How Finance of America plans to adjust its loan mix as rates rise
January 26, 2022 12:01 PM
While the conditions created by the global pandemic have been unprecedented for everyone, cyclical change is a scenario familiar to CEO Patti Cook and her team, who have been through tough housing cycles before.
Finance of America has been relying largely on traditional mortgage revenue — but not exclusively. During
In a wide-ranging interview with National Mortgage News, Cook shared her take on how the variety of loan channels and products at Finance of America are likely to help the company offset cyclical change for traditional home loans, and how her team could help optimize its results.
What follows are excerpts from that conversation, edited for clarity and length.
Is the diversified loan channel strategy your biggest competitive differentiator in this market cycle?
It is. I think very often, especially since we had this group of mortgage companies go public last year, we’ve gotten grouped with them. I think the biggest thing that we’re trying to get people to recognize is that we’re not just a mortgage company. Mortgage certainly has been a huge component of our business, but that’s not the real story. We separate our businesses into mortgage and specialty finance services. It’s what’s in that other category that differentiates us.
There’s a reverse business, a commercial business or loans to finance investor-owned properties. There’s also ahome improvement business , and we have capital markets and fee-for-service activity. Addressing the turmoil that’s being created in the mortgage market with the rise in rates is just one of our three strategic priorities: optimize the mortgage business so that it makes a little bit of money in 2022. The others are to invest in those other businesses that are growing because they’re not interest-rate dependent, and to spend money on technology and infrastructure in order to improve our ability to cross sell a diversified set of products.
When it comes to what’s going to drive [traditional] mortgages, we’re going to be pretty much like everybody else. We’re going to struggle when there’s declining value and declining margins, but because of distributed retail we will do well in a purchase market. That business is going to trade at a low multiple, because of the volatility associated with mortgages, but we should be getting credit for the other businesses because they’re showing significant and stable growth.
There’s a reverse business, a commercial business or loans to finance investor-owned properties. There’s also a
When it comes to what’s going to drive [traditional] mortgages, we’re going to be pretty much like everybody else. We’re going to struggle when there’s declining value and declining margins, but because of distributed retail we will do well in a purchase market. That business is going to trade at a low multiple, because of the volatility associated with mortgages, but we should be getting credit for the other businesses because they’re showing significant and stable growth.
Would you consider selling and buying in line with the market environment, or will you be more focused on holding and optimizing what you have?
We’re way more likely to optimize what we have because the company was purposely built to have a diverse wide set of products. We’ve bought companies. That's how we formed Finance of America. The first company we bought was the reverse business. Then we bought forward [traditional] mortgage companies and companies like Boston National Title. Now we're taking those products and improving the way we go to market, offering them so that we can maximize the household value of the customers we're doing business with. We bought these companies purposefully. They all have different drivers.
Does your experience with companies that have seen the mortgage industry’s ups and downs inform your approach?
Definitely. I think that’s not only true of myself, but other members of the management team. Certainly [founder and chairman] Brian Libman. He spent a good portion of his career at Lehman Brothers in mortgages. When I look back, I think about the things that I learned at Salomon Brothers when it was at the cutting edge of mortgage innovation during the ‘80s. Mortgage-backed securities didn't exist, neither did CMOs [collateralized mortgage obligations]. Those were all founded during that time period.
Part of my DNA is capital markets. What I learned by being at Freddie Mac from the best of times to the worst of times was sure a game changer for me. So the opportunities I’ve had from a financial and capital markets perspective, the operating experience that I got at Green Tree and now at Finance of America have formed a skill set that I'm very glad I have. You don't always get to put your experience to work later in your career. I look at it now and I'm lucky that at 68, I'm still benefiting from the 42 years of experience I’ve had.
Part of my DNA is capital markets. What I learned by being at Freddie Mac from the best of times to the worst of times was sure a game changer for me. So the opportunities I’ve had from a financial and capital markets perspective, the operating experience that I got at Green Tree and now at Finance of America have formed a skill set that I'm very glad I have. You don't always get to put your experience to work later in your career. I look at it now and I'm lucky that at 68, I'm still benefiting from the 42 years of experience I’ve had.
How will you use that knowledge to navigate this market cycle change and optimize FoA’s mortgage business?
As the mortgage market contracts because of the reduction in refis, we expect purchases to stay robust. We've launched a product called Flex, which is meant to serve those borrowers that just miss getting approved by the [government-sponsored enterprises that buy a large share of mainstream loans in the United States]. It's not like we're going to go down to [a FICO score of] 640, 620, or 600. It's more looking at who missed because their W-2 [tax form] is weighted towards an independent business of theirs, or somebody who might have had a problem during COVID for a certain amount of time, but is now back on their feet.
We’re tweaking the guidelines a little bit outside of the agencies and have the benefit of our capital markets team on the back end [to optimize secondary market disposition]. We deal directly with investors, sovereign wealth funds, and large insurance companies.
A great example we're proud of is a product in reverse calledHomeSafe. It's a jumbo reverse [that allows people to withdraw equity from the home while living in it] and we like to call it a category killer. The loan sizes are bigger than [those of the Home Equity Conversion Mortgages that the Federal Housing Administration insures] and we've got an outlet for it.
We’re tweaking the guidelines a little bit outside of the agencies and have the benefit of our capital markets team on the back end [to optimize secondary market disposition]. We deal directly with investors, sovereign wealth funds, and large insurance companies.
A great example we're proud of is a product in reverse called
You were talking about cross selling. What’s the extent to which you see mortgage servicing as an anchor for that?
I think we look at our servicing strategy from two dimensions. You've always gotta be asking yourself, what is the value of that servicing asset? That asset got really cheap in March of 2020. Up until then, we had been selling MSRs. We started retaining [mortgage servicing rights] in the spring of 2020. I wouldn't say it's a permanent part of the strategy, that we will always retain MSRs. We might be a little more opportunistic than some of our competitors. Whether or not we retain the MSR, we want to retain the customer. We think about wanting to bring that customer into our ecosystem and offer them other things besides just a mortgage. Obviously, if you retain servicing, the ability to be in front of them is enhanced. If we don't own the servicing, we've got to find other ways to reach them.
The whole industry, in a way, is trying to do what we're doing. Some of our mortgage competitors are beginning to offer other products. There's definitely a theme of diversification and cross sell.
The whole industry, in a way, is trying to do what we're doing. Some of our mortgage competitors are beginning to offer other products. There's definitely a theme of diversification and cross sell.
Have you tried to emphasize retention?
During the refi boom, one question was, what percent of your prior borrowers are coming back to you for a mortgage? Here's a really interesting statistic. In our retail business, even on our sold MSRs, we were capturing 50-plus percent of those loans and I think it says a lot. Our retention rates in distributed retail were high. In our call center, they were much lower than a company like Rocket’s, but that business is relatively small for us. The bulk of our recapture rates were coming through distributed retail and the rates are high there. Now that we own our MSRs, they've gone even higher.
It sounds like your main channel will continue to be distributed retail for the foreseeable future?
I would say that's a core part of our franchise. We're glad to have it as we head into a purchase market. I think when you look at some of our other offerings like home improvement, that'll feel like a more digital experience, even if that borrower came through the LO. Imagine you and I did our first mortgage together and it was a traditional retail relationship. If you've agreed and you're in our ecosystem, I'm going to ping you periodically on the opportunity to do a home improvement loan or the opportunity to look at a reverse, if it were age appropriate. Certainly our distributed retail is very important to the franchise.
How do you manage internal referrals?
Over the last couple of years, it's been kind of hard to get our LOs’ attention for anything other than what was just flowing over the transom. We've actually adjusted our incentive plans for them to get them to focus on non-mortgage. I think the challenge for us is that the LO still wants to control that relationship. They have to feel confident that that borrower is being well cared for. The communication between the sourcing LO and the referral partner has to be really good.
What does your channel mix look like for different products?
Even for [traditional] mortgages, we have some wholesale, which is smaller than retail. The reason we like wholesale for mortgages, despite the incredible margin pressure right now, is if you have non-agency products, that is a fast way to get that product out there. So we have kept that channel for a time like this, when we think there's an opportunity for non-agency.
In reverse, the majority of that volume is coming through wholesale. They're using brokers to originate. In commercial, the bulk of that volume comes through direct relationships with investors. There's a relatively small group of people that offer competitive fix-and-flip and single-family rental loans. The industry knows who they are. A lot of them come to us directly and then are repeat borrowers.
The [traditional] mortgage company is contributing volume that is very small at this point in a channel like reverse, it doesn't move the dial. The number coming from a mortgage referral that's internal is a little more meaningful in commercial but the products are each very much growing on their own. I look at the ability for mortgage to cross sell non-mortgage products as a little bit of the icing on the cake.
In reverse, the majority of that volume is coming through wholesale. They're using brokers to originate. In commercial, the bulk of that volume comes through direct relationships with investors. There's a relatively small group of people that offer competitive fix-and-flip and single-family rental loans. The industry knows who they are. A lot of them come to us directly and then are repeat borrowers.
The [traditional] mortgage company is contributing volume that is very small at this point in a channel like reverse, it doesn't move the dial. The number coming from a mortgage referral that's internal is a little more meaningful in commercial but the products are each very much growing on their own. I look at the ability for mortgage to cross sell non-mortgage products as a little bit of the icing on the cake.
