Credit rating agency Fitch announced late last week that its credit rating for Finance of America Companies (FOA), parent company of leading reverse mortgage lender Finance of America Reverse (FAR), has been downgraded from “B-” to “CCC+.”
The agency also downgraded subsidiary Finance of America Funding’s senior unsecured debt rating to “CCC-”/”RR6” from “CCC+”/”RR5” with an outlook that remains negative.
“The rating downgrade reflects the operating losses and resulting erosion of tangible equity FOA has experienced over the last year, which has resulted in continuing covenant breaches, which may limit the company’s ability to extend debt maturities and secure future funding,” Fitch stated in a press release announcing the decision.
Some of the justifications for the downgraded rating have appeared across the entirety of the forward and reverse mortgage industries, with Fitch highlighting that “high interest rates and borrower affordability challenges have reduced origination volumes, which, along with widening credit spreads, have resulted in significant negative fair value adjustments to FOA’s assets.”
Fitch noted that tangible equity at FOA has decreased to negative $5 million by the end of Q2 2023, down from $288 million 12 months earlier and $480 million at the end of 2021.
Maintaining a negative outlook stems from Fitch’s expectation that overall profitability at FOA will “remain weak,” which will challenge the company’s ability to “rebuild tangible capital levels.” The agency added that the incorporation of AAG is not expected to make a material difference for the company’s outlook, it said.
“Fitch’s believes execution risk remains with regard to the integration of [AAG] and the restructuring of FOA’s continuing business segments, which could impact its long-term franchise and market position,” the agency said in a statement.
However, Fitch added that FOA “remains supported by its market position within the reverse mortgage lending sector, its experienced senior management team and a history of strong support from shareholders Brian Libman and affiliated investment vehicles of Blackstone Inc.”
A comment request submitted to FOA was not immediately returned.
This marks the second time in 12 months that FOA’s credit rating has been downgraded by Fitch. In October 2022, Fitch first downgraded the rating from B+ to B-, maintaining a negative outlook based on expectations that the company’s leverage would remain elevated over the medium term amid weak earnings.
The agency did not revise the rating when news of FOA’s acquisition of American Advisors Group (AAG) became public, only saying that its ratings were unlikely to be impacted by the deal.
