Reverse mortgage growth touted in tough Q2 earnings for FAR parent

Losses will lead to cost controls including reducing the company workforce, but the interim CEO also touted FAR as an important growth segment

Finance of America Companies (FOA) — the parent organization of leading reverse mortgage lender Finance of America Reverse (FAR) — announced this week that steep losses of $168 million in Q2 2022 will lead to various cost control measures including a reduction in its workforce and a move away from a refinance-reliant direct-to-consumer forward channel.

However, FOA President and interim CEO Graham Fleming also took the time to describe the importance of the company’s reverse mortgage division, describing that growth in volumes and recent research illustrating the untapped potential of the market continue to demonstrate a need for further investment in this side of the business.

Reverse mortgage market challenges

Fleming describes the reverse mortgage business at FOA in very positive terms especially considering the stringer headwinds being faced on the company’s traditional mortgage segment, he explained on an earnings call this past Thursday. In the case of both reverse and commercial originations, the company could not reprice loans in the pipeline at the same pace that the market moved, which led to a decline in margins for both businesses when coupled with funded loans losing value.

“In order to combat this margin compression, we repriced loans and raised coupons several times,” Fleming said. “And yet despite these increases, we saw record origination volumes in reverse, and another strong quarter from commercial. As the capital markets stabilize, we expect margins in these businesses to return closer to historical averages, and we will take any additional actions necessary to improve profitability.”

In addition to addressing a need to “optimize” the traditional mortgage business, Fleming also described that investing further in the reverse mortgage segment will be a company priority going forward, and observable growth in FOA’s home improvement business will also bring cross-sell opportunities including for reverse, he explained.

“Reverse origination volumes of $1.58 billion in Q2 set yet another quarterly funding record and was roughly $100 million above the first quarter,” Fleming said. “This growth is attributable primarily to market penetration in first-time reverse customers. As a result, we have seen a decrease in prepayment rates as production shifts from refinance to new volume.”

Fleming also mentioned research published in July by FAR, indicating that senior consideration of incorporating home equity into retirement remains generally low even for people who could most easily qualify for a product like a reverse mortgage.

“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.”

Lower income, higher volume and education investment

FOA’s reverse mortgage segment generated $36 million in pre-tax income, a reduction of 32% from the same period one year ago according to Gericke. The notable rise in volume was undercut by lower margins, he explained.

“We are actively monitoring and adjusting product guidelines and pricing to return margins closer to historical averages,” he said of the reverse channel.

In a Q&A session after the core presentation, Fleming was asked about an ongoing strategy to grow the company’s customer base and directly mentioned the reverse mortgage segment as a player in its outlook moving forward.

“As I mentioned, in our reverse channel, we’re continuing our education to seniors,” he responded. “We’re looking to partner with some strategic relationships that will help improve the penetration. So, we’re very optimistic that we can grow customers in the reverse space.”

Gericke was also asked about where reverse mortgage volume is tracking, but declined to offer a specific figure. Instead, he explained that the tailwinds for the segment help to justify the company’s attention to it.

“As we’re seeing a shift away from refinance into new-to-reverse [volume], there’ll be some softening of volumes,” Gericke said. “But we still feel optimistic that we’re going to see good business in that channel. The macro tailwinds for that business [are] really big. If you think about the record amount of home equity that seniors have, that just creates a substantial market. So, I think that channel is going to see persistent, long-term volume levels growing.”

Lender challenges

Earlier in the same week, Liberty Reverse Mortgage parent company Ocwen Financial Corp. held its own Q2 earnings presentation, which also described a challenging market environment particularly for those active in both the forward and reverse spaces. Ocwen recorded a pre-tax loss of $26 million in Q2 2022 compared to income of $6 million one year prior, attributing losses to higher interest rates and spreads as well as asset sales.

Similarly to FOA, however, Ocwen’s CEO described that Liberty Reverse Mortgage continues to be a major factor in its portfolio diversification efforts for another reason cited by FOA: recently-recorded gains in senior-held home equity and positively-trending demographics for the segment.

At the end of July, RMD reported that Texas-based lender Open Mortgage had also cut its workforce in response to challenging market conditions. However, company CEO Scott Gordon also explained for RMD that the reverse mortgage channel’s impact from cuts would be minimal and that the business is still moving in a generally positive direction.

People familiar with the matter corroborated that reverse mortgage impacts from the cuts were generally limited when compared to those seen on the forward side.

For more forward-focused coverage of FOA’s earnings, read the story on the company’s performance at RMD sister site HousingWire.

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