Finance of America reports loss as credit spreads widen

Finance of America recorded a $64 million net loss in the first quarter, with the impact of negative fair value adjustments related to the widening of credit spreads outweighing efficiency initiatives the lender has undertaken in recent months.

The company’s results improved upon the $1.3 billion net loss it took in the fourth quarter of 2021 but compared less favorably to $124 million in net income a year earlier, when rates were lower and originations were higher. FOA reported that it cut 598 positions in the past year.

The $96 million in negative adjustments were more due to investors’ perception of increased risk in the market than the sudden run up in interest rates, CEO Patricia (Patti) Cook said during an earnings call.

“While we are hedged against rising interest rates, we cannot efficiently hedge our balance sheet against widening spreads, and as a result, we incurred significant fair-value adjustments,” said Cook, who plans to retire from her post once a successor is named.

The increased competition to sell non-qualified mortgages and other outside-the-box loans presented a challenge for the company, since a growing number of originators are counting on such sales to offset declines in refinance volumes.

“The mortgage origination segment was impacted by both lower-than-expected volume and a decline in non-agency pricing as many originators liquidated assets,” Cook said.

While pricing for non-agency loans weakened during the quarter, the segment did prove effective in generating increased originations for the company, which has been focused on using gains in nontraditional home lending and non-mortgage business lines to offset declines in traditional refinancing. Non-agency originations were up 8% year-over-year and currently account for 22% of the company’s mortgage volume.

“Our non QM product fills an important gap in the market and despite the current volatility impacting the margins of that product, we believe, over the long term, that this will be an important driver for growth,” Cook said.

On an adjusted basis FOA’s combined specialty finance and services segments were profitable during the first quarter as origination volume in some SF&S business rose, according to the company. Reverse mortgage originations within SF&S, for example, were up 92% year-over-year.

Adjusted net income from SF&S during the quarter was $47 million, up from $35 million a year earlier. In comparison, adjusted net income for mortgages went from $72 million a year ago to a net loss of $10 million in the first quarter of this year.

Unlike some other lenders that have used mortgage servicing rights-related gains to offset origination declines, the company’s MSR volume remained nearly unchanged from the previous fiscal period at $426 million due to an unspecified “strategic sale” done on a bulk basis during the quarter.

Further layoffs may lie ahead as the company seeks to bring its operational costs more in line with current market volumes and margins, but it plans to explore other efficiency alternatives as well.

“We’re monitoring volumes in mortgages diligently, and with volumes at this level, if they were to decline further, there would certainly be more headcount reduction,” said Cook. “But I think for us, what’s equally as important is we are really taking a ruthless look at efficiencies across the business model.”