Global credit rating agency DBRS Morningstar this week assigned a “good” rating, classified as its MOR RVO2 residential reverse mortgage originator ranking, to Finance of America Reverse (FAR). The source of the rating is derived from an exam of FAR’s senior leadership and overall loan performance, adding the recent acquisition of American Advisors Group (AAG) into its consideration.
“In December 2022, FAR entered into an asset purchase agreement with American Advisors Group (AAG), a direct-to-consumer reverse mortgage lender, to purchase a substantial majority of the assets and certain of the liabilities of AAG,” Morningstar said in its analysis of the company. “The AAG transaction was completed on March 31, 2023, and included the acquisition by FAR of all operations of AAG, including approximately 340 AAG employees. The AAG brand and operations are continuing but as a part of FAR.”
The company is well-positioned for stable performance, the agency said, though there are attributes that DBRS Morningstar is continuing to monitor.
“FAR has an acceptable earnings generation capacity, though earnings are reliant on transactional-based revenue sources, which introduces the potential for meaningful volatility in earnings,” the agency said. “FAR’s credit risk is limited, as it primarily securitizes or sells loans it originates instead of holding them on its balance sheet for an extended period.”
Similarly to other nonbank companies in the mortgage space, FAR has a narrow funding profile that is primarily reliant on secured wholesale funding sources, which ultimately results in “a highly encumbered balance sheet that may limit financial flexibility during periods of market stress.”
FAR’s capitalization is also characterized as “somewhat weak” due to its high level of leverage, but its status as a subsidiary of the publicly-traded Finance of America Companies (FOA) allows it to maintain “broad access to the equity capital markets,” the agency said.
The MOR RVO2 residential reverse mortgage originator ranking assigned to FAR is in recognition of the company’s “experienced senior management team, proficient origination practices, and solid loan performance,” according to Morningstar.
The company’s management team is a source of confidence in the rating, according to the agency.
“FAR is led by a senior management team averaging more than 18 years of industry experience,” DBRS Morningstar said. “Executive management changes include FOA naming Graham Fleming as the chief executive officer and promoting FAR president Kristen Sieffert to president of FOA. The underwriting department is decentralized and, as of December 31, 2022, consisted of approximately 21 underwriters averaging over five years of Company tenure and 10 years of relevant experience.”
The company also continues to grow its number of reverse mortgage originations, offering both Home Equity Conversion Mortgage (HECM) and proprietary loan options under its “HomeSafe” product suite. Delinquencies in 2022 averaged just under 0.5%. The company also revived its proprietary second-lien reverse mortgage earlier this year.
The company acquired or originated more than 14,000 reverse mortgage loans across its business channels in 2022, totaling just under $5 billion alongside a servicing portfolio of approximately $18 billion.
All such ratings by the agency are subject to review. The ratings are “designed to evaluate the quality of the parties that originate residential mortgage loans,” according to DBRS Morningstar. “Although the originator’s financial condition contributes to the applicable ranking, its relative importance is such that an originator’s ranking should never be considered as a proxy of its creditworthiness.”
In a statement provided to RMD by a FAR company spokesperson, the company said it was pleased with the rating.
“Finance of America is pleased to once again achieve the second-highest ranking available from Morningstar for reverse mortgage originators,” the spokesperson said. “It serves as a testament to our long-term strategy, the strength of our business, and our continued leadership in the industry.”
The spokesperson added that the company will continue to “invest in opportunities that offer the greatest long-term growth potential and will help make progress toward our goal of helping more homeowners understand the value and benefits home equity can provide to a modern retirement,” they said.
In its recent Q2 earnings report, FOA recorded a net loss of $221 million in the second quarter of 2023, which company leaders attribute to the negative impact of the mortgage rates and spreads. While the company says its reverse mortgage arm has grown, that growth was not enough to offset increased costs associated with the ongoing effort to incorporate the assets of AAG into its corporate infrastructure.
DBRS Morningstar has also previously classified Longbridge Financial, a subsidiary of Ellington Financial, with the MOR RVO2 rating.
Editor’s note: This story has been updated with a statement from Finance of America Reverse.