Finance of America Equity Capital LLC, a portfolio company of Blackstone Group, Inc. and parent company to leading reverse mortgage lender Finance of America Reverse (FAR), has released its earnings for the third quarter of 2020 ahead of its anticipated initial public offering (IPO) that will make the company publicly traded. This helps to provide a unique new look at the company’s business performance, including the outlook that the parent company has for FAR and the reverse mortgage business more broadly.
Reverse mortgage business for FAR appears to have improved year-over-year, and executive leadership at Finance of America has touted its reverse mortgage business as one of the things that helps to keep its portfolio more diverse than some of its direct competitors, according to a recent earnings call. However, the CEO of Finance of America also said that the burgeoning proprietary reverse mortgage market is active enough to support “a second product” in the category from FAR beyond current “HomeSafe” offerings.
Reverse mortgage business performance
According to released earnings information, Finance of America’s reverse mortgage originations earned pre-tax net income of $24 million, compared to $33 million the prior quarter. Based on Home Equity Conversion Mortgage (HECM) endorsement data released over the course of 2020 by the Federal Housing Administration (FHA), FAR currently stands as the number 3 reverse mortgage lender in the country with 3,803 total endorsements in the 12-month period ending in November, 2020.
Its highest single-month origination total in 2020 (barring incomplete December data) occurred in May, when FAR originated 419 HECMs that month. Between September and November, FAR saw slight monthly reductions in its endorsement totals according to monthly data aggregation by Reverse Market Insight (RMI).
Consequently, Q3 reverse mortgage pre-tax net income was lower than figures observed in Q2, which Finance of America attributes to lower funded originations.
“Compared to prior year, the reverse originations segment benefited from higher originations and net origination gains,” the company said in its Q3 earnings release.
However, the company made other gains based on its reverse mortgage holdings according to the release, particularly in the realm of its assets under management, the company said.
“Assets under management grew $494 million compared to the prior quarter as a result of growth in retained reverse mortgage and commercial investor loans, resulting in an 8% growth in revenue,” the earnings release specifies.
At the end of 2019, reverse mortgage loans held for HECM-backed Securities (HMBS) obligations stood at just under $9.5 million, while unaudited figures as of the end of Q3 2020 saw that figure rise to slightly over $9.8 million.
Executive leadership on the reverse mortgage segment
High-ranking executive leadership at Finance of America appears confident in the reverse mortgage business segment, while also acknowledging that some of the difficulties being faced by the industry come from forces well outside the company’s control. Serving as something of an introduction to a regular dialogue about the reverse mortgage business, Finance of America CEO Patti Cook describes the potential for the business by citing well-known demographic data to many reverse mortgage professionals.
“Our reverse business has tailwinds of its own that are not a function of low rates. Rather, there is a structural unmet need in this sector,” she explained on the earnings call. “Nearly 10,000 people in the U.S. will turn 65 every day for the next 10 years. Approximately 80% of this population has over 50% of their wealth tied up in home equity, which represents a roughly $7 trillion total addressable market. Most of these individuals have not saved enough to continue to fund their lifestyles post-retirement, and most of them also want to age in place. Tapping into their home equity via a reverse mortgage could be a very elegant solution.”
Speaking further with RMD about the outlook of the reverse mortgage business, Cook reiterated confidence in the product category due to some of the unique factors affecting it.
“All of our product lines are important as they give us great reach and allow us to connect with our customers however they choose. Moreover, it’s important to note that all of our addressable markets – forward mortgages, reverse mortgages and loans to residential real estate investors – are large and growing,” Cook told RMD. “As it relates to reverse mortgages, there are strong tailwinds supporting this line of business and the perception and acceptance of the products are continually improving. We believe our differentiated suite of financial tools as well as our proven ability to innovate will allow us to continue serving the growing needs of our clients and partners.”
New proprietary offering planned
Be that as it may, only one-eighth of 1% of this addressable market has availed themselves of a reverse mortgage, Cook says. In an effort to meet more of the market potential, Cook touted the existing slate of proprietary products offered by FAR while hinting that there is more to come on that front.
“We have already launched a very successful proprietary reverse product targeted to this population to supplement the standard FHA-backed reverse mortgage product, and have plans for a second proprietary product,” Cook said. “Most importantly, this sector represents an opportunity for us to do something great for our borrowers: help them solve a problem and achieve their financial goals. We at Finance of America have a real competitive advantage in this sector, as we have already demonstrated our ability to innovate.”
When asked to clarify if this referred to another proprietary product offering outside of the “HomeSafe” line, Cook responded that what she referred to on the earnings call will indeed be different and new.
“The new product we plan to introduce will be different from our very successful HomeSafe suite of products,” she told RMD. “It will offer our customers another innovative option to tap into their home equity and give them even greater flexibility and choice to help achieve their financial goals in retirement.”
Finance of America announced in October it was set to make an IPO with a valuation of $1.9 billion, upon a merger with a special-purpose acquisition company (SPAC) called Replay Acquisition Corp (NYSE: RPLA), which was formed for the purpose of combining or consolidating companies operating in businesses that it deemed to have a strong likelihood of creating returns for its shareholders.
Read the earnings summary at Finance of America.