Finance of America Companies (FOA) recorded heavy losses in the fourth quarter of 2022 as the closing date of its its acquisition of American Advisors Group (AAG) looms.
The lender recorded $182 million in net losses in the fourth quarter. FOA’s adjusted net loss was marked as $56 million. For the full year, FOA recorded an adjusted net loss of $61 million.
While attributing most of the losses to the dissolution of its forward mortgage division from late last year, the company remains committed to “high growth” businesses, such as its reverse mortgage division, Finance of America Reverse (FAR), executives said on Tuesday’s earnings call.
Overall outlook for FAR, AAG deal timeline
In addition to dissolving Finance of America Mortgage late last year, FOA also announced the sale of Finance of America Commercial.
These decisions speak to the company’s priorities, said Graham Fleming, FOA president and interim CEO.
“We made these decisions to account for uncertainty in the residential mortgage market,” Fleming said. “However, this did not stop us from prioritizing investments in high-growth businesses like reverse [mortgages]. Benefiting from strong demographic and economic tailwinds, our new strategic direction is fully centered on helping Americans achieve their retirement goals.”
Fleming also addressed FAR’s position in the reverse space. The company is offering both Home Equity Conversion Mortgages (HECMs) in addition to proprietary reverse mortgage options under its HomeSafe brand, which will make FOA easily the largest reverse originator in the industry.
“AAG is the largest HECM originator, while we are the largest proprietary originator, making it a strategic fit within our company and our focus.”
On the earnings call, Fleming also emphasized AAG’s strength in direct-to-consumer marketing. Using AAG’s marketing apparatus — including spokesman Tom Selleck — is an essential part of appealing to a broader base of potential clients, he explained.
In 2022, FAR originated $4.8 billion in funded volume and produced $128 million in pre-tax income.
The deal is expected to close on March 31, Fleming said.
Securitizations, financial strength
FOA CFO Johan Gericke explained that FAR’s capital markets team has securitized roughly $1.4 billion in proprietary reverse mortgage loans, allowing the company to “materially reduce” its inventory of loans for investing and funding liabilities.
He also described how the AAG acquisition is expected to strengthen FOA going forward.
“First, it includes a $30 million equity raise from our majority shareholders to strengthen capital and liquidity,” he said. “Also, the acquisition will result in the issuance of roughly $50 million in new equity to acquire the business at a potentially below tangible book. And lastly, we anticipate substantial cost and revenue synergies from the elimination of overlapping functions and an expanded sales force and product set, which should result in operational benefits to FOA.”
In a question-and-answer session held after the presentation, Fleming said that reverse volumes have come down so far in 2023, and that the bankruptcy of Reverse Mortgage Funding (RMF) made for uncertainty around how to execute securitization.
“Q1 is probably going to be the trough for this year for sure,” Gericke said. “As we pick up the volume and start realizing the synergies in Q2 from the AAG transaction, that’ll obviously start driving earnings. So, you should think of the earnings profile to be ‘trough’ in Q1. For the year, Q2 [should be] better, and then in Q3 and Q4 we’ll obviously have the business fully integrated from the reverse side [as we] work on achieving synergies.”
In late-day trading on Tuesday, FOA’s share price stood at $1.50 marking a 3.45% increase from Monday according to Yahoo Finance.
