Business context and reporting period
Finance of America Companies Inc. is a specialty finance holding company with mortgage, reverse mortgage and commercial lending, lender services, and portfolio management businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022. The company’s 2021 nine-month comparison combines successor and predecessor periods around the April 2021 business combination; comparisons should be read with that accounting distinction in mind.
Financial results and condition
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 |
|---|---|---|---|
| Total revenue | $71.1 | $456.5 | $479.7 |
| Net income (loss) before tax | $(304.7) | $54.6 | $(550.8) |
| Net income (loss) | $(301.7) | $50.1 | $(533.5) |
| Net loss attributable to controlling interest | $(84.5) | Income of $21.4 | $(133.7) |
| Basic earnings (loss) per share | $(1.35) | $0.36 | $(2.16) |
| Operating expenses | $258.9 | $411.9 | $933.5 |
- Q3 included $138.2 million of impairment charges: $51.2 million for indefinite-lived intangibles, $72.0 million for definite-lived intangibles, and $15.0 million for fixed assets and leasehold improvements. The impairment reflected weaker mortgage demand and expected operating losses.
- Q3 net fair value losses on loans and related obligations were $6.4 million, versus gains of $122.5 million a year earlier. The company attributed pressure largely to higher market discount-rate assumptions and lower origination gains.
- Cash and cash equivalents were $169.1 million at September 30; restricted cash was $210.1 million. Total assets were $21.19 billion, total liabilities $20.61 billion, and total equity $575.1 million. The balance sheet includes substantial securitized loan assets and related obligations.
- Other financing lines of credit totaled $2.306 billion outstanding against stated capacity of $4.451 billion, subject to covenants and asset eligibility. Notes payable, net, was $382.8 million. The company reported approximately $17.9 billion of debt obligations in its MD&A; carrying values differ by debt type and fair-value accounting.
- For the nine months, operating cash flow was $1.061 billion, investing cash flow was $(1.656) billion, and financing cash flow was $510.9 million. Cash and restricted cash declined $84.4 million to $379.2 million. Operating cash flow reflects, among other items, loan-sale proceeds and changes in operating assets and liabilities.
Material changes versus the prior comparable period
- Mortgage Originations weakened sharply: Q3 net rate-lock volume fell to $2.5 billion from $7.7 billion, and mortgage origination margin, including servicing margin, declined to 1.87% from 2.61%. For nine months, volume was $11.6 billion versus $22.8 billion and margin was 2.07% versus 2.95%.
- Reverse Originations’ Q3 revenue fell 34.7% to $72.1 million, mainly on lower margins; nine-month originations rose, but production margin fell to 6.08% from 9.40%.
- Lender Services Q3 revenue declined 49.5% to $44.2 million as refinancing-related title and insurance activity contracted. Commercial Originations Q3 revenue declined 55.2% to $12.5 million.
- Mortgage servicing rights fell to $103.1 million from $427.9 million at year-end 2021. The servicing portfolio’s unpaid principal balance declined to $8.77 billion from $39.30 billion, reflecting substantial MSR sales.
- Weighted-average rates on outstanding financing lines of credit increased to 5.66% from 2.75% at year-end 2021. The company also reported obtaining waivers or amendments, or paying off facilities, for certain profitability, debt-service-coverage, and tangible-net-worth covenants; it said it remained compliant with liquidity-reserve covenants.
Outlook, risks, contingencies, and unusual items
- On October 20, 2022, the board authorized a plan to discontinue substantially all Mortgage Originations operations, except the home-improvement channel, and redirect resources to Reverse Originations, Commercial Originations, Lender Services, and Portfolio Management. The plan was expected to begin in Q4 and be substantially complete by year-end. Severance, retention, contract-termination, and other charges are expected; amounts were not provided.
- The company gave no numerical earnings or revenue guidance. Management described inflation, rising interest rates, market volatility, wider credit spreads, and weaker mortgage demand as pressures on volumes, margins, fair values, and funding costs. It cautioned that liquidity and refinancing access depend on operating performance and continued availability of financing facilities.
- Reverse mortgage operations carry significant borrower-advance and repurchase obligations. Unfunded borrower commitments were approximately $3.1 billion for agency and non-agency reverse loans, $133.0 million for fix-and-flip loans, and $19.7 million for agricultural loans at September 30.
- Fair values for many loans, servicing rights, and related obligations rely on Level 3 inputs and management assumptions; changes in rates, spreads, prepayments, credit losses, or home prices could materially affect reported results.
- The company reported a $23.5 million tax charge associated with establishing a valuation allowance against deferred tax assets. It also released previously estimated contingent tax-receivable-agreement liabilities through earnings; the remaining TRA liability was $4.9 million, down from $29.4 million at year-end 2021. TRA payments, if due, generally provide certain former owners 85% of specified realized tax benefits.
- As of September 30, the company said no litigation matters were both probable or reasonably possible and estimable. Three coordinated California PAGA lawsuits remained unresolved; the company said potential losses could not be reasonably estimated.
- Disclosure controls were deemed ineffective because material weaknesses remained in accounting for complex equity and financial instruments and in controls over income-tax accounting for significant transactions. Management said remediation was underway but not yet complete.
- After quarter-end, the company increased affiliate revolving promissory-note commitments from $30 million to $50 million and extended maturity to July 31, 2023, at 6.5% interest. It also entered into a reverse HECM MSR-backed financing arrangement of up to $75 million, maturing in 2027.
Important facts for investors to verify
- Progress, total costs, and realized savings from the Mortgage Originations discontinuation plan, including effects on remaining businesses and financing capacity.
- Liquidity availability under credit facilities, covenant waivers and amendments, facility renewals, and the impact of higher variable borrowing costs.
- Valuation assumptions and sensitivity of Level 3 assets and liabilities to rates, spreads, prepayments, credit performance, and home-price changes.
- The scale and funding needs of reverse-mortgage advances, repurchases, servicing obligations, and unfunded commitments.
- Whether the material weaknesses are remediated and controls operate effectively; also monitor the California PAGA cases and any resulting financial exposure.
- Reconcile cash-flow trends, debt carrying and fair values, and reported non-GAAP measures to GAAP results; adjusted measures do not represent discretionary cash available to shareholders.