Finance of America Companies (FOA), the parent company of leading reverse mortgage lender Finance of America Reverse (FAR), reported a $64 million loss in the first quarter of 2022 and that it has cut nearly 600 jobs over the past 12 months. However, in spite of that news the company chose to emphasize the positive performance of FAR in comparison with its other business segments.
With a 12% increase in funded reverse mortgage volume since Q4, it has reached 1.47 billion as the company uses its reverse business to lead an ongoing effort in portfolio diversification.
Executives on an earnings call attributed the rapid rise of mortgage rates as a key driver of losses, while the continued rise of home price appreciation (HPA) has helped to fuel its reverse mortgage segment.
Reverse business, home improvement as bright spots
FOA CEO Patricia Cook, who earlier this year announced that she would be retiring from her role in the near future, described a challenging traditional mortgage origination segment before leading into a discussion of FAR’s performance.
“Our mortgage origination segment […] was not immune to the impact of rising rates and recorded an adjusted loss of roughly $10 million for the quarter or negative $0.05 in adjusted earnings per share,” she said. “The mortgage origination segment was impacted by both lower-than-expected volume and a decline in non-agency pricing as many originators liquidated assets.”
Such volatility has not deterred the company from seeking out its strategic initiatives, however, including the further building out of its specialty finance and service business (SF&S), she explained.
“We have substantially reduced run rate expenses in the mortgage business and continued to invest in SF&S to drive growth, particularly in our reverse business,” she said.
Cook credited the recent consolidation of FOA’s consumer-direct channels as a move that will help to simplify the flow of business to different segments, including to FAR. She also mentioned the further development of Finance of America Home Improvement (FOAHI). In 2021, the company announced the acquisition of home improvement financing option “Benji,” an offering it acquired from Renovate America, Inc. The acquisition of Benji morphed into FOAHI, which company leadership at the time said had major potential to interact with other verticals like Finance of America Mortgage (FAM) and FAR.
“The technology platforms we acquired as part of this business is modern, scalable, and we constantly hear from our customers that it is one of the best in the industry,” Cook said. “Not only has this helped us win new business, we added 150 new contractors to the platform in Q1. But it also gives us tremendous flexibility to add new products.”
The average age of a FOAHI customer is 54 years, Cook said, which offers an opportunity to introduce reverse mortgage products to those customers. Home modification is cited as a potential use case for reverse mortgage loan proceeds, and FAR also recently changed its proprietary reverse mortgage product suite to offer loans to borrowers as young as age 55 in some states.
“This business can become a highly effective customer acquisition channel at a zero cost of acquisition once the business reaches break-even, which we expect to happen later this year or early next,” she said.
Reverse mortgage performance, future investments
The SF&S business is a continued priority for FOA, which includes its reverse mortgage business, Cook said. Since that segment continues growing at a “strong pace,” investing more into it is a natural action to take, she explains.
“March was our highest origination month ever,” Cook said, echoing the industry-wide March volume spike which was its highest in 11 years. “Our reverse pipeline has never been bigger, driven by strong home price appreciation over the past couple of years, as well as continued investments in processing capacity.”
Margins did decline “more than expected,” however, which Cook attributed to wider spreads impacting capital markets execution. Margins are expected to remain “pressured” into the first part of Q2, she explained.
Reverse mortgage revenue dropped 5% quarter-over-quarter for FOA due to these conditions, however the segment also saw a noticeable increase in pre-tax income according to Johan Gericke, CFO of FOA.
“The reverse origination segment generated pre -tax income of $68 million, up 51% from Q1, 2021,” Gericke said. “Our current pipeline in reverse remains elevated, driven by strong demand for the product.”
Finally, in a Q&A segment at the end of the call, the FOA executive team was asked to expand upon the idea of leveraging the FOA loan officer corps and existing broker partners to cross-sell reverse mortgages, commercial loans and other products. While progress on this front is still developing, both Cook and Gericke remain optimistic about the impact such a move could have on both forward and reverse mortgage business.
“[Our strategy centralizes] the power of our product set and how we can help our customers through the life of their financial journey, whether it’s to refinance the home improvement and ultimately to use a reverse loan to help fund their retirement and lower their payments,” Gericke said. “And so, that whole operating model is going to become a lot more pronounced as we make investments in our technology and our organizational structure to drive this forward.”
