Finance Of America Companies Inc. quarterly report, Q2 FY2022

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Finance of America Companies Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement figures are generally converted from thousands to millions. Comparisons with 2021 require caution because the filing presents both Successor and Predecessor periods following the April 2021 business combination.

Business context

FoA is a financial-services holding company whose subsidiaries originate and service residential and reverse mortgages, commercial real-estate and agricultural loans, and provide lender services. It reports five operating segments: Mortgage Originations, Reverse Originations, Commercial Originations, Lender Services, and Portfolio Management. Effective January 1, 2022, Commercial Originations subsidiary FACo merged into FAM.

Financial performance and liquidity

  • Q2 revenue: $141.1 million, down from $389.1 million in Q2 2021. The filing attributes the decline chiefly to lower mortgage gain-on-sale revenue and sharply lower fair-value gains.
  • Q2 earnings: Consolidated net loss was $167.8 million, versus a $14.8 million loss a year earlier. Net loss attributable to controlling interest was $40.7 million, or $0.65 per basic share and $0.70 per diluted share. Q2 Adjusted EBITDA was negative $18.9 million and Adjusted Net Income was negative $21.8 million; both are non-GAAP measures.
  • Q2 costs and margins: Expenses were $325.0 million, down from $400.8 million. Mortgage Originations margin, including servicing margin, was 2.14%, compared with 2.78%; net rate-lock volume was $3.8 billion versus $6.7 billion. Reverse Originations production margin was 4.93%, compared with 9.33%.
  • First-half results: Revenue was $408.6 million and consolidated net loss was $231.8 million. Adjusted EBITDA was $40.9 million and Adjusted Net Income was $15.5 million. Management reported mortgage origination margin of 2.12%, versus 3.13% in the comparable 2021 period, and net rate-lock volume of $9.1 billion, versus $15.1 billion.
  • Cash flows: For the six months, operating activities provided $754.7 million, investing activities used $1.226 billion, and financing activities provided $581.6 million. Cash and restricted cash totaled $573.8 million at June 30, including $219.0 million of cash and cash equivalents and $354.8 million of restricted cash.
  • Balance sheet and debt: Total assets were $21.736 billion, total liabilities $20.873 billion, and equity $863.2 million at June 30. Key obligations included $10.746 billion of HMBS-related obligations, $6.752 billion of nonrecourse debt, $2.593 billion of other financing lines, and $353.0 million of notes payable. Management described total debt obligations as approximately $18.0 billion.
  • Liquidity and covenants: The company reported compliance with required liquidity-reserve covenants, but obtained waivers or amendments for certain profitability, debt-service-coverage, and tangible-net-worth covenants effective June 30. FAR had a Ginnie Mae waiver for its minimum capital ratio. Financing capacity is subject to asset eligibility and covenant compliance.

Material changes and management commentary

  • Higher interest rates and market yields pressured loan fair values, mortgage production volumes and gain-on-sale margins. Q2 fair-value losses from changes in market inputs or model assumptions were $112.2 million; first-half losses were $249.9 million, primarily reflecting higher discount-rate assumptions.
  • Mortgage Originations weakened: Q2 loan sales were $4.7 billion versus $7.0 billion a year earlier, and weighted average gain-on-sale margin on sold loans fell to 0.3% from 2.4%. Higher realized hedge gains partly offset the margin decline.
  • Reverse Originations volume grew, but lower production margins reduced Q2 segment revenue to $80.0 million from $95.5 million. Commercial Originations reported a Q2 segment loss before taxes of $11.7 million, including negative $4.0 million of net origination gains.
  • Lender Services revenue declined as rising rates reduced refinance-related title and closing activity. Portfolio Management was particularly affected by fair-value losses; its Q2 segment loss before taxes was $129.1 million.
  • MSRs were $359.0 million, down from $427.9 million at year-end 2021. The servicing portfolio’s unpaid principal balance declined to $29.5 billion from $39.3 billion, including substantial MSR sales during the first half.
  • Management said existing facilities, operating cash flows and portfolio financing were expected to support ongoing cash requirements, and anticipated renewing or replacing maturing facilities. The filing provides no specific earnings or revenue guidance.

Risks, contingencies and unusual items

  • FoA identified a continuing material weakness in internal control over financial reporting, involving complex financial instruments and significant or unusual transactions, including income-tax accounting. Disclosure controls were concluded to be ineffective as of June 30, 2022. Management said the statements were fairly presented and described remediation efforts; the weakness is not considered remediated until controls operate effectively and are tested.
  • Interest-rate, spread, liquidity and fair-value risks are significant. Most mortgage assets and related obligations are carried at fair value, and many valuations rely on unobservable Level 3 assumptions.
  • The company had approximately $2.9 billion of unfunded reverse-mortgage borrower commitments, plus $123.2 million for fix-and-flip and $56.5 million for agricultural loans. These may require funding before securitization or other financing.
  • Four coordinated California PAGA representative lawsuits were disclosed. One plaintiff sought voluntary dismissal in July 2022; the outcomes and any loss range could not be reasonably estimated. The company reported no other matters it considered probable or reasonably possible with estimable losses.
  • Inflation, Federal Reserve rate increases, COVID-19 effects and the Russia-Ukraine conflict were cited as sources of market and operating uncertainty. The filing also identifies regulatory, agency approval, financing, counterparty and servicing risks.

Important facts for investors to verify

  • Review the covenant waivers and amendments, remaining headroom, and refinancing or renewal status of facilities with near-term maturities.
  • Track mortgage and reverse-loan origination volumes, gain-on-sale and production margins, and the effects of further rate or spread changes on fair values.
  • Assess the quality and liquidity of cash and restricted cash, as well as the capacity to fund borrower draws and other unfunded commitments.
  • Monitor remediation and independent testing of the material weakness in financial reporting controls.
  • Review Level 3 valuation assumptions, MSR portfolio changes, legal developments and potential cash obligations under tax receivable agreements.