Good morning. I'm Kelsey Duffey, Senior Vice President of Investor Relations at Walker & Dunlop, and I would like to welcome you to Walker & Dunlop's third quarter 2022 earnings conference call and webcast. Hosting the call today is Willy Walker, Walker & Dunlop Chairman and CEO. He is joined by Greg Florkowski, Executive Vice President and CFO. Today's webcast is being recorded, and a replay will be available via webcast on our investor relations section of our website. At this time, all participants have been placed in a listen-only mode, and the line will be open for your questions following the presentation. If you have dialed into the call and would like to ask a question at that time, please press star nine on your phone.
If you're accessing the webcast on your computer, please click the Raise Hand icon on the bottom menu bar of the webcast screen. This morning, we posted our earnings release and presentation to the investor relations section of our website. These slides serve as a reference point that Willy and Greg will touch on during the call. Please also note that we will reference the non-GAAP financial metrics, adjusted EBITDA, and adjusted diluted earnings per share during the course of this call. Please refer to the appendix of the earnings presentation for a reconciliation of these non-GAAP financial metrics. Investors are urged to carefully read the forward-looking statements language in our earnings release. Statements made on this call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements describe our current expectations, and actual results may differ materially. Walker & Dunlop is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, and we expressly disclaim any obligation to do so. More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC. I will now turn the call over to Willy.
Thank you, Kelsey, and good morning, everyone. WD delivered exceptional service to our clients during a volatile and challenging third quarter. $17 billion of total transaction volume was very strong and is thanks to our people, brand, and the use of technology in everything we do. I've been CEO of Walker & Dunlop for 15 years. I've seen a lot. The housing boom and bust, the great financial crisis, dramatic regulatory changes, new administrations, a pandemic, and I've watched this amazing company deal with adversity, adjust, and continue growing. WD shareholders should be confident in three things. Number one, our scaled lending partnerships with Fannie Mae, Freddie Mac, and HUD provide our clients with much needed countercyclical capital during times of market dislocation.
Number two, our business model, which includes consistent servicing and asset management fees, along with escrow income that expands as rates rise, has consistently outperformed in down markets. Number three, our disciplined credit culture on loans we originate as well as our own balance sheet will allow us to expand while others contract over the coming months and years. We have no greater insight than anyone else on how the markets will evolve over the coming quarters, but we are better positioned than any competitor firm in our industry to continue providing solutions to our clients, maintain our exceptional team, and continue investing towards our five-year plan, growth plan to Drive to '25. $17 billion of total transaction volume in Q3 generated total revenues of $316 million, down only 9% from Q3 of last year.
In this rising rate environment, every deal, whether a sale or a refinancing, is under pricing pressure. Spreads on our agency lending remain compressed as we work closely with Fannie Mae and Freddie Mac to make deals work for our clients. Good news, we closed a lot of financing in Q3. Bad news, we saw a steep decline in our non-cash mortgage servicing rights revenue and net income. This pricing pressure is solely due to interest rate increases, and it will abate the moment rates stabilize. To underscore this point, in Q3 of last year, the capital markets were flooded with competitors lending at tight spreads and low rates, and our average gain on sale margin was 165 basis points. This year, in a quarter when competitors withdrew, our average gain on sale margin was 123 basis points, down 25%.
That pricing compression is due to the 10-year treasury jumping over 100 basis points during the quarter and our need to adjust prices to meet our clients' needs. When the Fed stops dramatic rate increases at every meeting, spreads on our agency lending should normalize, and our average gain on sale margin will recover. Our scaled and enduring partnerships with Fannie Mae and Freddie Mac provided much-needed countercyclical capital to the multifamily market during the quarter. Year-to-date lending volume with the GSEs is $13 billion. As you can see on slide four, $9 billion of volume with Fannie Mae is 17% market share, keeping us on track to be Fannie's largest lending partner once again. Two additional comments on pricing deals to win.
First, we added $1.8 billion of loans to our servicing portfolio in Q3, and the average servicing fee increased from 24.6 basis points to 24.7 basis points, as payoffs had lower average servicing fees than the new loans we added. Second, we get paid for our risk via our servicing fees, so tighter servicing fees would hopefully correspond to lower risk. The weighted average loan-to-value on the risk-sharing loans we originated in Q3 was 57%, down from 61% last year. We feel extremely good about the loans, credit quality, and customer service we delivered in Q3. As soon as rates stabilize, our servicing fees and capitalized MSRs should revert to historic averages. Cash revenues and earnings continued to grow in Q3.
Adjusted EBITDA expanded to $75 million, up 4% year-over-year, while adjusted EPS, which strips out the impact of non-cash items, was up 5% to $1.55. These numbers are reflective of WD's terrific business model. As banks, debt funds, and CMBS lenders pulled out of the market in Q3, our capital markets group had a surprisingly strong quarter, with $6.6 billion of debt brokerage volume. Similarly, as multifamily sales volumes fell precipitously, off 17% according to RCA, our property sales team closed $5 billion of volume, down only 5% from last year. These numbers are truly exceptional in comparison to our competitors' published numbers for Q3, and show the ability of our bankers and brokers to deliver for our clients in challenging markets.
We expect to see softening in both of these executions in Q4, but feel very good about our team's ability to continue growing market share in 2023. All of our teams excelled for our clients in Q3. According to Bain & Company, the most relevant question to determine customer service is, would you recommend this product or service to a friend? The answer to that question on a scale of -100 to +100 is your Net Promoter Score. The average Net Promoter Score in the financial services industry is 44. Walker & Dunlop's Net Promoter Score is 91, over 2x the industry average. Beyond providing exceptional customer service, we continue to use technology to identify and attract new clients to Walker & Dunlop.
In Q3, 69% of our refinancings were new loans to Walker & Dunlop, and 30% of our total transaction volume was with new clients. Rising rates and economic headwinds may curtail business volumes in the short term, but Walker & Dunlop's service level and use of technology position us exceptionally well to continue to outperform going forward. We built or acquired complementary businesses in affordable housing, research, small balance lending, and appraisals over the past three years. Zelman & Associates and Alliant Capital, our two major 2021 acquisitions, contributed near $30 million in revenues in Q3 and are both in budget for 2022. Hindsight is always 20/20 vision, but it speaks volumes about WD's M&A strategy that our two largest recent acquisitions were not pro-cyclical, such as expanding our bank or broking operations, but rather enduring consistent business models that perform in good and bad markets.
GeoPhy, the largest technology investment we've ever made, is focused on accelerating the growth of our small balance lending and appraisal businesses. All of these investments get us very excited about WD's future growth. Our servicing portfolio grew to $121 billion, up 6% over Q3 2021, and generated $76 million of income on the quarter. 89% of the servicing fees in our portfolio are prepayment protected, and as Greg will explain in a moment, the escrows inside that portfolio earn more and more as rates rise. When the great financial crisis in 2008 and pandemic in 2020 hit, our first concern was credit. Would WD suffer significant loan losses? The answer was no, due to WD's credit culture and the strength of multifamily as an asset class.
Today, as we look at our portfolio and the fundamentals of multifamily, the answer is no once again. We have an exceedingly clean book, thanks to our team and credit discipline. We have no credit exposure to office, retail, or other commercial real estate asset classes. We have no credit risk on construction loans. We did not make nor carry credit risk on any CLO loans. The weighted average debt service coverage ratio in our at-risk servicing portfolio currently sits at 2.32 times. Let me put that into context. Our minimum debt service coverage ratio on new loans is 1.25 times, and the overall portfolio currently sits at 2.32 times. Credit is not a concern.
I will now turn the call over to Greg to discuss our Q3 results and financial outlook in more detail, and then I'll come back with thoughts about 2023 and beyond. Greg?
Thank you, Willy, and good morning, everyone. Our $17 billion of transaction volumes this quarter generated total revenues of $316 million, down 9% from the third quarter of last year, and diluted earnings per share of $1.40, down 37% compared to last year. As a result of the spread in pricing dynamics Willy just described, our non-cash MSR revenues dropped 38% despite nearly flat Fannie Mae volumes. The decrease in MSR revenues caused our operating margins and return on equity to fall below our target ranges at 17% and 11%, respectively. Our value proposition includes navigating challenging markets on behalf of our clients and closing the deal that works for them. This quarter, we were able to deliver for our clients when they needed us most.
Importantly, our agency lending grows our servicing portfolio and increases our long-term stable cash revenues, which occurred yet again this quarter as the servicing portfolio increased to $121 billion. As a result, our cash revenues expanded and our adjusted EBITDA grew 4% to $75 million and drove 5% growth in adjusted earnings per share to $1.55 this quarter. A further benefit of our servicing portfolio is the $3 billion of escrow earnings we hold. Sharp increases in short-term rates disrupted transaction volumes but dramatically increased our escrow earnings. This quarter, escrow earnings increased nearly 800% to $18 million, compared to only $2 million in the year ago quarter.
Another contributor to growth in adjusted EBITDA and adjusted EPS is the acquisitions of Alliant and Zelman. On a combined basis, these businesses generated nearly $30 million of primarily cash revenues this quarter, highlighting the benefit of the investments we made in the stable subscription revenues of Zelman and the assets under management at Alliant. In the first quarter of 2022, we introduced segment financial results to provide more transparency into our operating structure and overall financial performance. As shown on slide seven, our capital markets segment, which drives transaction volumes, generated revenues of $183 million this quarter, down 27% compared to last year. Expenses for the segment fell 8%, largely due to lower variable commissions from lower transaction-related revenues, which helped produce break-even adjusted EBITDA for the segment this quarter.
A little more than 60% of compensation costs are variable for this segment, mitigating expected declines in transaction-related revenues for the rest of this year. We are confident our team will continue to deliver strong GSE and HUD volumes due to the counter-cyclical nature of the capital, but recognize our debt brokerage and property sales teams will face pressure as liquidity from banks and other executions pull back. Our long-term outlook for our capital markets team remains unchanged despite the headwinds, and we will continue making investments to sustain our long-term growth objectives for this segment. Our SAM segment includes the performance of our servicing activities and asset management businesses. As shown on slide eight, revenues for our SAM segment grew 40% this quarter, or $39 million, due to increased servicing fees, escrow earnings, and revenues from Alliant.
The growth in revenues generated 69% growth in operating income and 30% growth in adjusted EBITDA. The revenues within our SAM segment are resilient and growing. Our loan servicing portfolio is generating over $300 million of annual recurring revenues, and the prepayment protected duration of the portfolio is nearly nine years. Our long-term strategy to grow our assets under management is paying dividends as our $17 billion of assets under management earned $83 million of revenues year-to-date. Lastly, short-term rates continue to increase and escrow and other interest income will continue to drive growth in cash and adjusted EBITDA. Our corporate segment represents the corporate G&A of our business and also includes our corporate debt expense.
As shown on slide nine, the net loss for the segment decreased $3.4 million, or 11% this quarter, while adjusted EBITDA increased 3% from the year ago quarter. A few things to highlight. Total compensation costs were down $10 million as we made downward adjustments to our company bonus and performance-based equity accruals this quarter on our revised outlook for 2022, which I'll explain in a moment. Those downward revisions were offset by a $7.5 million increase in interest expense on our corporate borrowings as our term debt is indexed to SOFR.
During the quarter, we also restructured our legal entity organizational chart and repatriated the intellectual property earlier this year, the impact of which was an overall reduction in future tax liabilities of about $6 million, or approximately $0.20 of diluted EPS, which reduced our consolidated annual effective tax rate to 14% this quarter. This was a one-time benefit of the restructuring, and our annual effective tax rate will return to its normal level of about 27% next quarter. Year-to-date, total transaction volumes are up 27%, but operating margins are trending to remain below our target ranges at 22% and 14% respectively, due largely to the declines in non-cash revenues we began experiencing in the second quarter. Our year-to-date diluted EPS is $5.13, down 10% compared to the same period last year.
Year-to-date adjusted EPS is up 10%, reflecting our business's ability to generate cash even as the transaction markets slow down. Over the last 90 days, rapid increases in interest rates and fears of a global recession impacted transaction volumes and caused servicing fees on new loans to remain at lower levels. We expect servicing fees on new loans to remain at current levels for at least the rest of 2022, and we do not expect transaction activity for our brokered and investment sales executions to rebound until interest rates stabilize. As shown on slide 10, we are now projecting diluted EPS will be down between 15% and 20% this year. Notably, year-to-date personnel expense as a percentage of revenue is 48%, in line with last year. Our variable costs will adjust downward in line with any decline in transaction revenues in the fourth quarter.
That, coupled with the strength of our servicing and asset management revenues, give us confidence that we will deliver growth in adjusted EBITDA in 2022 in the mid- to high-single digits. We are not making any adjustments to our ROE or operating margin targets, but expect to perform at the lower end of the ranges. As we look ahead, we reviewed our operating costs and have been actively reducing expenses based on our outlook for slower transaction volumes next year. These reductions will largely impact our G&A costs and most this year. We are not immediately reducing headcount, but we have significantly curtailed our planned new hires and become more selectively backfilling positions.
As you can see on slide 11, we operate an efficient business, generating over $900,000 of annualized revenue per employee at the top of our peer group by a wide margin. Importantly, over half of our compensation costs are variable, causing compensation expense to naturally adjust downward for any declines in transaction revenues. We are in a service business and we believe that our people and culture differentiate us, as reflected in the Net Promoter Score Willy outlined. We do not intend to disrupt the quality of that service by reducing headcount, and we believe our business model and access to counter-cyclical capital allow us to invest in our people to not only continue growing market share in the coming months, taking advantage of the opportunity when transaction volumes rebound in 2023.
We ended the third quarter with $152 million of cash on the balance sheet, in line with the end of Q2. We prioritized investing in the business this quarter and used capital to pay down principal on our outstanding debt, fund co-investments to grow our asset management business, bring on three new property sales teams, and fund obligations under our purchase agreement with Alliant. Given the number of opportunities to invest nearly $50 million back into the business this quarter and our desire to maintain a strong cash balance, we did not repurchase shares. We continue to generate a healthy amount of cash to fund our operations and invest in the business. Yesterday, our board approved a dividend of $0.60 per share again this quarter, payable to shareholders of record as of November 25, 2022.
We will have returned nearly $100 million of capital to shareholders this year through a combination of share repurchases and dividends, and we continue to prioritize this closely with investments in the business. We face a challenging macro backdrop and several of our operating metrics like diluted EPS, operating margin, and ROE will remain under pressure in the near term due to lower servicing fees on new loans and lower transaction volumes. Our ability to generate cash and growth in adjusted EBITDA is not tied to the transaction markets. Our servicing portfolio provides over $300 million of annuity-like cash flows. As shown on slide 12, our escrow earnings are growing and fully hedge our floating rate debt.
As Fed funds has now reached 4%, our escrow earnings will generate between $100 million and $115 million of annualized revenues, more than offsetting increases in floating rate debt expense and providing between $55 million and $70 million of annualized operating income. We also have a healthy balance sheet with $711 million of corporate debt, and we continue to maintain a strong cash position. Our corporate debt to adjusted EBITDA has declined from 2.4x at year-end to just over 2x today, largely from the continued growth in adjusted EBITDA. We have a resilient and diversified business model that will continue to generate strong cash flow despite the uncertain macro environment. We remain focused on managing costs to operate an efficient platform while investing in our business to create long-term profitable growth.
I will now turn the call back over to Willy.
Thank you, Greg. Walker & Dunlop's successful business model generates strong cash flows in up and down markets. If you look back at our performance coming out of the GFC and pandemic, after initial market overreaction, WD wildly outperformed the competition due to our access to countercyclical capital, focused business model, and disciplined credit culture. If you look at slide 14 with WD in dark blue, after getting hit harder in the market sell-off than the S&P CRE services providers and mortgage originators, WD recovered quickly in 2020 and moved dramatically higher than the market and the competition. This was due to our access to countercyclical capital, which not only provided needed liquidity when the market dislocated, but also in its aftermath when the competitive landscape was deserted.
Remember that Walker & Dunlop surpassed J.P. Morgan and Wells Fargo in 2020 as the largest provider of capital to multifamily industry. Fast-forward to 2021 when the investments we made in debt and property brokerage rebounded, and you see why the WD business model is so powerful. Unlike 2021, when the Fed funds rate was at zero, in this higher interest rate environment, we will continue generating high margin revenues on our escrow balances. When I joined Walker & Dunlop in 2003, we had a $6 billion servicing portfolio. Today, that portfolio is 20 times bigger at $121 billion. As Greg just mentioned, it generates $76 million in revenue in Q3.
Add to that our asset management business, which is currently making first trust preferred equity in JV equity investments, while many competitors sit on the sidelines, and you see the WD strategy of building long-term durable revenue streams come front and center. Our affordable housing platform, Alliant, is a market leader in the much needed and focused on area of affordable and workforce housing. Even in this elevated rate environment with the potential for a recession in 2023, we reiterate our confidence in achieving our five-year Drive to '25 growth plan. Can we get to $65 billion of annualized debt financing? We've done $54 billion of debt financing over the past four quarters. Will we get to $25 billion of multifamily investment sales? We've done $26 billion over the last twelve months. $160 billion servicing portfolio.
In a higher rate environment, existing loans get stickier, and our bankers and brokers have shown time and again how to take market share. The new businesses of small balance lending, appraisals, affordable debt and equity, research, and investment banking add significant cash revenues and will accelerate the growth of our scaled banking and brokerage businesses. Reaching our revenue target of $2 billion is highly achievable. While GAAP EPS is pressured in 2022 due to lower non-cash mortgage servicing rights, a return to normalized servicing fees and MSRs in conjunction with increased escrow, asset management, and servicing income will push us over $13 a share by 2025 in our current modeling. Yesterday, we celebrated Walker & Dunlop's 85th anniversary, 85 years since my grandfather and great uncle started this company. We have weathered many economic cycles at WD.
My family has lived through all of those cycles and tried to provide consistent visionary leadership throughout. As we weather the current economic headwinds, it is very clear that WD is exceptionally well-positioned. I would reiterate the three points I made to open this call. WD has access to countercyclical capital, which will allow us to continue meeting our clients' needs. WD's business performs in both up and down markets, and our conservative lending and corporate debt structure positions us very well in times of uncertainty and opportunity. Walker & Dunlop's people, brand, and technology are world-class. We will continue winning with our clients, with our partners, and for our investors. I will now turn the call over to Kelsey to open the line for questions.
The line is now open for questions. At this time, if you have a question on the phone, please press star nine. Or if you're on your computer, please click the Raise Hand icon at the bottom of your webcast screen. Our first question is coming from Jade Rahmani at KBW. Jade?
Jade, we can't hear you.
You're on mute.
Still nothing, Jade.
Can you hear me?
Now you can.
I think you just came through, Jade. Try now.
Oh, thank you very much. Sorry about that.
That's okay.
On the transaction volume outlook, quite impressive performance in the quarter. Was wondering if you could give any fourth quarter update on how things are trending. You said you don't expect things to pick up. The Fannie Mae volumes in particular were extremely strong, and also broker loan volumes were much stronger than some of the performance we've seen elsewhere. They were up 3% year-over-year. Just on those two line items maybe, could you provide any comment?
First of all, Jade, thanks for joining us this morning. Look, first of all, we're not giving explicit volume guidance for Q4. As you underscored, Q3 volumes were stronger than any of the competition that I've read earnings releases on. I think that, as I said previously, speaks to our team and their relationships and relevance to our clients. I would say this on Q4 transaction volumes. There's still quite a bit of carryover from Q3 into Q4 on the investment sales side, and so we are still seeing sales happen. The real question is the, if you will, replenishment of the pipeline. That has slowed down significantly, as I said in my comments.
On the capital markets side, many of those bankers and brokers in that group are very focused on agency financing right now. As it relates to the agencies, what we're generally seeing is that Freddie Mac stepped into the market very strong in October into the beginning of November, and was pricing deals to win and won a lot of business over the past several weeks. Freddie Mac will get to a point in the next couple weeks where they can no longer process business in 2022, and I would think that then opens a lane for Fannie Mae to step back into the market and price deals to win. As you know, our very scaled relationships with Fannie and Freddie are very valuable to us.
Right now, they are dominating the lending market as they have in the past and as they will likely do going well into 2023.
Thank you very much. On the gain on sale margins, that was definitely one of the big variances versus our model. I think when we met, you were hopeful that there could have been a trough in margins in July, thereabout. Do you still believe that's the case? Could you give any directionality on where you expect gain on sale margins to be headed?
Yeah. Jade, when we did meet here in New York back in the late summer, early fall, I did express to you that I was hopeful that we had hit the trough and that things were gonna come back out. Quite honestly, that inflation print that we saw and the Fed raising by another 75 basis points basically put the pricing situation right back to where it was. Because if you think about it, our borrowers, if we quote a deal for them, and let's back up a month, and we would say that the indicative pricing was gonna be a 5.25 coupon rate. All of a sudden, rates move up by 30 basis points on the base rate on the 10-year Treasury. Now all of a sudden, we're looking at pricing at 5.50.
We've got to work to get back to that 5.25. We and Fannie Mae would sit there and look at our G-fee and our S-fee and try and make that type of a deal work. That's the type of pricing pressure we are dealing with right now. I would underscore what I said in my prepared remarks, which is just that this is all rate driven. It's not competitive landscape driven. As a result of that, once we get any type of stabilization from the Fed, I think we will see spreads widen, and I think we will see the ability to price back to normalizing guarantee fees, which will obviously help that non-cash mortgage servicing right line item as it relates to both revenues and net income.
Thank you very much.
Thank you.
Thanks, Jade.
Thank you, Jade. Our next question is from Steve Delaney at JMP. Steve?
Good morning, everyone. Thank you for taking the question. Willy, a pretty remarkable, I think, bit. Top line transaction volume and revenues, you know, were down, but you know in high single digits on a year-over-year basis, given what we've been through. I think we know that you have a rate-driven business with respect to your customers doing transactions and their demand for ten-year fixed rate loans. Given where we are, I assume there's some disrupted business plans with your borrowers' properties. Given your relationship with the agencies, is this an opportunity for WD to step in and expand your bridge lending business, possibly to include extension loans? The CLO market is essentially. It's not closed, but it might as well be.
All the commercial mortgage REITs, et cetera, are not in a position to step in. You have capital. Is that an area where over the next two or three quarters you see opportunity? As part of that, specifically, Freddie Mac has this Q-Series program that they're trying to reactivate. You know, could that be part of a strategy to expand short-term lending when high rates are reducing demand for long-term lending. Thank you.
Sure, Steve. A really good and insightful question. Let me talk through a couple of the things that you mentioned there. The first thing is the volumes that we saw in Q3, I would underscore, show the strength of the relationship with Walker & Dunlop and our relevance to our customers. While volumes may come down in Q4, as both Greg and I have said, our relevance to our clients has never been more significant. We are engaged with many clients who are dealing with exactly what you just outlined, which is a business plan that isn't on pace, a business plan that has changed dramatically given rate movements. That has then driven some people to say, "Let's go take a chance to try and add some.
You know, do a cash-out refinancing and put capital on their balance sheet. We're doing a lot of that right now. It's had some people say, "I wanna sell my whole portfolio regardless of where cap rates are. Let's go sell it." We're doing a lot of BOVs on people who wanna raise capital and potentially transact at this point. Your point as it relates to the CLO market and the Freddie Q-Series, my understanding is that Freddie's gonna do about $3 billion of Q loans in Q4.
To those on the call who may not know what Steve and I are talking about, if you back the clock up very significantly back to the 2007 timeframe, Freddie Mac went and would buy loans that were, if you will, stuck on warehouse lines and be able to go and securitize those through what became their K-Series, and are now being called Q-Series. Some of you may have heard that, a few of our competitor firms who had loans sort of hung on warehouse lines have been looking to sell those loans into the Freddie Mac Qs. We, as I said in my prepared remarks, do not have any hung CLO loans, and we have no credit exposure to CLO loans. With that said, Steve, we do have quite a number of loans on our balance sheet.
We have loans that sit in our joint venture with Blackstone. The Q execution may be something for some of those loans to create additional liquidity at Walker & Dunlop. At the same time, I would say this, we are, as Greg said, very focused on both returning capital to our shareholders through our dividend payment. At the same time, maintaining a cash balance on our balance sheet to not only be opportunistic as it relates to any M&A opportunities that come along, any teams that may not be on a platform that is as stable as Walker & Dunlop. Also to use that capital to help key clients who may need us to step in with our balance sheet and do something for them.
We have a track record and history of doing that with some of our largest client partnerships. I would think that we would do that in a heartbeat when and if it's needed by our clients.
Your last comment tied in directly to my second question that, you know, in these tough markets, there are usually some casualties, corporate casualties. We're not wishing for that, but what part of your business would you most like to grow opportunistically, you know, over the next year, where we're going through this kind of shakeout, period and transition period?
I would underscore the fact that we did not make pro-cyclical acquisitions in 2020 and 2021.
Mm-hmm.
I think it's really. We talked about it at our board meeting yesterday. It says a ton about the fact that both Alliant and Zelman are on budget for 2022. We did not go out and acquire a big investment sales business whose volumes have gone from robust to nothing.
Right.
We did not go out and buy a mortgage brokerage firm whose volumes have gone from robust to nothing. I feel extremely good about our discipline from an M&A standpoint. Clearly, as you've seen us do in the past, whether it be the acquisition of CWCapital in 2012, coming out of the great financial crisis, we've been very opportunistic to go and buy origination platforms when the market has dislocated, and when other platforms don't fare as well as ours do, given the long-term consistent revenue streams and earnings that we have. We'll be looking. I think the other thing to keep in mind, though, and I would underscore this for any investors who would be concerned about this.
Buying at our scaled size, we've done tuck-in acquisitions on mortgage brokerage and property sales platforms and brought in people. We haven't done a major enterprise acquisition since that acquisition of CW in 2012. The JLL HFF merger, as many people who are listening to this call know, was an unmitigated disaster as it relates to human resource and human capital management. It turned out to be an accretive deal for JLL because they took a lot of their products and pushed them through the HFF relationships. As it relates to merging those two big companies together, it was wildly challenging to hold on to talent at both JLL and HFF. We are very cautionary as it relates to going and doing a large-scale human capital intensive acquisition.
The other thing that I would say on that is culture matters. We have maintained and built a culture at Walker & Dunlop that I believe is truly unique and distinct. If we went and did a large-scale transaction, we would put ourselves susceptible to merging cultures that in a people business is very challenging. Does that mean we'll never do it? Does that mean we'll never take a look at something which is a large-scale human capital focused deal? I wouldn't completely rule it out, but it's probably not at the top of the list today.
Understand. Thank you for the comments, Willy. We'll miss you at our conference next week. I know that Sheri Thompson will do a great job representing WD on our affordable housing panel. Thanks.
Thanks, Steve.
Thank you, Steve. Our next question comes from Henry Coffey of Wedbush Securities. Henry?
Yes. Good morning, everyone, and thank you for taking my question. Is it sounds like, and I don't have the answer here, that on one hand, you know, your customers are slamming on the brakes. On the other hand, anybody walking around any major metro market doesn't see anything that looks or smells like a recession. How much of this is just, in your mind, customers, you know, overwhelmed by the rapid change in rates, confusion over the election? I hear what's-his-face may try to run again. And how much of this is, you know, people reacting to some real changes in the underlying economics of multifamily lending, be it rent rates or, you know, ability to get buildings built or whatever the business disruption issues may be.
I mean, is this all capital markets related or are there some real shifts going on in the multifamily business from your perspective?
Henry, first of all, great to have you on this morning. Let me give you a couple anecdotes that I'll just hopefully will answer your question. First of all, with rates moving at the rate that they have moved, cap rates have not adjusted fully to those rate movements. I've heard Jade ask the question on previous calls of some of our competitor firms, you know, "How are people buying with negative leverage?" I think there were many acquirers in the August-September timeframe who are happy to deal with the negative leverage of buying at a 4-5 cap rate and putting 5% debt on a deal.
I would say to you that in October and November, there are not many people who feel comfortable going and putting negative leverage on deals right now, due to no real transparency as it relates to where rates end up going. As a result of that has put downward pressure on transaction volumes. At the same time, there are many people. I've spoken to three clients in the last week who called me up saying, "Oh, it's just terrible, and there's nothing going on, and we're pencils down and we can't do anything." I'll sit there and say, "I had dinner with a client last night who told me that they acquired two assets in the last month." "Really? How'd they do that?" Talk them through how they're doing it.
I think we're doing right now a quite significant financing someone who wants to do a cash out refinancing to just put cash on their balance sheet. We received a phone call two weeks ago about someone who wants to sell their entire almost billion-dollar multifamily portfolio. While many people think that it's pencils down right now, I wrote an email to all Walker & Dunlop salespeople last Friday saying, "If you're seeing that life insurance companies and banks are pencils down, this is the opportunity for Walker & Dunlop to be pencils up in meeting our clients' needs." I got a bunch of emails back from bankers and brokers across Walker & Dunlop saying, "I've never been busier." The real question there becomes busy or making revenues, right? 'Cause every client wants to talk to us right now.
Every client wants us to be running numbers on the valuation of their properties. Every client wants us to be thinking about refinancing scenarios. The other thing that's a very interesting data point in the market right now is the number of borrowers who believe that rates are gonna go back down. We have, in many instances, put forth fixed rate quotes. Today, most fixed rate financing is going off in the low sixes.
Back a month ago, we were putting out fixed rate quotes in the mid-fives, and we had numerous clients who opted to go with floating rate debt on a three-year floater rather than going on a seven or 10-year fixed rate deal, just because they don't think that locking in mid-fives fixed rate debt for a seven or 10-year period is a wise move and that they're gonna float and watch rates come back down. Personally, I would have locked the rate, put the paper away, and focused on my cap rate and my rent growth. That's me, not my borrowers. The point I'm trying to underscore here, Henry, is the fact that it's a dynamic market, but there is significant conviction that rates start to come back down in the back half of 2023.
All we need at WD is for rates to stabilize. We don't need rates to come back down. We are not Rocket Mortgage. We do not need a lower rate environment to get transaction volumes back up and going. What we need to have happen is, A, we've got countercyclical capital now, so we'll continue to lend with that capital. And B, as it relates to our servicing fees, the moment that we can get some rate stabilization, those MSRs will revert back to normal and we will have normalized MSR income and net income.
I'll add on there, too. Beyond multi, we are seeing plenty of activity on the non-multi asset classes as well, and rate stabilization brings capital back into the markets, and we should see our volumes rebound there as soon as you get stabilization. There's opportunity across the landscape.
I think everybody listening to the call who has any history with you understands that WD is gonna be just fine. You plan your business, you plan your balance sheet, et cetera. Like, what I'm really wondering about is, you know, if we put aside all the, quote, "capital markets funding stuff," which is, you know, the whole business. If we put that aside and look at your clients, how are they faring in terms of the operating profitability of their properties? You know, we
Yeah.
We've seen home price appreciation go down in the residential market since June. Obviously, a lot of that's rate related. You know, what about the fundamentals of their business? You all have a unique perspective on exactly that, not only in terms of what people wanna do with their balance sheets, but exactly how the properties are performing. If we push all the noise aside, what does it look like?
Yeah. Everyone who owns today, Henry, is loving life. Everyone who owns today has an asset that was financed anytime over the last 10 years is sitting back going, "I have rarely had the type of performance on this asset that I've gotten." Their cash flow is fantastic, their leasing is fantastic. And while there's lots of reporting as it relates to rent growth peeling back from the very elevated levels that it was in 2021 and the beginning of 2022, as I tried to underscore in our comments on our servicing portfolio, I had someone call me last week who said, "Oh my gosh, you know, there's $100 million of multifamily debt that's coming up to be refinanced every year over the next 10 years.
With rising interest rates, none of that stuff's gonna be able to be done. I looked at the CEO of this company and I said, "Do you know what the debt service coverage ratio is in the Walker & Dunlop $120 billion servicing portfolio today? It's 2.32 times. 2.32 times. Every one of those assets has plenty of cash flow to be refinanced in a higher rate environment." Unless you went out and did a floater in Q1 of 2022, and you didn't put a cap on it because it was done by a CLO provider, not one of the agencies, yeah, you could have some pain there.
As Peter Linneman said on the Walker & Dunlop webcast, probably about a month ago when I asked him on this specific point, he said, "Will there be some pain? Yeah. Will there be real opportunities? Few and far between." I think the bottom line here is that we're seeing a market adjustment right now. We're seeing a number of people sit on the sidelines just basically saying, "I'm gonna wait and see where rates go and where cap rates go, and then I can get back and get active." There are people who are taking advantage of this market dislocation. There will clearly be people who have to sell assets to raise capital, and may do so at quote-unquote, distressed pricing. There will be someone there right now to take advantage of that. The final thing I would say is the banks are still on the sidelines.
As you well know, J.P. Morgan, Wells Fargo, and Bank of America basically went pencils down sometime in mid-August. There is no way, at least from my read of it, that they can stay on the sidelines in 2023. They are all overcapitalized, they have all taken significant loan loss reserves, and my assumption would be, come January 1, Jamie Dimon and Charlie Scharf say, "Get back to work. Start making loans again." If that ends up happening, that will change the liquidity in the commercial real estate space. Today, warehouse lines have been pulled. As we talked about with Steve, there's no CLO market, there's barely a CMBS market. The market's really to the agencies right now, selectively to life insurance companies from a debt capital standpoint.
I think that to your point, Henry, if we see any kind of break on the inflation numbers and you get any type of, okay, here's our forecast as it relates to Fed rate increases, you could see the market stabilize, and you could see transaction volume come back nicely. That's clearly a best-case scenario. Many people, our competitor firms on their earnings calls last week and the week before said, "We're looking at a strong back half of 2023." I think that's a reasonably fair and reasonably conservative comment. The question will be with Q2 2023, and then the other piece to it for Walker & Dunlop is how long does the market stay dislocated where we take advantage of our position with the agencies to supply capital to the market?
One of the things we tried to say in our prepared remarks was that if you look at our history in past crises, it's not during the crisis where we completely outperform, even though we do, but it's also afterwards. Because it takes time for capital to form again. It takes time for life insurance companies to get conviction on the market. It takes time for banks to say, "Okay, we're clear from a liability standpoint. We've finished reserving. Now it's time to get back into the markets." We will take advantage of that. Every single time, we have shown very clearly that this business and our platform is positioned very well to do just that. Super. Thank you. Thank you.
Thank you, Henry. We have no further questions at this time, so I will now turn the call back to Willy for closing remarks.
Thank you everyone for joining us today. Thank you to the WD team for a fantastic Q3. As Greg and I both underscored, while these are challenging times, we feel exceptionally well positioned, and we have a team that's engaged with our customers every single day and doing a fantastic job of providing capital and capital solutions to our clients. Thanks everyone for joining us today. Thank you, Jenna and Kelsey, for all your work on this earnings call. Greg, well done, and I hope everyone has a great day.