Business context and reporting period
Finance of America Companies Inc. (FoA) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company is restructuring around reverse-mortgage retirement solutions and portfolio management. It acquired AAG/Bloom assets on March 31, 2023 and exited or wound down traditional mortgage, commercial origination, and lender-services operations; these exited businesses are presented as discontinued operations.
Key financial results and position
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Continuing-operations revenue | (70.4) | (37.5) | (41.5) | (11.8) |
| Continuing-operations net loss | (172.5) | (104.7) | (337.6) | (276.8) |
| Net loss, including discontinued operations | (174.9) | (301.7) | (382.8) | (533.5) |
| Net loss attributable to controlling interest | (65.4) | (84.5) | (141.4) | (133.7) |
| Basic loss per share | (0.75) | (1.35) | (1.77) | (2.16) |
Negative revenue reflects sizable fair-value and loan-sale losses. Q3 net fair-value losses on loans and related obligations were $53.1 million, compared with $10.2 million a year earlier. Nine-month net fair-value gains were $30.1 million, versus losses of $5.1 million in 2022. Management attributed the broader period’s results to weak origination volume, market-spread and interest-rate effects, and lower servicing-related income. Nine-month pre-tax loss from continuing operations included $197.5 million of noncash fair-value adjustments.
Net interest margin, as defined by management across reported interest components, was $45.7 million in Q3 2023 versus $29.8 million, and $128.2 million for nine months versus $86.0 million. The company reported no conventional positive operating margin in the periods summarized; continuing operations remained loss-making.
- Origination: Reverse-mortgage new-originations volume was $470.0 million in Q3, down from $1.14 billion; nine-month volume was $1.18 billion, down from $4.19 billion. Weighted average production margin rose to 6.68% from 6.27% in Q3 and to 7.53% from 6.08% for nine months.
- Cash flow: For the first nine months, operating cash flow was negative $10.2 million, investing cash flow was positive $139.3 million, and financing cash flow was negative $124.0 million. Cash and restricted cash totaled $282.6 million at period-end, including $66.3 million of unrestricted cash and $216.3 million of restricted cash.
- Balance sheet: Total assets were $26.40 billion and total liabilities $26.29 billion at September 30, 2023; equity was $103.6 million, down from $404.8 million at year-end 2022. Accumulated deficit was $775.7 million.
- Debt and liquidity: The filing describes approximately $26.1 billion of debt obligations, principally HMBS-related obligations and nonrecourse debt supported by loan collateral. Balance-sheet amounts included $17.0 billion of HMBS obligations, $7.8 billion of nonrecourse debt, $852.8 million of other financing lines, and $411.1 million of notes payable. Total unrestricted and restricted cash was $282.6 million.
Material changes versus prior comparable periods
- Q3 continuing-operations pre-tax loss widened to $172.6 million from $113.2 million, chiefly because lower reverse-mortgage originations reduced origination gains and fair-value performance weakened. Q3 reverse-mortgage originations were 58.6% lower year over year.
- Nine-month continuing-operations pre-tax loss increased to $338.4 million from $295.2 million despite lower fair-value losses and lower expenses. Origination gains fell to $88.8 million from $254.8 million, and fee income fell to $33.4 million from $72.2 million.
- Q3 total expenses increased 14.2% to $105.4 million year over year, partly reflecting AAG platform infrastructure and business-development spending. Nine-month expenses declined 5.7% to $299.2 million, reflecting cost reductions and lower headcount.
- MSR fair value fell to $7.9 million from $95.1 million at year-end 2022; the related servicing portfolio UPB declined to $1.07 billion from $8.60 billion, largely following asset sales.
- The AAG/Bloom asset acquisition had total recorded consideration of $215.4 million, including $140.9 million cash consideration and equity-related consideration. FoA also sold ANTIC/BNT and other lender-services assets and completed a sale of commercial-origination operational assets.
Outlook, management commentary, risks and contingencies
Management cited persistent inflation, higher interest rates, reduced customer demand, compressed margins, and wider market spreads as pressures on results and liquidity. It expects to wind down the remaining Home Improvement loan pipeline by the end of March 2024 and substantially complete the Incenter Solutions wind-down by the end of 2023. The filing provides no specific earnings or revenue guidance.
Management stated it believes available actions and operating results will provide sufficient liquidity to meet obligations and covenants for at least twelve months and one day from issuance of the financial statements. The company extended revolving working-capital line maturities to November 30, 2024. It also disclosed covenant challenges: certain warehouse-facility covenants were not met at year-end 2022 and quarter-ends during 2023, with waivers, amendments, or repayments obtained as needed. FAM was below Fannie Mae/Freddie Mac net-worth requirements and in violation of a Fannie Mae tangible-net-worth covenant at quarter-end; FAM had surrendered its Fannie Mae selling approval and expects to surrender remaining agency approvals after servicing transfers, expected in Q1 2024. FAR received a Ginnie Mae capital-requirement waiver.
- Reverse-mortgage unfunded borrower commitments were $4.5 billion at September 30, 2023, up from $3.1 billion at year-end 2022, creating potential funding and liquidity demands.
- Most financial instruments are valued using Level 3 inputs and management estimates; changes in rates, spreads, prepayments, defaults, or home prices could materially affect reported fair values.
- Other risks include refinancing and renewal of warehouse facilities, covenant compliance, integration of AAG/Bloom, the ability to restore profitable operations, servicing and regulatory requirements, and legal or compliance matters.
- The company disclosed three coordinated California PAGA lawsuits; outcomes and possible losses could not be reasonably estimated. It reported no other matters considered probable or reasonably possible with estimable losses.
- Controls and procedures were assessed as effective at September 30, 2023; no material change in internal control over financial reporting was reported for the quarter.
Investor facts to verify
- Whether covenant waivers, amendments, facility renewals, and FAM’s agency-approval transition proceed as planned.
- How much of reported cash is available for general corporate use, given the large restricted-cash balance and $4.5 billion of reverse-mortgage unfunded commitments.
- Whether reverse-mortgage origination volumes and AAG integration generate sufficient recurring gains to offset operating costs and funding expenses.
- The sensitivity and eventual cash realization of Level 3 fair values, particularly under continued high rates or wider spreads.
- Progress and proceeds from business wind-downs and asset sales, and any resulting liquidity, impairment, or contingent-liability effects.