FoA sees reverse, home improvement as key to its future

Finance of America Companies (FoA), the parent company of leading reverse mortgage lender Finance of America Reverse (FAR), reported a fourth straight quarter of losses in Q3 2022 amid a challenging mortgage market. This news followed a recent decision to close down its forward mortgage subsidiary, Finance of America Mortgage (FAM).

FAR saw an overall 28% reduction in funded reverse mortgage volume in Q3, which FoA attributed to “a strategic decision to reduce correspondent aggregation.”

Despite the drop in volume, FAR experienced its seventh consecutive quarter of growth among new-to-reverse customers in its HomeSafe reverse mortgage product suite. It also tallied $72 million in Q3 revenue. That revenue was lower compared to Q2, a result of industrywide reductions in volume, but was partially offset by improved margins, the company said.

Reverse without forward

In it prior 2022 earnings calls, FoA leadership has emphasized that its specialty finance and services (SF&S) businesses — including FAR and its home improvement lending subsidiary — will be a greater focus of the company’s lending activities.

During the earnings call, interim FoA CEO Graham Fleming emphasized the importance of FAR to the company going forward.

“[W]e believe that in the future, many consumers will seek to broaden discussions with their financial advisors to include home equity, as they reassess retirement planning and their long-term financial needs,” Fleming said. “Against this backdrop, and with FoA’s leading position offering reverse mortgage products that leverage home equity, we will better serve our customers in their financial journey. Our company has a history of product innovation, and our reverse business has a tremendous opportunity to continue this legacy during these changing market conditions.”

Fleming also noted FoA’s desire to expand partnerships with existing forward mortgage lenders and other financial services companies. The goal is to bring more of FAR’s products — including the Federal Housing Administration (FHA)-backed Home Equity Conversion Mortgage (HECM) and its HomeSafe reverse mortgage loans — to a broader range of professionals in anticipation of the wider incorporation of home equity into retirement plans.

“Where we previously were focused on leveraging our own mortgage retail platform to offer these products, we will now pursue the opportunity to expand this program throughout the mortgage industry,” Fleming said. “We intend to have several large retail lenders and other financial services companies offer our reverse products.”

Education as a business driver

Fleming also noted during the call the importance of education to expanding the awareness and distribution of reverse mortgage loans to a broader audience, citing the recent educational collaboration with Morningstar as a move that exemplifies its priorities surrounding product education.

“We continue to believe that education is key to the growth of the reverse industry, and that collaboration will make education about reverse mortgages, including the Finance of America suite of products, available to around 150,000 advisors,” Fleming said. “By teaming with Morningstar, we can ensure that mortgage advisors are educated about home equity as they create diverse and long-term financial strategies for their clients.”

Fleming characterized FoA’s SF&S businesses as profitable, with FAR earning $34 million in pre-tax income in Q3. He also noted that the reverse mortgage business has not been immune to the harsher economic climate, which has plagued the forward mortgage market.

“The industry has not been immune to the impacts of the market, and we are seeing attractive opportunities to strengthen our platform and expand this cornerstone line of business,” Fleming said. “This should allow FoA to exit this downturn in a position of strength, to capitalize on structural long-term market opportunities resulting from Baby Boomers’ significant home equity.”

FoA’s home improvement loan vertical was described as a “complement” to FAR, serving as an “efficient customer acquisition channel” and assisting in the educational mission for FAR and its reverse mortgage products.

“The average age of a home improvement customer is 52 years old, as these customers look to update their home for retirement,” Fleming said. “A home improvement loan offers an effective solution for homeowners seeking to leverage their equity and is an attractive option for those who have already locked in low interest rates on their mortgages.”

Potential for new products

During the Q&A session of the earnings call, Fleming was asked to expand on the activity in the reverse mortgage segment in light of unexpected losses.

“We are seeing reductions in refinance volume, as rates have gone up,” Fleming said. “And then we’ve reset rates based upon current securitization economics on the deals that we’re issuing. We are, as I mentioned, continuing to see growth in new-to-reverse. And given the current economic climate, we are working on some new products that will assist seniors accessing equity.”

Fleming also explained that FoA backed off some correspondent acquisitions in Q3, and that volumes were down as a result.

“[That was due to] not acquiring, I think on an equivalent basis in Q2, about $150-200 million of correspondents,” he said. “So we think as that market normalizes, we’ll be able to increase the volume through new-to-reverse, a second lien product, and increasing our correspondent acquisitions.”