After enduring a sharp reduction in loan volume over the past several months, along with the bankruptcy of a leading lender, the reverse mortgage industry was rocked again with the news that industry leader American Advisors Group (AAG) would be acquired by Finance of America Companies (FOA). The deal, announced on December 7, likely represents a great arrangement for FOA. Still, if or how the wider industry will benefit from the consolidation of AAG and FOA remains to be seen, industry professionals say.
In turn, the news that two leading providers of reverse mortgage loans will consolidate has led to a discussion of possible industry impacts among professionals. For some, the move is a positive step forward, as it combines AAG’s powerful marketing practices with FAR’s dedication to product development. However, when combined with the recent bankruptcy of Reverse Mortgage Funding (RMF), the acquisition will result in consolidation of the wider industry, as there are fewer major players in the space, others said.
RMD reached out to industry professionals, including analysts, an industry educator and executives at competing lenders to gain perspective on the acquisition.
Industry consolidation
News of the AAG purchase by FOA was generally well-received, with some reverse pros noting that the loss of any major lenders in the space could limit the industry’s overall reach.
“Consolidation in times like these is natural and healthy,” said Scott Harkless, chief revenue officer of top 10 lender Open Mortgage. “The reverse industry is still a part of the mortgage industry, and the same things that happen in mortgage generally are going to happen in reverse.”
Harkless said there were consolidations in the aftermath of the 2008 financial crisis.
“There was a lot of consolidation, but in the end, the mortgage market came roaring back until we saw the current sort of slowdown,” said Harkless, who worked at Countrywide. “So, this type of development with AAG and FAR does not cause me dismay. I think the long-term viability of the reverse mortgage industry is very healthy, because this is a product that meets the very serious needs of consumers.”
Consolidation is expected, but having fewer overall players in the space is not ideal, according to Dan Hultquist, author of Understanding Reverse.
“Market conditions have been challenging, and so I think many of us expected some consolidation,” said Hultquist. “Nevertheless, we need more entities in the reverse space, not less.”
The move should be perceived as very positive and understandable for FAR, according to a C-level reverse mortgage industry executive who requested anonymity to speak candidly about the implications of the deal, which is in the range of $30 million according to initially-released details of the transaction by FOA.
“I think for those of us in the industry, FAR acquiring AAG is not a surprise, as there’s been a close relationship between FAR and AAG for years,” the executive said. “So number one, that is not a shocking development. I think what’s probably more shocking is the price. I wouldn’t even call it shocking, it’s just the price would have been better four years ago than it is today. But it’s a really great move on FAR’s part. They’re acquiring, essentially, the best call center in the reverse mortgage world, frankly, and it’s historically been a very well-run operation.”
For Steven Sless, former reverse mortgage division president of Primary Residential Mortgage, Inc., the deal makes sense given the current business climate. But it also presents an opportunity for the major players to further involve forward mortgage professionals in reverse lending.
“With the reverse industry experiencing the most wide-scale consolidation since its inception, my hope is that companies such as FAR, Mutual of Omaha, Longbridge Financial, Open Mortgage and others find ways to effectively bring forward mortgage loan originators into the fold,” Sless said. “Having two or three national reverse lenders drive awareness and marketing efforts is a losing proposition for the entire reverse arena. If reverse lending as we know it is to survive and thrive once again, forward mortgage lenders, mid-size brokers, large reverse exclusive companies, and trade organizations all must do their part.”
Sless agreed with Harkless’ perspective regarding the long-term viability of the reverse business considering the demographics working in the industry’s favor as well as the industry’s single-digit market share in comparison to the wider mortgage business.
“We have seen large banking institutions such as Wells Fargo, MetLife and others exit the space,” Sless said. “Many at the time felt that would be the demise of wide-scale reverse lending, and that certainly was not the case. The reverse industry will not crumble, but it does need to look in the mirror, and everyone involved needs to ask the question as to why we have never been able to achieve a market share of more than 2%.”
Thriving again will require outreach to the forward mortgage profession on a wider scale than previously seen, Sless added.
“Reverse can thrive once again, but in my humble opinion, it will only do so on the backs of forward mortgage originators, along with the support and resources of the remaining large national lenders,” Sless said.
Advertising practices as a benefit for the industry
The reverse mortgage industry hasn’t done a great job of connecting with the customer, said Hultquist. Perhaps the lone exception is AAG’s advertising campaign featuring celebrity spokesperson Tom Selleck in its reverse mortgage television commercials.
“AAG has done the industry a great service in creating awareness, and over the last decade, no organization has been more effective at communicating the reverse mortgage message,” Hultquist said. “For that, I say, ‘Thanks, and I hope Finance of America will continue in this direction.’”
Perhaps the benefit to the industry from this acquisition is keeping Tom Selleck active in reverse mortgage advertising, the C-level executive added.
“FAR is doing everybody a favor by making sure the Tom Selleck advertising initiatives remain in place, because that helps everybody,” they said. “Any of these national campaigns that are done by any of our peers, we’re all grateful for. That was the first question I had, in a very self-interested way: are they going to keep Tom Selleck? I think we’re all grateful that it’s porting over.”
In terms of connecting the reverse industry with borrowers, Selleck has more demonstrated value than the AAG brand itself, according to the rival executive.
“When I said ‘American Advisors Group,’ people never [understood what I was talking about]. I had to basically first go to ‘Tom Selleck’ and then associate the brand with him,” he said. “The brand in and of itself, for the broad marketplace, is not readily recognizable like a Rocket Mortgage would be [on the forward side]. So, my honest opinion is if Tom Selleck stopped saying ‘American Advisors Group’ and started saying ‘Finance of America Reverse,’ it would have little impact.”
FAR President Kristen Sieffert described the AAG marketing apparatus as a “critical piece of the acquisition.”
Business capacity, effects on 2023
On the other hand, having fewer but better-positioned companies could be a positive development for the industry, according to Michael McCully, partner at New View Advisors, which analyzes industry performance metrics including volume data and Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) issuance.
“There’s too much capacity for current volume,” said McCully. “Fewer, better-capitalized HMBS issuers is what the industry needs. AAG’s DTC business should still thrive under new ownership. While the transaction won’t impact 2023 origination volume, consolidation should relieve some of the earnings pressure issuers are facing.”
Reverse Market Insight (RMI) President John Lunde said the consolidation is a natural reaction to the business climate, which has resulted in a big dip in origination volume since September.
“I think it says a lot about the industry consolidating in the current lower origination volume environment and positioning for an upswing,” Lunde said. “It’s always challenging to talk about clients merging, particularly as we believe the industry needs more strong companies actively originating reverse mortgages rather than less, but in some ways it’s an inevitable consequence of the macro environment and yet another casualty we can chalk up to the Fed’s anti-inflation crusade. Not saying they’re wrong, but just that the pain is undeniable in the housing and mortgage markets.”
In an alert to FAR’s wholesale partners issued shortly after the deal was announced, the company said it remains committed to current partnerships and that when the deal closes by mid-2023, partners should be “unaffected by the integration.”
No sign of regulatory scrutiny right now
This transaction will consolidate two of the largest reverse mortgage industry players, RMD reached out to the Federal Trade Commission (FTC) to determine if the deal will warrant regulatory scrutiny.
For the 12 months ending in November 2022, AAG’s market share stands at 25.8% while FAR’s market share is 8.9%, according to data compiled by RMI. By contrast, in the forward mortgage market, no single lender has even 10% market share.
A spokesperson for the FTC said that it is not common practice to comment on acquisition deals prior to a formal review process. The law as it currently stands only requires companies to notify the FTC and the U.S. Department of Justice (DOJ) when a deal is valued at more than $101 million. The agencies then have a 30-day period to determine if they will open an investigation into a deal.
This deal, which will require a mix of cash and equity, is supported by a $30 million capital investment through a private placement of FOA’s common stock from existing stockholders, including entities affiliated with FoA chairman and founder Brian Libman.
AAG, founded and controlled by Reza Jahangiri, will receive at least $10 million in cash, plus stock shares in FOA, which currently trades at about $1.33 a share, according to an 8K filed by FOA with the Securities and Exchange Commission (SEC) last week.
