Finance of America Companies on Wednesday told investors that it managed to increase in originations in 2021, but a more competitive landscape reduced margins and, consequently, the company’s net income.
Amid a tough environment for forward mortgage lending, Finance of America is betting on specialty finance & services products – reverse mortgages, investor loans, commercial loans – which are expected to deliver most of the return this year.
Finance of America funded $35.6 billion in 2021, up 9% compared to 2020, mainly due to reverse and commercial businesses. However, in the fourth quarter, the total volume was $8.79 billion, down 10% year-over-year and 2% quarter-over-quarter.
On paper, the company posted a $1.17 billion loss in 2021, reverting a $498 million profit in the prior year, which was virtually an impairment of goodwill and intangible assets. The action was needed to align its book value with supportable control premium, due to a sustained decline in the stock price, FoA executives said. The adjusted net income, which excludes the impairment, was $308 million in 2021, down 28% year-over-year.
In the fourth quarter, the company had a $1.33 billion loss on paper due to the impairment, compared to a $50 million profit in the prior quarter and a $152 million profit in the same quarter of 2020. The adjusted net income was $70 million, a 7% decline quarter-over-quarter and down 43% year-over-year.
During a conference call with analysts, Patti Cook, the outgoing chief executive officer, said Finance of America delivered a “solid performance” in its first year as a public company, with the specialty finance and services business standing out while the mortgage industry is facing a tough environment.
In 2021, the company’s best performance was in commercial originations, increasing from $855 million to $1.7 billion, up 107%. Reverse originations increased 57% year-over-year, to $4.26 billion.
About $29.6 billion of the total funded last year came through its traditional forward mortgage lending arm, which increased 2% in comparison with the previous year – in total, 55% of the mortgage volume was in refinancing last year, filings show. In the fourth quarter, however, mortgage originations declined 22% compared to Q4 2020 and 7% in comparison to the Q3 2021, to $6.89 billion.
Margins in the mortgage business declined from 3.88% in 2020 to 2.86% in 2021. Cook said margins are declining because the company is originating more through the wholesale channel than the retail division.
Like many of its competitors, FoA has reduced headcount to account for reduced volumes.
“We have taken steps to position our mortgage business for dramatically reduced refinance volume, while still maintaining our ability to benefit from expected growth in the purchase and nonagency markets,” she said to analysts. “This quarter, our mortgage segment posted a loss, which can be primarily attributed to our nascent home improvement business.”
The company’s strategy is to sell more specialty finance and services products through mortgage channels. It also has a home improvement business. The revenue of these products attributable to mortgage went from $46 million in 2019 to $96 million in 2021. The segments are expected to remain the major driver of profitability in 2022, Cook said.
During the conference call, an analyst asked why the company’s stocks performance is disconnected to executives’ optimism with the business. Cook answered the company has been consistent in telling specialty finance and services products will drive the company earnings during mortgage cycles. “People have to believe that the trend continues. We should start to be distinguished from the peers.”
Finance of America shares were trading at $3.39 around 10 a.m. EST on Thursday, up 4.46% from the prior day. The company made its public debut in April by merging with the special purpose acquisition company Replay Acquisition Company valued at $1.9 billion. It began trading at $10 a share. On Wednesday, its market value was $191.5 million.
In early February, the company announced that Cook will retire as soon as the company finds a successor. Cook will remain on the board of directors until the annual meeting of stockholders.