With metallurgical coal prices achieving record highs at a time when housing is experiencing new lows, the management team at Walter Industries took more steps late last week to unburden its natural resources unit by unloading its financing and home building businesses from the balance sheet. A total separation of the subsidiaries should be completed by year-end.

Management increased its $225.0 million revolver to $475.0 million to repay debt related to its financing arm. Approximately $220.0 million of the available revolver funds went to settle terminate two mortgage warehouse facilities due to mature in July and October respectively. This financial move gave the company access to $330.0 million in unencumbered mortgage assets with a historical delinquency rate below 5% while freeing it from a reliance on asset-backed securitization markets.

In tandem with the financial transaction came a corporate announcement that the company's mortgage subsidiary, Walter Mortgage Co., will no longer provide customers of its home building business, Jim Walter Homes, with financing after May 1. Consequently, Jim Walter will have to transition to a third-party financing model, which likely will include government-sponsored loan programs.

The split between the financing and home building businesses suggested that management may move to sell off the entities discretely rather than enact a collective spin off. However, by disconnecting the relationship between home building and financing, the company could be sacrificing not only value, but a sale as well.

In a research note published this morning, FTN Midwest Securities Corp. analyst Jay McCanless wrote, "Without the backing of Walter Mortgage Co., we believe JWH must quickly become an FHA-certified originator or develop a partnership with either a regional or several local banks to provide construction financing. Once these partnerships are in place, we believe the salability of the unit should substantially increase."

With a history dating back to 1946, Jim Walter made its name as an affordable builder. Primarily an on-your-lot builder, the company offered homes at various stages of construction, allowing customers to contribute "effort equity" to the building process. This model kept the median price of a Jim Walter home well below those of other new-home builders.

However, as land became scarcer and more expensive during housing's boom years, the company began to foray into community development. But the shift was arguably behind the power curve. In mid-February, management announced that it would close nearly half of its sales branches as a first step toward dividing the business units.

For 1Q2008, the home building arm delivered 446 new homes, compared to 734 a year ago. Cancellations crept up 17% year-over-year, while competitive pricing strategies contributed to an 8% decline in average sale price to $89,800. Although new orders fell 39% from the same time last year to 450, the good news was that more sales came out of fewer sales centers. In 1Q2007, the company sold roughly 9.1 homes per sales branch; in 1Q2008, that ratio increased by 10% to 10 homes. The company counted 45 sales centers at the end of the quarter.