Company reclassified certain trust expenses from interest expense to general and administrative expenses on the consolidated statements of income. Additionally, the Company reclassified certain legal and professional expenses out of general and administrative expenses.

3. Acquisitions

     GTCS Holdings, LLC

     On March 28, 2011, the Company executed a Membership Interest Purchase Agreement to acquire GTCS Holdings LLC, or Green Tree, in a transaction valued at $1.065 billion. Green Tree, based in St. Paul, Minnesota, is a leading independent, fee-based business services company which provides high-touch, third-party servicing of credit-sensitive consumer loans. The Company will issue approximately 1.8 million shares of common stock to the seller; assume approximately $18 million of existing Green Tree debt, and issue approximately $765 million of new debt which, together with cash, will be used to acquire the equity of Green Tree, repay certain existing Green Tree corporate indebtedness, and pay fees and expenses of the transaction. In addition, the Company will have access to a $45 million revolving line of credit. The transaction is subject to receipt of government approvals, third-party consents and the satisfaction of other customary closing conditions. The Company expects to complete the transaction in the third quarter of 2011.

     Marix Servicing, LLC

     On November 1, 2010, the Company completed its acquisition of a 100% interest in Marix. 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.

     The purchase price for the acquisition was a cash payment due at closing of less than $0.1 million plus estimated contingent earn-out payments of $2.1 million. The earn-out payments are driven by net servicing revenue in Marix’s existing business in excess of a base of $3.8 million per quarter. The payments are due within 30 days after the end of each fiscal quarter through the three year period ended December 31, 2013. The estimated liability for future earn-out payments is recorded in accounts payable and other accrued liabilities. In accordance with the accounting guidance on business combinations, any future adjustments to the estimated earn-out liability will be recognized in the earnings of that period. Based upon the results of the first quarter earn-out payment calculation, there was no amount paid as of March 31, 2011 and the accrual for the contingent earn-out payment was adjusted to $1.8 million, resulting in $338 thousand being recorded in income during the first quarter of 2011.

     The fair value of the estimated earn-out liability is based on the present value of the expected future payments to be made to the seller of Marix in accordance with the provisions outlined in the purchase agreement. In determining fair value, Marix’s future performance is estimated using financial projections developed by management. The expected future payments are estimated on the basis of the earn-out formula specified in the purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

4. Restricted Cash and Cash Equivalents

     Restricted cash and cash equivalents relate primarily to funds collected on residential loans owned by the Company’s various securitization trusts (see Note 8), which are available only to pay expenses of and principal and interest on indebtedness of the securitization trusts. Restricted cash equivalents at March 31, 2011 and December 31, 2010 include short-term deposits in FDIC-insured accounts and compensating balances. Restricted cash equivalents also include $5.9 million at March 31, 2011 and December 31, 2010 held in an insurance trust account. As part of the Marix acquisition, the Company is required to maintain cash investments in support of letters of credit issued by third party banks in connection with certain Marix servicing and lease contracts in the amount of $0.8 million at March 31, 2011 and December 31, 2010.

5. Custodial Accounts

     In connection with its servicing activities, the Company has a fiduciary responsibility for servicing accounts related to borrower escrow funds and custodial funds due to investors, aggregating approximately $24.4 million and $24.0 million as of March 31, 2011 and December 31, 2010, respectively. These funds are maintained in segregated bank accounts, which do not represent assets and liabilities of the Company, and accordingly, are not reflected in the accompanying consolidated balance sheets.

6. 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:

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 March 31, 2011.

     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):

		Quoted Prices in
		Active Markets								Significant
		for Identical				Significant Other				Unobservable
		Assets				Observable Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)			Total
March 31, 2011		$	—			$	—			$	1,843			$	1,843
December 31, 2010		$	—			$	—			$	1,820			$	1,820

     The subordinate security 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 18.7 years. The subordinate security has an overcollateralization level of 10.6% 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 at March 31, 2011 include the following:

	•		Yield: 18.5%
	•		Probability of default: 2.3%
	•		Loss severity: 68.3%
	•		Prepayment: 3.5%

     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 months ended March 31, 2011 and December 31, 2010 (in thousands):

		As of and for the				As of and for the
		Three Months Ended				Year Ended
		March 31, 2011				December 31, 2010
Balance at beginning of period		$	1,820			$	1,801
Total gains (losses):
Included in net income			—				—
Included in other comprehensive income			23				19
Balance at end of period		$	1,843			$	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 REO 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 real estate owned expenses, net in the consolidated statements of income.

     Carrying values, and the corresponding fair value adjustments during the period, for 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:
March 31, 2011		$	58,659			$	—			$	—			$	58,659			$	(1,093	)
March 31, 2010		$	61,951			$	—			$	—			$	61,951			$	(657	)

     These REO properties are generally located in rural areas and are primarily concentrated in Texas, Mississippi, Alabama, Florida, South Carolina, Louisiana and Georgia. The REO properties have a weighted-average holding period of 12 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 March 31, 2011 and 2010 was 10.0% and 19.2%, respectively.

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 March 31, 2011 and December 31, 2010, respectively (in thousands):

		March 31, 2011								December 31, 2010
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial assets:
Cash and cash equivalents		$	58,390			$	58,390			$	114,352			$	114,352
Restricted cash and cash equivalents			53,658				53,658				52,289				52,289
Receivables, net			2,018				2,018				2,643				2,643
Servicing advances and receivables, net			9,779				9,779				11,223				11,223
Residential loans, net			1,652,361				1,584,000				1,621,485				1,566,000
Subordinate security			1,843				1,843				1,820				1,820
Real estate owned			58,659				58,659				67,629				67,629
Financial liabilities:
Accounts payable and other accrued liabilities			32,112				32,112				33,640				33,640
Dividend payable			—				—				13,431				13,431
Mortgage-backed debt, net of deferred debt issuance costs			1,241,368				1,205,000				1,262,131				1,235,000
Servicing advance facility			—				—				3,254				3,254
Accrued interest			7,910				7,910				8,122				8,122

     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 and other accrued liabilities, dividends payable, and accrued interest — The estimated fair value of these financial instruments approximates their carrying value due to their high liquidity or short-term nature.

     Servicing advances and receivables — The estimated fair value of these advances approximate the carrying value due to the advances having no stated maturity, are non-interest bearing and are generally realized within a short period of time.

     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.

     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.

     Real estate owned — Real estate owned is recorded at the lower of its carrying amount or estimated fair value less estimated costs to sell. The estimates utilize management’s assumptions, which are based on historical resale recovery rates and current market conditions.

     Mortgage-backed debt, net of deferred debt issuance costs — The fair value of mortgage-backed debt 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.

     Servicing advance facility — The fair value of the servicing advance facility approximates the carrying value due to the short-term nature of the facility.

7. Servicing Advances and Receivables, net

     Servicing advances represent payments made on behalf of borrowers or on foreclosed properties in the owned and serviced for others portfolios. The Company began servicing for other investors as a result of the acquisition of Marix in November 2010. The following table presents servicing advances and receivables, net (in thousands):

		March 31, 2011				December 31, 2010
Principal and interest		$	3,372			$	3,285
Taxes and insurance			14,832				17,128
Other servicing advances			6,244				4,183
Subservicing fees receivable			690				783
Servicing advances and receivables			25,138				25,379
Less: Allowance for uncollectible servicing advances			(15,359	)			(14,156	)
Servicing advances and receivables, net		$	9,779			$	11,223

As of December 31, 2010, there were advances of $4.5 million pledged as collateral. The facility was terminated and repaid on March 31, 2011.

8. Residential Loans, net

     Residential loans are held for investment and consist of unencumbered residential loans and residential loans held in securitization trusts. Residential loans held in securitization trusts consist of residential loans 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 for transfers and servicing. The Company has determined that it is the primary beneficiary of the securitization trusts because (1) as the servicer the Company has the right to direct the activities that most significantly impact the economic performance of the Trusts through the Company’s ability to manage the delinquent assets of the Trusts and (2) as holder of all or a portion of the residual securities issued by the Trusts, the Company has the obligation to absorb losses of the Trusts, to the extent of its investment, and the right to receive benefits from the Trusts both of which could potentially be significant. Specifically, the Company, as servicer to the ten trusts owned by Walter Investment or Mid-State Capital, LLC or Mid-State, a wholly-owned subsidiary of Walter Investment, subject to applicable contractual provisions, has discretion, consistent with prudent mortgage servicing practices, to determine whether to sell or work out any loans securitized through the securitization trusts that become troubled. 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 Company’s only continued involvement with the residential loans held in securitization trusts is retaining all of the beneficial 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 assets of the securitization trusts are pledged as collateral for the mortgage-backed debt, and are not available to satisfy claims of general creditors of the Company. The mortgage-backed debt issued by the securitization trusts is to be satisfied solely from the proceeds of the residential loans and other collateral held in securitization trusts, are not cross-collateralized and are non-recourse to the Company (see Note 11). The Company records interest income on residential loans held in securitization trusts and interest expense on mortgage-backed debt issued in the securitizations over the life of the securitizations.

Residential loans, net are summarized in the table below (in thousands):

		March 31, 2011				December 31, 2010
Residential loans, principal balance		$	1,849,274			$	1,803,758
Less: Yield adjustment, net(1)			(181,993	)			(166,366	)
Less: Allowance for loan losses			(14,920	)			(15,907	)
Residential loans, net(2)		$	1,652,361			$	1,621,485

Residential Loan Pool Acquisitions

     The Company acquired residential loans to be held for investment in the amount of $44.8 million adding $62.8 million of unpaid principal to the residential loan portfolio in the first quarter of 2011. There were no acquisitions during the first quarter of 2010. These acquisitions were financed with proceeds from the Company’s private placement securitization that closed on December 1, 2010, or 2010 securitization. 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.

Purchased Credit-Impaired Residential Loans — At acquisition, the fair value of residential loans acquired outside of a business combination is the purchase price of the residential loans, which is generally based on the outstanding principal balance, probability of default and estimated loss given default.

     During the three months ended March 31, 2011, the Company acquired certain residential loans it deemed to be credit-impaired as detailed in the table below (in thousands). There were no credit-impaired residential loans acquired during the three months ended March 31, 2010.

Contractually required cash flows for acquired loans at acquisition		$	46,779
Nonaccretable difference			(22,707	)
Expected cash flows for acquired loans at acquisition			24,072
Accretable yield			(7,431	)
Purchase price		$	16,641

The table below sets forth the accretable yield activity for purchased credit-impaired residential loans for the period ended March 31, 2011 (in thousands):

		Accretable Yield
Balance at beginning of period		$	4,174
Additions			7,431
Accretion			(87	)
Balance at end of period		$	11,518

The table below provides additional information about purchased credit-impaired residential loans:

		March 31, 2011				December 31, 2010
Outstanding balance (a)		$	72,823			$	26,277
Carrying amount			25,679				9,348

Disclosures About the Credit Quality of Residential Loans and the 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 Company has one portfolio segment and class that consist primarily of less-than prime, credit challenged residential loans. The risk characteristics of the portfolio segment and class relate to credit exposure. The method for monitoring and assessing the credit risk is the same throughout the portfolio. The allowance for loan losses on residential loans includes two components: (1) specifically identified residential loans that are evaluated individually for impairment and (2) all other residential loans that are considered a homogenous pool that are collectively evaluated for impairment.

     The Company reviews all residential loans for impairment and determines a residential loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect amounts due according to the original contractual terms of the loan agreement. Factors considered in assessing collectability include, but are not limited to, a borrower’s extended delinquency and the initiation of foreclosure proceedings. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company determines a specific impairment allowance generally based on the difference between the carrying value of the residential loan and the estimated fair value of the collateral.

     The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses, for the residential loans evaluated collectively is based on, but not limited to, delinquency levels and trends, default frequency, prior loan loss severity experience, and management’s judgment and assumptions regarding various matters, including the composition of the residential loan portfolio, known and inherent risks in the 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, current economic and market conditions within the applicable geographic areas surrounding the underlying real estate, 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. Generally, as residential loans age, the credit exposure is reduced, resulting in decreasing provisions.

     While we consider the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary if circumstances differ substantially from the assumptions used by management in determining the allowance for loan losses.

The following table summarizes the activity in the allowance for loan losses on residential loans, net (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Balance, December 31		$	15,907			$	17,661
Provision charged to income			625				1,455
Less: Transfers to REO			(922	)			(1,381	)
Less: Charge-offs, net of recoveries			(690	)			(411	)
Balance, March 31		$	14,920			$	17,324

The following table summarizes the ending balance of the allowance for loan losses and the residential loan balance by basis of impairment method (in thousands):

		March 31,				December 31,
		2011				2010
Allowance for loan losses:
Loans individually evaluated for loss potential		$	4,096			$	3,599
Loans collectively evaluated for loss potential			10,824				12,308
Loans acquired with deteriorated credit quality			—				—
Total		$	14,920			$	15,907
Recorded investment in Residential Loans:
Loans individually evaluated for loss potential		$	45,231			$	44,737
Loans collectively evaluated for loss potential			1,596,371				1,583,315
Loans acquired with deteriorated credit quality			25,679				9,340
Total		$	1,667,281			$	1,637,392

Impaired Residential Loans

The following table presents loans individually evaluated for impairment which consist primarily of residential loans in the process of foreclosure and purchased credit-impaired residential loans (in thousands):

						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
Amortized cost:
With no related allowance recorded:
March 31, 2011		$	6,855			$	8,177			$	—			$	9,394			$	3
December 31, 2010		$	11,932			$	13,911			$	—			$	10,164			$	13
With an allowance recorded:
March 31, 2011		$	38,376			$	41,131			$	4,096			$	35,591			$	16
December 31, 2010		$	32,805			$	35,799			$	3599			$	39,808			$	106
Purchased credit-impaired:
With no related allowance recorded:
March 31, 2011		$	25,679			$	39,667			$	—			$	15,457			$	205
December 31, 2010		$	9,340			$	14,329			$	—			$	4,670			$	40
With an allowance recorded:
March 31, 2011		$	—			$	—			$	—			$	—			$	—
December 31, 2010		$	—			$	—			$	—			$	—			$	—

Aging of Past Due Residential Loans

     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. Interest income on non-accrual loans, if received, is recorded using the cash method of accounting. Residential loans are removed from non-accrual status when the amount financed and the associated interest are no longer over 90 days past due. If a non-accrual loan is returned to accruing status the accrued interest, at the date the residential loan is placed on non-accrual status, and forgone interest during the non-accrual period, are recorded as interest income as of the date the loan no longer meets the non-accrual criteria. The past due or delinquency status of residential loans 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. Loan balances are charged off when it becomes evident that balances are not fully collectible. The following table presents the aging of the residential loan portfolio (in thousands).

		30-59				60-89				Greater												Total				Non-				Recorded
		Days Past				Days Past				Than 90				Total								Residential				Accrual				Investment >
		Due				Due				Days				Past Due				Current				Loans				Loans				90 Days and Accruing
Amortized Cost:
March 31, 2011		$	19,825			$	8,556			$	51,456			$	79,837			$	1,587,444			$	1,667,281			$	51,456			$	—
December 31, 2010		$	24,262			$	8,274			$	43,355			$	75,891			$	1,561,501			$	1,637,392			$	43,355			$	—

Credit Risk Profile Based on Delinquencies

     Factors that are important to managing overall credit quality and minimizing loan losses are sound loan underwriting, monitoring of existing loans, early identification of problem loans, timely resolution of problems, an appropriate allowance for loan losses, and sound nonaccrual and charge-off policies. The Company primarily utilizes delinquency status to monitor the credit quality of the portfolio. Monitoring of the residential loan increases when the loan is delinquent. The Company considers all loans 30 or more days past due to be non-performing. The classification of delinquencies, and thus the non-performing calculation, 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.

The following table presents residential loans by credit quality indicator (in thousands):

		March 31, 2011				December 31, 2010
Performing		$	1,587,444			$	1,561,501
Non-performing			79,837				75,891
Total		$	1,667,281			$	1,637,392

		Number of				UPB				Percentage of				Number of				UPB				Percentage of
		Loans				March 31,				Total				Loans				December 31,				Total
		March 31, 2011				2011				March 31, 2011				December 31, 2010				2010				December 31, 2010
California			836			$	349,906				23.2	%			700			$	291,192				21.6	%
Florida			852				210,813				14.0				882				216,300				16.0
New York			458				180,461				12.0				422				163,466				12.1
New Jersey			260				79,309				5.3				232				71,875				5.3
Other < 5%			3,684				685,241				45.5				3,303				605,496				45.0
			6,090			$	1,505,730				100.0	%			5,539			$	1,348,329				100.0	%

10. Subordinate Security

     The Company’s subordinate security totaled $1.8 million at March 31, 2011 and December 31, 2010. The subordinate security was acquired as part of the Merger with Hanover and is summarized as follows (in thousands):

     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.

		March 31, 2011				December 31, 2010
Principal balance		$	3,812			$	3,812
Purchase price and other adjustments			(2,200	)			(2,200	)
Amortized cost		$	1,612			$	1,612
Unrealized gain			231				208
Carrying value (fair value)		$	1,843			$	1,820

11. Mortgage-Backed Debt and Related Collateral

Mortgage-Backed Debt

     The securitization trusts beneficially owned by 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 two private offering. Hanover Capital Grantor Trust, acquired from Hanover as part of the Merger, is a public debt offering.

     These eleven trusts have an aggregate of $1.3 billion of outstanding debt, collateralized by $1.7 billion of assets, including residential loans, REO and restricted cash and cash equivalents. 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 ten securitization trusts owned by the Company and Mid-State Capital.

     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, allocate any excess overcollateralization to paying down 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. Since January 2008, Mid-State Trust 2006-1 has exceeded certain triggers and has not provided any excess cash flow to the Company. The delinquency rate for the trigger calculations, which includes REO, was at 11.35% compared to a trigger level of

8.00%. The delinquency trigger for Mid-State Trust 2005-1 and Trust X were exceeded in November 2009 and October 2006, respectively, and cured in 2010. With the exception of Trust 2006-1, which exceeded its 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 result in a trigger breach causing 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 according to specific terms of the respective indenture agreements.

Collateral for Mortgage-Backed Debt

     The following table summarizes the collateral for the mortgage-backed debt as of March 31, 2011 and December 31, 2010, respectively (in thousands):

		March 31, 2011				December 31, 2010
Residential loans of securitization trusts, principal balance		$	1,663,807			$	1,682,138
Real estate owned			33,569				38,234
Restricted cash and cash equivalents			43,149				42,859
Total mortgage-backed debt collateral		$	1,740,525			$	1,763,231

12. Servicing Revenue and Fees

The Company’s third party servicing operations began as a result of the acquisition of Marix in November 2010. The following table presents servicing fees (in thousands):

		March 31, 2011
Servicing fees		$	1,026
Incentive fees			880
Other servicing fees			598
Other ancillary fees			433
Servicing revenues and fees		$	2,937

13. Share Based Compensation

     The Company’s share-based compensation expense has been reflected in the consolidated statements of income in salaries and benefits expense. There were no options or non-vested share-based awards granted during the three months ended March 31, 2011.

14. Credit Agreements

     On April 20, 2009, the Company entered into a syndicated credit agreement, a revolving credit agreement and security agreement, and a support letter of credit agreement. As of March 31, 2011, no funds have been drawn under any of the credit agreements and the Company is in compliance with all covenants. The credit agreements were cancelled on or before April 6, 2011.

15. Servicing Advance Facility

     As of November 11, 2008, Marix entered into a Servicing Advance Financing Facility Agreement, or the Servicing Facility, between Marathon Distressed Subprime Fund L.P., as a lender, an affiliate of Marathon, and Marix as a borrower. The note rate on the Servicing Facility is LIBOR plus 6.0%. The facility was originally set to terminate on September 30, 2010, but was extended as part of the purchase agreement for six months to March 31, 2011. The maximum borrowing capacity on the Servicing Facility was $8.0 million.

     On September 9, 2009, Marix entered into a Servicing Advance Financing Facility Agreement, or Second Facility, between Marathon Structured Finance Fund L.P. as an agent and a lender, an affiliate of Marathon, and Marix as a borrower. The rate on this agreement was converted from one-month LIBOR plus 6.0% to one-month LIBOR plus 3.5% on March 31, 2010. The facility was set to terminate on March 31, 2010, but was extended for twelve months to March 31, 2011. The maximum borrowing capacity on the Second Facility was $2.5 million.

     The collateral for this servicing advance facility represents servicing advances on mortgage loans serviced by Marix for investors managed by or otherwise affiliated with Marathon, and such advances include principal and interest, taxes and insurance, and corporate advances. During the first quarter of 2011, the Company paid off the servicing advance facilities.

16. Comprehensive Income and Accumulated Other Comprehensive Income

     The components of accumulated other comprehensive income are as follows (in thousands):

		Excess of				Net
		Additional				Unrealized				Net
		Postretirement				Gain on				Amortization of
		Employee Benefits				Subordinate				Realized Gain on
		Liability				Security				Closed Hedges				Total
Balance at December 31, 2010		$	686			$	208			$	357			$	1,251
Pre-tax amount			(122	)			23				(45	)			(144	)
Tax benefit			14				—				—				14
Balance at March 31, 2011		$	578			$	231			$	312			$	1,121

17. 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.

     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):

		For the Quarter Ended March 31,
		2011				2010
Basic earnings per share:
Net income		$	3,490			$	8,112
Less: net income allocated to unvested participating securities			(36	)			(113	)
Net income available to common stockholders (numerator)			3,454				7,999
Weighted-average common shares			25,779				25,657
Add: vested participating securities			817				686
Total weighted-average common shares outstanding (denominator)			26,596				26,343
Basic earnings per share		$	0.13			$	0.30
Diluted earnings per share:
Net income		$	3,490			$	8,112
Less: net income allocated to unvested participating securities			(35	)			(113	)
Net income available to common stockholders (numerator)			3,455				7,999
Weighted-average common shares			25,779				25,657
Add: Potentially dilutive stock options and vested participating securities			952				746
Diluted weighted-average common shares outstanding (denominator)			26,731				26,403
Diluted earnings per share		$	0.13			$	0.30

     The calculation of diluted earnings per share for the three months ended March 31, 2011 and 2010 does not include less than 0.1 million and 0.2 million shares, respectively, because their effect would have been anti-dilutive.

18. 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 (a) the Board of Directors’ determination that it remains in the best interests of the Company to continue to be taxed as a REIT, and (b) 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. We expect that upon consummation of the Green Tree acquisition we will no longer qualify as a REIT.

     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.

     If the Company elects or otherwise fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income and applicable state and local tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it fails to qualify as a REIT. Even if the Company qualifies for taxation as a REIT, it may be subject to some U.S. federal, state and local taxes on its income or property.

19. Income Taxes

     The Company recorded income tax expense of $0.1 million for each of the three months periods ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011 and 2010, an estimated tax rate of 4.0% and 1.6%, respectively, was used to derive income tax expense of $0.1 million for each period, calculated on income from operations, before taxes, of $3.6 million and $8.2 million, respectively. The increase in estimated tax rate was due to our taxable TRSs net income representing a greater portion of the net income than in the prior year first quarter.

     The Company recognizes tax benefits in accordance with the 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 March 31, 2011 and December 31, 2010, the total gross amount of unrecognized tax benefits was $7.7 million.

20. Transactions with Walter Energy

     Following the spin-off, the Company and Walter Energy have operated independently, and neither has any ownership interest in the other. In order to allocate responsibility for overlapping or related aspects of their businesses, the Company and Walter Energy entered into certain agreements pursuant to which the Company and Walter Energy assume responsibility for various aspects of their businesses and agree to indemnify one another against certain liabilities that may arise from their respective businesses, including liabilities relating to certain tax and litigation exposure.

21. 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 March 31, 2011, the unpaid principal balance of the 13 remaining mortgage securities was approximately $1.4 million.

Employment Agreements

     At March 31, 2011, the Company had employment agreements with its senior officers, with varying terms that provide for, among other things, base salary, bonus, and change-in-control provisions that are subject to the occurrence of certain triggering events.

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-K, 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.

     In addition, Walter Energy’s most recent public filing disclosed that the IRS completed an audit of Walter Energy’s federal income tax returns for the years ended May 31, 2000 through December 31, 2005. WIM predecessor companies were included within Walter Energy during these years. The IRS issued 30-Day Letters to Walter Energy proposing changes for these tax years which Walter Energy has protested. Walter Energy’s filing states that the disputed issues in this audit period are similar to the issues remaining in the above-referenced dispute and therefore Walter Energy believes that its financial exposure for these years is limited to interest and possible penalties; however, we have no knowledge as to the extent of the claim. In addition, Walter Energy reports that the IRS has

begun an audit of Walter Energy’s tax returns filed for 2006 through 2008, however, because the examination is in its early stages Walter Energy cannot estimate the amount of any resulting tax deficiency, if any.

     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 the time of filing, 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.

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, 2010, filed in our Annual Report on Form 10-K on March 8, 2011. 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 under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 8, 2011 and detailed from time to time 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 November 2010 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 and the effects of competition from a variety of local, regional, national and other mortgage servicers.

     On November 2, 2010, the Company closed on a securities purchase agreement to acquire 100% of the ownership interests of Marix, a mortgage servicing business. See Note 3 for further information on this acquisition. Risks and uncertainties related to this acquisition include, but are not limited to, 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.

     On March 25, 2011, the Company entered into a Membership Interest Purchase Agreement to acquire 100% of the ownership interests in GTCS Holdings, LLC. See Note 3 for further information on this acquisition. The risks and uncertainties include, but are not limited to, the satisfactory completion of all conditions precedent to the closing of the proposed transaction in accordance with the terms and conditions of the purchase agreement, including the receipt of regulatory and customer approvals; the negotiation, execution and delivery of definitive financing agreements and the satisfaction of all conditions precedent that will be contained therein; the completion of asset sales contemplated by the purchase agreement; the obligation to pay a termination fee under the purchase agreement in certain circumstances if the closing does not occur; and anticipated growth of the specialty servicing sector. See Part II, Item IA, “Risk Factors”, for additional risks and uncertainties related to this acquisition.

     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. The Company originates, purchases, and provides property insurance for residential loans. The Company also provides ancillary mortgage advisory services. At March 31, 2011, the Company had five 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, Walter Investment Reinsurance Company, Ltd., or WIRC, and Marix Servicing LLC, or Marix.

Basis of Presentation

     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.

Acquisitions

     GTCS Holdings, LLC

     On March 28, 2011, we executed a Membership Interest Purchase Agreement to purchase GTCS Holdings LLC, or Green Tree, in a transaction valued at $1.065 billion. Green Tree, based in St. Paul, Minnesota, is a leading independent, fee-based business services company which provides high-touch, third-party servicing of credit-sensitive consumer loans. We will issue approximately 1.8 million shares of common stock to the seller; assume approximately $18 million of existing Green Tree debt, and issue approximately $765 million of new debt which, together with cash, will be used to acquire the equity of Green Tree, repay certain existing Green Tree corporate indebtedness, and pay fees and expenses of the transaction. In addition, we will have access to a $45 million revolving line of credit. The transaction is subject to receipt of government approvals, third-party consents and the satisfaction of other customary closing conditions. We expect to complete the transaction in the third quarter of 2011.

     Marix Servicing, LLC

     On August 25, 2010, we entered into a definitive agreement with Marathon Asset Management, L.P., or Marathon, and an individual seller to purchase 100% of the outstanding ownership interests of Marix. The acquisition was effective as of November 1, 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.

     The purchase price for the acquisition was a cash payment due at closing of less than $0.1 million plus contingent earn-out payments. The earn-out payments are driven by net servicing revenue in Marix’s existing business in excess of a base of $3.8 million per quarter. The payments are due within 30 days after the end of each fiscal quarter through the three year period ended December 31, 2013. The estimated liability for future earn-out payments is recorded in accounts payable and other accrued liabilities. In accordance with the accounting guidance on business combinations, any future adjustments to the estimated earn-out liability would be recognized in the earnings of that period. Based upon the results of the first quarter earn-out payment calculation there was no amount paid as of March 31, 2011 and the accrual for the contingent earn-out payment was adjusted to $1.8 million, resulting in $338 thousand being recorded in income during the first quarter of 2011.

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, 2010 included in our Annual Report on Form 10-K filed with the SEC on March 8, 2011. There have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

Results of Operations

     For the three months ended March 31, 2011 and 2010, we reported net income of $3.5 million and $8.1 million, respectively. The main components of the change in net income for the three months ended March 31, 2011 and 2010 are detailed in the following table (in thousands):

		For the Three Months Ended
		March 31,								Increase
		2011				2010				(Decrease)
Net interest income:
Interest income		$	41,355			$	41,628			$	(273	)
Less: Interest expense			20,392				21,003				(611	)
Total net interest income			20,963				20,625				338
Less: Provision for loan losses			625				1,455				(830	)
Total net interest income after provision for loan losses			20,338				19,170				1,168
Non-interest income:
Premium revenue			2,032				2,691				(659	)
Servicing revenue and fees			2,937				—				2,937
Other income, net			699				760				(61	)
Total non-interest income			5,668				3,451				2,217
Total non-interest expenses:
Total non-interest expenses			22,373				14,378				7,995
Income before income taxes			3,633				8,243				(4,610	)
Income tax expense			143				131				12
Net income		$	3,490			$	8,112			$	(4,622	)

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.

The following table summarizes the average balance, interest and weighted average yield on residential loan assets and mortgage-backed debt for the periods indicated (in thousands):

		For the Three Months Ended March 31,
		2011												2010
		Average								(3)				Average								(3)
		Balance				Interest				Yield				Balance				Interest				Yield
Assets
Residential loans		$	1,652,337			$	41,355				10.01	%		$	1,649,834			$	41,628				10.09	%
Liabilities
Mortgage-backed debt		$	1,271,028			$	20,392				6.42	%		$	1,255,917			$	21,003				6.69	%
Net interest spread (1)(3)						$	20,963				3.59	%						$	20,625				3.40	%
Net interest margin (2)(3)											5.07	%											5.00	%

Net Interest Spread

     Net interest spread of 3.59% for the three months ended March 31, 2011 increased as compared to 3.40% in the same period of 2010, due primarily to a decrease in interest expense and higher yields on the recently acquired residential loans. The decrease in interest expense is due to the declining balances on older trusts with higher interest rates. The average prepayment rate for the portfolio was 2.2% for the three months ended March 31, 2011, as compared to 2.3% in the same period of 2010.

Net Interest Margin

     Net interest margin increased for the three months ended March 31, 2011 as compared to the same period in 2010 primarily due to decreased interest expense due to the declining debt balances on older trusts with higher interest rates and the 2010 securitization at a weighted average interest cost of 4.56%.

Provision for Loan Losses

     The provision for loan losses decreased for the three months ended March 31, 2011, as compared to the same period in 2010. The decrease from the prior year period was primarily driven by improving economic trends, including lower unemployment rates, which supports assumptions for lower default rates.

Non-Interest Income

     The increase in non-interest income for the three months ended March 31, 2011, as compared to the same period in 2010, was primarily due to additional subservicing revenues and fees related to the Marix acquisition offset by lower premium revenues in the insurance business, lower collections on insurance advances and a decline in advisory revenues.

Non-Interest Expenses

     The increase in non-interest expenses for the three months ended March 31, 2011, as compared to the same period in 2010, was primarily a result of $4.0 million of higher servicing and overhead costs related to the Marix acquisition and $3.0 million of transaction costs related to the acquisition of Green Tree. These increases are offset by the prior year quarter including a severance charge of $0.7 million associated with certain senior management changes. Additionally, we recorded a $1.1 million adjustment for a decline in value on REO properties and had an increase of $0.5 million in tax and escrow advances.

Income Taxes

     The increase in income tax expense for the three months ended March 31, 2011, as compared to the same period in 2010 was due to taxable activities of our TRSs.

Additional Analysis of Residential Loan Portfolio

Allowance for Loan Losses

     The following tables show information about the allowance for loan losses for the periods presented (in thousands):

						Allowance
						as a % of
		Allowance for				Residential
		Loan Losses				Loans (1)
March 31, 2011		$	14,920				0.89	%
December 31, 2010		$	15,907				0.97	%

		Net Losses and				Net Losses and
		Charge-offs				Charge-offs as a %
		Deducted from the				of Average
		Allowance (3)				Residential Loans (2)
March 31, 2011		$	17,716	(4)			1.07	% (4)
December 31, 2010		$	14,799				0.90	%

     The following table summarizes activity in the allowance for loan losses in our residential loan portfolios, net for the three months ended March 31, 2011 and 2010 (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Balance, December 31		$	15,907			$	17,661
Provision charged to income			625				1,455
Less: Transfers to REO			(922	)			(1,381	)
Less: Charge-offs, net of recoveries			(690	)			(411	)
Balance, March 31		$	14,920			$	17,324

Delinquency Information

     The following table presents information about delinquencies in our residential loan portfolios:

		March 31, 2011				December 31, 2010
Total number of residential loans outstanding			33,971				33,801
Delinquencies as a percent of number of residential loans outstanding:
31-60 days			0.88	%			1.12	%
61-90 days			0.36	%			0.39	%
91 days or more			2.11	%			1.99	%
			3.35	%			3.50	%
Principal balance of residential loans outstanding (in thousands)		$	1,849,274			$	1,803,758
Delinquencies as a percent of amounts outstanding:
31-60 days			1.26	%			1.54	%
61-90 days			0.55	%			0.49	%
91 days or more			2.92	%			2.65	%
			4.73	%			4.68	%