Finance of America Companies (NYSE: FOA), parent organization of leading reverse mortgage lender Finance of America Reverse (FAR), has released its second quarter 2021 earnings report after successfully going public earlier this year, touting its reverse mortgage arm as key to its portfolio diversity as well as for having record levels of revenue so far this year when compared to prior, pre-IPO years.
While total revenue for the entire FOA organization was down when compared to Q1 2021, all segments have displayed “substantial growth” when directly compared to the first six months of 2020, and the reverse segment in particular was highlighted for making a substantial contribution to the quarter’s earnings. Changing dynamics on the forward lending side led to drops in revenue, however the reverse mortgage segment is not as prone to such changes which contributed to its high level of performance.
Reverse pushes FOA forward
FOA CEO Patti Cook describes difficult dynamics on the traditional mortgage and lending businesses, but the diversified portfolio allowed FAR to have a positive effect on the company’s overall revenue in Q2.
“Our market leading reverse originations segment generated strong growth in earnings contribution in the second quarter,” Cook explained in the announcement of FOA’s Q2 earnings. “Importantly, the reverse business is less correlated to the direction of interest rates than the forward mortgage market, and we believe the segment is well positioned to generate strong and sustainable growth. Baby boomers are increasingly looking to age in place, and our reverse mortgage products enable this demographic to tap into the equity accumulated in their homes to fund or supplement their retirement savings.”
Funded reverse mortgage volume increased in Q2 to slightly over $1 billion, a 32% increase over each of Q1 2021 as well as Q2 2020, which accounts for the highest quarterly volume ever for FAR. Funded volume and total revenue both saw increases, which the company credits to “distinct tailwinds in the reverse origination segment.”
Pre-tax income increased to $53 million in Q2, an increase of $20 million when compared to Q2 2020 and of $8 million when compared to Q1 2021. Reverse mortgage loans held for investment, subject to Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) related obligations at fair value increased from $9.9 million in December 2020 to over $10.3 million as of June 30, 2021 pending an audit.
Reverse mortgage originations also helped to stem losses seen in other areas of the business, according to Cook.
“Our working segment was not immune to the industry dynamics, and we saw declines in revenues aligned with our peers. In contrast, we saw substantial growth in our reverse, commercial, and lender services segments,” Cook said in an earnings call on Thursday morning. “Both reverse and lender services generated record revenue in the quarter, and in combination, revenue growth from these three businesses offset a portion of our mortgage revenue decline.”
‘Very proud’ of reverse business performance, FAR president comments
When the earnings call turned to a segment led by FOA CFO Johan Gericke, the executive specifically called out the reverse mortgage business segment as a driver of profitability for the whole organization.
“[W]e are very proud of the results generated in our reverse business,” Gericke said. “Funded volumes were up 32% quarter-over-quarter to $1 billion, our highest quarter ever. This generated segment revenue of $95 million and pre-tax income of $53 million for the second quarter of 2021, up 38% and 18% respectively compared to prior quarter levels. The reverse segment results also includes $4 million of non-recurrent costs related to the business combination.”
The opportunity for growth present specifically in the reverse mortgage industry was further emphasized by Graham Fleming, president of Finance of America Companies.
“Finance of America is a leader in the reverse mortgage industry and has been the top producer in the wholesale channel for more than a decade,” Fleming said. “The opportunity is to work with industry peers and partners to increase awareness of product benefits, leading to greater adoption. Therefore, we are focused on educating seniors on their opportunities in retirement, and we are well-positioned to make home equity an accepted part of a prudent sustainable retirement plan.”
This helps to make additional opportunities in the reverse mortgage business both “sizable and under-penetrated,” Fleming said, especially considering current estimates placing the value of senior-held home equity at over $8 trillion according to an analysis by the National Reverse Mortgage Lenders Association and data analytics firm RiskSpan.
“Less than 2% of this addressable market has taken advantage of a reverse mortgage,” Fleming said. “As mentioned earlier, the secular tailwinds in reverse are tied to the increasing senior population, which is growing at 3% annually. Add to that the fact that 90% of seniors want to age in place, and it is clear this presents a substantial opportunity to create value for shareholders over time.”
The quarter also saw the funding of the first “EquityAvail” loan, the proprietary hybrid forward/reverse mortgage product introduced by FAR earlier this year. When reached for comment, FAR President Kristen Sieffert commented on the milestones recognized by the parent company in the earnings report and presentation.
“FAR continues to be a leader in the industry. We saw record success in Q2 with over $1 billion in reverse originations—a significant milestone for our company,” Sieffert told RMD in a statement. “In the near term, we remain focused on educating potential customers about the diverse and holistic solutions available to them in retirement, in addition to raising awareness of our impressive product benefits and new innovative offerings like EquityAvail. With this strong foundation and the power of our platform, we are well positioned to meet strong demand among the increasing population of Baby Boomers looking to access equity in their homes to age in place.”
Stock price takes a hit due to forward performance
In spite of the positive performance the company recorded in reverse originations, the market reacted poorly to news of lower originations and revenues in the company’s larger traditional mortgage business. Late day trading on Thursday saw FOA’s stock price fall nearly 21% in reaction to narrower gain on sale margins and their effect on overall financial results. Total revenue for the quarter declined by $119 million, translating to a loss of 23% quarter-on-quarter to $389 million largely due to lower revenue on traditional mortgage originations.
Funded volume of mortgage originations fell by nearly $7 million, translating to 18% quarter-on-quarter. Gain on sale and other income from mortgage loans held for sale fell by nearly $104 million compared to Q1 2021, settling at $187.6 million.
The performance on the forward side may indicate why FOA wanted to highlight the generally positive performance of the reverse mortgage business, however that does not disqualify the gains on the reverse side. Time will tell whether or not the positive results from FAR will be persuasive to investors in the larger organization.
According to HECM volume data compiled by Reverse Market Insight (RMI), FAR is the third-largest lender in the reverse mortgage industry, recording 4,663 endorsements in the 12-month period ending July 31.
