Finance of America eliminates big chunk of workforce as losses mount

Lender reported loss of $168 million in Q2

Finance of America posted steep losses in the second quarter and has pledged to eliminate a significant percentage of its workforce to contain the financial fallout.

As with other lenders seeing huge declines in mortgage origination volume, Finance of America’s traditional mortgage business took a hit due to tumbling refinance volumes and an increase in spreads on both non-agency and agency mortgage products, which resulted in revenue reductions. 

The traditional mortgage business notched $4.23 billion in funded volume in the second quarter, down 17% quarter over quarter and 39% year over year. Refinance volume dropped 64% between the first and second quarter.

“Spreads on both agency and non agency mortgages increased to new highs in a matter of weeks,” Johan Gericke, CFO of Finance of America, told analysts. “This meteoric rise in both rates and credit spreads put tremendous pressures on our origination businesses.” 

In response to lower origination volume and margins, the multichannel lender has worked to drastically reduce costs

“We reduced our workforce in mortgage originations to match capacity with current market demand, taking out roughly 35% in costs on a run rate basis, equating to over $100 million annualized,” said Graham Fleming, interim CEO of Finance of America. “These reductions will be realized over the remainder of the year.”

Prioritizing home equity solutions in a rising rate environment

The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with Barry Coffin about the ways lenders can capitalize on these trends by revving up their home equity solutions.

The multichannel lender cut its workforce across centralized operations and branches, eliminating processors, underwriters, appraisers and the support team, in several rounds in the second and third quarters of 2022, former employees told HousingWire. 

Between March 2021 and March 2022, the company cut 598 jobs onshore and offshore.

In other efforts to manage cost cutting efforts, the executive said the firm moved out of the direct-to-consumer channel that was heavily reliant on refinance leads and is right-sizing each of the branches. 

Finance of America’s distributed retail business remains poised to take advantage of the shift to a purchase market, in which purchase originations consist about 85% of the total volume, according to Fleming. 

The rapidly rising rates and spreads also led to compressed margins for both reverse and commercial mortgages. Funded loans deteriorated in value between the time of funding and the eventual sale of securitization, the executive said. 

However, reverse origination volume rose to $1.58 billion in the second quarter, posting a record for five consecutive quarters. The product’s funded volume rose 7% from $1.48 billion in the previous quarter and jumped 56% from $1.01 billion in the same period in 2021. 

Commercial origination volume rose 35% year-over year to $540 million but declined 6% quarter over quarter.

In total, FoA funded $6.35 billion in the second quarter of 2022, consisting of traditional and nontraditional mortgage products, down 11% quarter over quarter and 24% year over year. 

While Gericke did not provide financial guidelines for the third quarter, citing “significant volatility,” the executive said he expects profitability levels for the third quarter to come in between the first six months of this year.

“We expect better margins reverting closer to historical averages, assuming the market ultimately stabilizes at this level,” said Gericke. 

“In general, we expect profitability levels for the third quarter to fall somewhere between Q1 and Q2 for both mortgage and SF&S (specialty finance and services). Given our expectation that our increased margins will not be fully realized until the latter half of Q3.”

Finance of America shares closed at $1.97 on Thursday, down 1.5% from the previous close. 

In April 2021, the company made its public debut by merging with the special purpose acquisition company Replay Acquisition Company, valued at $1.9 billion. It began trading at $10 a share. On Monday, its market value was $123 million.

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