Moody’s appraises public companies with reverse mortgage segments

The credit ratings agency specifically looked at the strengths and weaknesses of two businesses, including their industry-leading reverse mortgage divisions

Corporate credit rating agency Moody’s Investors Service has released updated ratings for two public companies which feature reverse mortgage divisions, affirming its rating for PHH Mortgage Corporation while downgrading its rating for Finance of America Companies (FOA). PHH and FOA are the parent companies of leading reverse mortgage lenders Liberty Reverse Mortgage and Finance of America Reverse (FAR), respectively.

Moody’s found the rating for PHH to be generally stable while noting additional risk for Finance of America. However in the case of the latter, it also specifically cited the company’s reverse mortgage activity as a benefit to the organization’s more stable fundamentals when compared to its activity on the forward mortgage side, broadly noting that volatility across the mortgage industry has increased.

PHH: Moody’s ratings affirmed and outlook is positive

PHH Mortgage Corporation is a subsidiary of Ocwen Financial Services, and had previously earned a Caa1 corporate family rating (CFR) which as affirmed by Moody’s after the company’s latest quarterly earnings report.

“Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk,” according to Moody’s long-term rating definitions. However, the rating’s affirmation also comes with a change in the overall outlook of the company from “stable” to “positive,” and recognition that the company’s financial position did not significantly deteriorate after posting tough Q2 earnings.

“The affirmation of [PHH]’s ratings reflects the firm’s currently weak but improving profitability and modest capital levels,” Moody’s said of the rating. “[PHH]’s profitability has been weak due to a cost structure intended for a larger servicing portfolio. However, the company has significantly reduced costs. Furthermore, its mortgage servicing rights’ (MSRs) joint venture with Oaktree, its recent acquisitions to grow its lending and servicing businesses, along with the extension of debt maturities, should provide the firm with the means and the runway to grow its businesses and improve its profitability.”

Moody’s also included PHH’s stake in the reverse mortgage business as a portion of the reasoning for its affirmed rating.

“[PHH]’s modest reported capitalization is partly due to its inclusion of securitized Home Equity Conversion Mortgages (HECMs) and related liabilities on its balance sheet, in accordance with US GAAP accounting standards,” Moody’s said in its announcement. “While the company does not own the underlying assets of the securitizations, as a servicer it is required to repurchase the FHA-insured HECM mortgages from the Ginnie Mae pools under certain circumstances. Moody’s views the credit risk of securitized HECM loans to be modest due to the FHA insurance, which carries the full faith and credit of the US government.”

By the end of June, the company’s capital levels were “more solid at 12.0%” when adjusting the capital ratio for reverse mortgage loans and securitizations on its balance sheet, the agency explained.

“The change in [PHH]’s outlook to positive from stable reflects the progress the company is making in transitioning its strategy to focus on originations and servicing of non-delinquent forward and reverse mortgages from the servicing of seriously delinquent loans, which should lead to a more resilient business model and more stable earnings profile,” Moody’s explained.

Finance of America: Moody’s rating downgraded, though reverse mortgage division a benefit

For FOA, Moody’s downgraded the company’s rating to a Caa2, marginally lower than PHH’s new rating and keeping the company in “non-investment grade” territory according to Moody’s ratings scale. Previously, FOA’s CFR stood at B2. However, the outlook also changed from “negative” to “stable,” according to Moody’s.

“Over the next 12 to 18 months, Moody’s expects FOA’s and the mortgage sector’s profitability to continue to be challenged as higher interest rates will result in materially lower origination volumes and industry excess capacity will keep gain-on-sale margins low,” Moody’s said of its rating rationale.

The change of outlook to “stable” also means that Moody’s has recognized “a change in the operating conditions of the mortgage industry broadly,” it explained.

“The stable outlook reflects Moody’s expectation that the company’s current ratings reflect the challenging operating conditions in the mortgage sector that will continue to pressure FOA’s profitability, making it difficult for the company to reduce its high financial leverage over the next 12-18 months,” the rationale reads.

Moody’s also specifically sees the reverse mortgage division of FOA as a proverbial feather in its cap, with better profitability when compared to the forward mortgage division.

“The stable outlook also recognizes that FOA is one of the top-three largest originators of reverse mortgages, a top-30 retail originator of residential mortgages, and a leading originator of fix-and-flip residential and single-family investor mortgages,” Moody’s said. “Its profitable reverse mortgage business represents a key differentiating positive factor in its business mix and franchise.”

Reverse mortgage sentiment in earnings reports

Both FOA and Ocwen Financial each took time to emphasize the general strength of their respective reverse mortgage business in Q2 2022 earnings reports and presentations earlier this month.

Ocwen CEO Glen Messina discussed the reputational perceptions of the reverse mortgage industry in the Q2 earnings presentation, with Ocwen believing they’re moving in a positive direction concerning their potential as a tool for retirement planning.

“We believe the legacy stigma is diminishing around reverse mortgages and [that the product] is becoming more accepted as a retirement planning tool,” he explained. “In this business environment, we’re focused on a deliberate strategy comprised of five initiatives to drive business performance and deliver value for our shareholders.”

At FOA, interim CEO Graham Fleming mentioned the company’s ongoing commitment to reverse mortgages due to a perceived unrealized potential in the segment during that company’s Q2 earnings call.

“These results underscore not only the massive market opportunity, but also the need for greater consumer education and awareness to fuel product adoption,” he said. “We’re actively working on a strategic partnership to unlock a new origination channel that will target reverse as an efficient financial planning tool. And we’re very excited about the prospect of growing this over time.”

Read the Moody’s reports for PHH and FOA, respectively.

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