Business context and reporting period
Finance of America Companies Inc. (NYSE: FOA) filed this Form 10-K for the fiscal year ended December 31, 2022. It operated five segments during 2022: Mortgage Originations, Reverse Originations, Commercial Originations, Lender Services and Portfolio Management. Because the 2021 results span “Successor” and “Predecessor” accounting periods, the company compares 2022 with their combined results; that comparison is not GAAP or pro forma. The filing reports annual results, not a separate Q4 income statement.
Management is reshaping the company around reverse mortgages and retirement solutions. The traditional mortgage wind-down, excluding home improvement, was completed February 28, 2023. The Commercial Originations asset sale closed March 14, 2023. The AAG acquisition and sale of the ANTIC and BNT title businesses were pending as of the filing date.
Financial performance and position
| Metric | FY 2022 | Prior comparable period |
|---|---|---|
| Total revenue | $573.2 million | $1.736 billion combined 2021 |
| Net loss | $715.5 million | $1.177 billion combined 2021 |
| Adjusted EBITDA (non-GAAP) | $(42.5) million | $301.6 million combined 2021 |
| Adjusted net income (loss) (non-GAAP) | $(60.6) million | $201.4 million combined 2021 |
| Operating cash flow | $1.408 billion provided | $(96.6) million combined 2021 |
Revenue fell about 67% year over year, principally due to lower traditional mortgage volume and margins, reduced lender-services activity, and weaker fair-value results. The consolidated net loss improved year over year, but the company remained loss-making. The loss attributable to controlling interest was $190.7 million; basic and diluted loss per share were $3.06 and $3.12, respectively. The filing’s non-GAAP measures exclude items including fair-value changes, impairments and certain costs; they are not substitutes for GAAP results or cash flow.
Mortgage Originations generated $298.8 million of revenue and a $294.6 million pretax loss. Net rate-lock volume fell to $11.9 billion from $29.0 billion in 2021; the reported origination margin was 1.94% versus 2.64%. Reverse Originations produced $289.4 million of revenue and $128.3 million of pretax income. New reverse-loan originations rose 13.4% to $4.8 billion, while production margin declined to 5.87% from 9.05%. Portfolio Management reported a $347.4 million pretax loss, largely reflecting fair-value losses on portfolio assets and liabilities.
Operating cash flow was positive despite the net loss, primarily because of loan-sale proceeds and changes in operating assets and liabilities. Investing activities used $1.819 billion and financing activities provided $225.2 million. Cash and restricted cash declined $186.2 million to $277.4 million, including $97.4 million of unrestricted cash. The company reported approximately $1.4 billion of liquidity sources at year-end, including about $1.3 billion of undrawn warehouse lines; availability is subject to facility terms and covenants.
Total assets were $20.9 billion, total liabilities $20.5 billion and equity $404.8 million at December 31, 2022. The company reported total indebtedness of approximately $20.2 billion, including $399.4 million of notes payable and $11.0 billion of HMBS-related obligations; it also reported $7.3 billion of nonrecourse debt. About 93% of outstanding debt was variable-rate after derivatives. The weighted average rate on financing lines of credit increased to 8.14% from 2.75%.
Material changes versus the prior comparable period
- Revenue declined from about $1.7 billion to $573.2 million as higher rates reduced mortgage demand, refinancing and related service volumes.
- Mortgage loan sales fell to $14.6 billion from $29.5 billion; weighted average gain-on-sale margin declined to 0.9% from 2.9%.
- Fair-value losses from market inputs and model assumptions increased, particularly on long-term portfolio assets and liabilities. The company recorded $192.5 million of impairment charges in 2022, primarily in Mortgage Originations and Lender Services.
- Expenses declined with lower volume, reduced headcount and cost-cutting, but remained substantially above revenue.
- Reverse mortgage production expanded, but lower margins and higher costs reduced segment revenue versus the combined 2021 period.
- Mortgage servicing rights fell to $95.1 million from $427.9 million, alongside a substantial reduction in the serviced agency portfolio.
Outlook, risks and unusual items
The company provided no specific numeric earnings or revenue guidance. Management expects to focus on reverse mortgages and retirement solutions, citing the large home-equity market among older homeowners. It expects the AAG acquisition to expand reverse-mortgage distribution and revenues; the planned consideration included $10 million cash and approximately $50 million in FoA Equity units. A committed $30 million equity raise was linked to the acquisition closing. The planned ANTIC and BNT sale carried approximately $100 million gross cash consideration, or about $65 million net of cash on hand, and was expected to close in Q2 2023.
Management disclosed that, before considering its plans, the losses, market conditions and covenant pressures raised questions about the company’s ability to meet obligations over the following 12 months. Management concluded its plans were probable and expected to provide sufficient liquidity, including business exits, asset sales, the AAG transaction and an extension of revolving working-capital lines through May 15, 2024. This conclusion depends on execution and transaction closings. The company had obtained covenant waivers or amendments during 2022; FAM also received waivers for specified net-worth covenant violations. FAR’s capital-ratio waiver from Ginnie Mae remained important.
Key risks include refinancing and variable-rate debt costs, warehouse-line renewals and covenant compliance, access to secondary markets for reverse loans, required HECM buyouts, and reliance on fair-value models using significant Level 3 inputs. The company disclosed approximately $3.1 billion of unfunded reverse-mortgage borrower commitments. California represented 44% of mortgage, reverse and commercial originations by unpaid principal balance. Legal and regulatory matters include coordinated California PAGA employment cases for which the company could not estimate a loss range, and CFPB orders applicable to AAG that FOA would assume upon acquisition. The filing also describes broad consumer-protection, licensing, cybersecurity and servicing risks.
The financial-statement and internal-control audits received unqualified opinions. The auditor identified liquidity/going concern assessment and fair value of reverse loans and related obligations as critical audit matters. Management reported effective disclosure controls and internal control over financial reporting and stated previously identified material weaknesses had been remediated.
Important facts for investors to verify
- Whether the AAG acquisition, related $30 million equity raise and expected integration benefits were completed on the stated terms, and how compliance with AAG’s CFPB orders is being monitored.
- Cash proceeds and timing from the title-business sale and other asset dispositions, and the remaining assets, liabilities and costs after the company’s business exits.
- Current unrestricted liquidity, facility availability, covenant-waiver terms and upcoming financing maturities; distinguish reported liquidity capacity from cash freely available to the holding company.
- Actual cash conversion and operating performance behind positive 2022 operating cash flow, including the effect of loan sales, servicing advances and HECM buyout requirements.
- Sensitivity of reported earnings and equity to Level 3 fair-value assumptions, impairment charges and future market-spread changes.
- Progress toward sustainable profitability in the focused reverse-mortgage business, including realized origination margins, funding access and post-acquisition costs.