Finance of America reports first earnings after massive pivot

Finance of America ended 2022 far smaller than what it was just months earlier, but leaders said plenty of work still remained to shore up its balance sheet following its latest quarterly loss.

The Plano, Texas-based mortgage company posted a net loss of $182 million in the fourth quarter of 2022, a period that saw Finance of America pivot toward becoming a "retirement-focused home equity provider." The company trimmed its deficit from $301.7 million three months earlier and $1.34 billion over the same period in 2021.

"By simplifying our business structure and focusing on its inherent efficiency, we will be, one, well positioned for long-term growth and two, set up to be the preeminent choice for Americans looking to achieve their retirement goals using their home equity," said President and Interim CEO Graham Fleming in the company's earnings call.

In a year that opened with a massive internal restructuring, Finance of America's net loss came in at $715.5 million compared to a negative profit of $1.18 billion 12 months prior. 

As application volumes diminished throughout 2022, the company later announced an end to its wholesale lending channel in October, followed by an exit altogether from forward-mortgage originations days later. 

Transforming its business model entirely toward reverse lending, Finance of America then acquired the nation's leader in the segment, American Advisors Group in December, before selling off other non-core parts of the business in 2023, including title insurance operations and its commercial lending subsidiary.

When excluding losses from mortgage and commercial originations and other lender services, Finance of America said it would have gained $53 million in adjusted net income last year. 

Total revenue for 2022 clocked in at $573.2 million compared to $1.74 billion a year earlier. In the fourth quarter, the company generated revenue of $93.6 million, an increase from $71.1 in 3Q, but down from $383 million in the final three months of 2021.

As the year began, leaders said getting finances in order remained top of mind, even as it moves toward combining American Advisor Group's assets within its organization. Having received regulatory approval, the merger is expected to close at the end of March. AAG is the largest originator of government-sponsored Home Equity Conversion Mortgages, while Finance of America leads in proprietary reverse products.

"We've been more focused on the balance sheet than new originations," said Chief Financial Officer Johan Gericke.

Cash in the fourth quarter decreased over 42% to $97.3 million from $169 million in 3Q, solely due to the operational losses in the mortgage origination segment, according to Gericke.

To preserve liquidity, Gericke said Finance of America sold over $200 million worth of loans since late 2022 and has committed trades to sell the majority of remaining volume by the end of the first quarter, as it winds down mortgage and commercial originations segments.

Liquidity at reverse-mortgage businesses turned into a heightened source of concern in home finance after the bankruptcy of one of Finance of America's competitors Reverse Mortgage Funding, in December. Many of the characteristics of RMF's portfolio leading to its shutdown are likely lurking in the books at other lenders, according to a recent analysis by the Urban Institute. 

"We had some uncertainty around securitization execution," Gericke said, alluding to events at RMF. "So we were primarily focused in Q4 and Q1 on delevering the balance sheet and moving those assets into securitizations." 

Since the tail end of 2022, Finance of America has completed four securitizations worth over $1.4 billion in reverse-mortgage volume, it said.

In the fourth quarter, its reverse originations segment posted a pretax loss of $10 million based off of $644 million in production. One quarter earlier, the unit generated $34 million from $1.14 billion in volume.

Meanwhile, the now discontinued mortgage originations segment recorded a pretax loss of $68 million during the quarter compared to $170 million three months earlier. Funded production  totaled $1.1 billion and $2.7 billion.

While company officials expect its new business model to reap profits in the long term, the next few months will continue to be a period of readjustment as it works through its recent changes and gets its books in order, Gericke said.

"Q1 is probably going to be the trough for this year for sure, as we pick up the volume and start realizing the synergies in Q2 from the AAG transaction."