Finance of America Companies Inc. — Q2 2023 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2023. Finance of America is restructuring into a retirement-solutions platform focused on reverse mortgages and home-improvement loans, alongside portfolio-management services. Prior-period results have been recast for discontinued operations and the revised segment structure, so comparisons reflect a substantially changed business.
Financial performance and position
- Q2 revenue and earnings: Total revenue was negative $111.9 million, versus negative $21.2 million in Q2 2022. Continuing-operations net loss was $220.6 million, compared with $117.6 million; total net loss was $222.5 million versus $167.8 million. Loss attributable to controlling interest was $79.1 million, or $0.91 per basic share.
- First-half results: Revenue was $29.0 million versus $24.9 million in the first half of 2022. Continuing-operations net loss was $165.1 million versus $172.1 million; total net loss was $207.9 million versus $231.8 million. Loss attributable to controlling interest was $76.1 million, or $1.00 per basic share.
- Drivers and expenses: Q2 net fair-value losses on loans and related obligations were $93.1 million, including $162.4 million of losses from changes in market inputs or assumptions, partly offset by other fair-value and portfolio activity. First-half fair-value gains were $83.3 million. Q2 net interest expense was $28.5 million; first-half expense was $58.0 million. First-half operating expenses fell 13.5% to $193.8 million.
- Origination activity: Q2 new reverse-mortgage originations were $397.6 million, down 74.8% from $1.58 billion; first-half originations were $709.1 million, down 76.8% from $3.05 billion. Higher production margins—8.28% in Q2 versus 4.93% a year earlier—partly offset lower volume. Home-improvement originations were $48.9 million in Q2.
- Cash flow and liquidity: For the first half, operating cash flow was $115.7 million, investing cash outflow $46.3 million, and financing cash inflow $1.1 million. Cash and restricted cash totaled $347.9 million at June 30, including $55.6 million of unrestricted cash and $265.5 million of restricted cash.
- Debt and equity: Total liabilities were $26.27 billion and total equity $273.7 million; assets were $26.55 billion. The filing reports approximately $25.9 billion of debt obligations, primarily mortgage-related HMBS and nonrecourse financing. Other financing lines of credit were $1.07 billion, and net notes payable were $411.8 million. The weighted-average rate on financing lines was 8.10%, up from 7.35% at year-end 2022.
Material changes and unusual items
- On March 31, 2023, the company acquired specified American Advisors Group (AAG/Bloom) assets and liabilities for total consideration of $215.4 million, including $140.9 million cash consideration. The transaction was accounted for as an asset acquisition; no goodwill was recorded. It added reverse-mortgage assets, servicing rights and operations, and included equity consideration and potential further unit issuance.
- The company completed its Mortgage Originations wind-down, sold commercial-origination assets in March, and sold remaining Lender Services assets on June 30. The sale of title businesses ANTIC and BNT closed July 3, after quarter-end. Related businesses are reported as discontinued operations; first-half discontinued-operations net loss was $42.7 million.
- Reported mortgage servicing rights fell to $9.5 million from $95.1 million at year-end, while the associated servicing portfolio UPB declined to $1.29 billion from $8.60 billion, reflecting substantial MSR sales and portfolio changes.
Outlook, liquidity, risks and contingencies
- Management cited persistent inflation, higher interest rates, weaker customer demand, compressed margins, and wider market spreads as pressures on results and fair values. It stated that its actions and expected operating results should provide sufficient liquidity to meet obligations and covenants for at least twelve months and one day after the statements were issued; this is management’s assessment, not a guarantee.
- The company was out of compliance with certain warehouse-facility financial covenants at December 2022, March 2023 and June 2023 measurement dates. It obtained waivers, amended covenants or repaid facilities as needed. After quarter-end, revolving working-capital notes with affiliated lenders were extended to November 30, 2024; the rate rose from 6.5% to 10%, with a further increase to 15% scheduled for May 15, 2024. Certain securitization residual securities were pledged as collateral.
- FAM did not meet specified Fannie Mae tangible-net-worth requirements at June 30 and voluntarily surrendered its Fannie Mae selling approval effective that date; servicing approval was expected to be surrendered after remaining servicing transfers, expected in Q4 2023. FAR received a Ginnie Mae waiver for a minimum capital requirement and reported compliance with applicable Ginnie Mae requirements.
- Reverse-mortgage unfunded borrower commitments were approximately $4.6 billion at June 30, up from $3.1 billion at year-end. The company also faces funding, margin-call, facility-renewal, fair-value-estimation, servicing, regulatory, integration and litigation risks. Management reported no litigation matters for which probable or reasonably possible losses could be estimated, but California PAGA claims remain pending and the loss range could not be reasonably estimated.
- No specific earnings or revenue guidance is provided. Management’s expectations regarding integration, liquidity, cost savings and renewed facilities are forward-looking and subject to the risks described in the filing.
Investor verification priorities
- Track unrestricted liquidity separately from restricted cash, borrower funding needs, and the availability and renewal terms of warehouse and other credit facilities.
- Review covenant compliance and waiver status, FAM’s remaining Fannie Mae servicing transfer, and FAR’s Ginnie Mae capital waiver.
- Assess the AAG integration, acquired portfolio performance, realized cost savings, and potential additional equity or indemnity-holdback units.
- Monitor reverse-mortgage origination volume and margins, fair-value assumptions and sensitivity to rates and spreads, and the continuing decline in MSR balances.
- Evaluate the rising cost and collateral terms of related-party working-capital notes, debt maturities, and the company’s ability to fund approximately $4.6 billion of reverse-mortgage commitments.