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Finance of America Companies reported a $64 million loss in the first quarter of 2022. Hit by fast-rising interest rates and declining refinances, the company also cut almost 600 jobs since last March.
It attributed the drop in earnings to widening credit spreads, but at the same time it says it saw an increase in its non-agency products.
“When refinance volumes fall there remains substantial opportunity for our loan officers and brokers to sell Reverse and Commercial products." CEO Patricia Cook said.
Cook said the company is prepared for a higher rate environment and had credit spreads not widened then it would not have seen an overall reduction in revenue.
The volume mix in non-agency products increased from 18 to 22% from the prior quarter.
“The devastating war in Ukraine and rapidly rising inflation resulted in the fastest increase in interest rates in decades,” Cook said on the call. “We don’t expect interest rates to return to the level we’ve seen earlier in the year.”
The $64 million loss between January to March is an improvement over the $1.33 billion loss in the previous quarter. Those Q4 results were due to an impairment of goodwill and intangible assets.
The company said the spreads on triple-A mortgage-backed securities widened by 50 basis points in March. As a result, FoA recorded substantial negative fair value marks against revenue.
“Credit spreads widened on most financial assets, as investors proceeded to increase risk in the market,” Cook said on the earnings call. “While we are hedged against rising interest rates, we cannot efficiently hedge our balance sheet against widened spreads.”
”As a result we experienced significant fair-value adjustments as we updated model assumptions,” Cook said.
Cook, who is retiring, said they are prepared to operate the company in the “higher rate environment.”
“In our mortgage originations business, we remain focused on profitability as the market experiences rapidly rising rates and a switch to purchase volume,” Cook said. “Our pre-tax loss was due to a precipitous drop-off in refinance volumes as rates rose rapidly in Q1. In addition, spreads on non-agency mortgage products widened substantially, resulting in a reduction in revenue. We have reconfigured the business to be profitable at much lower volumes to account for anticipated lower refinance volume.”
The lender’s traditional mortgage business reached $5.1 billion in funded volume in the first quarter, down 26% quarter-over-quarter and 39% year-over-year.
For the second quarter, the company forecasts total revenue for the traditional mortgage business to be between $125 million and $145 million. It expected the specialty finance and services to do much better with a company forecast of $195 million to $215 million in revenues and a 12% to 14% margin.