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Fitch Downgrades Home Point's Rating To B-

David Krechevsky
Apr 11, 2023
Fitch Ratings

Places negative rating on proposed sale of wholesale origination assets to The Loan Store.

  • The downgrade reflects Fitch's view that the announced transaction represents a significant shift in Home Point's business strategy.
  • Fitch said it views the deal as 'a weakening of Home Point's business model and franchise position.'

Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of Home Point Capital Inc. and its subsidiary, Home Point Financial Corp., to B- from B and placed them on Rating Watch Negative (RWN). 

The actions, announced Monday, follow the company's announcement on Friday that it has entered a definitive agreement to sell its wholesale originations channel to The Loan Store Inc. in exchange for an equity stake in the company.

Senior unsecured debt ratings have also been downgraded to CCC+ from B-/RR5, Fitch said.

The downgrade reflects Fitch's view that the announced transaction represents a significant shift in Home Point's business strategy away from being a large originator and servicer of mortgage loans focused on the wholesale channel, towards a more opportunistic and evolving approach.

Fitch said it views this as “a weakening of Home Point's business model and franchise position.”

Fitch said it also believes the transaction “introduces execution risk associated with further right-sizing the expense base, given the ongoing revenue reduction following the asset sales.”

It noted that the changes come as Home Point’s senior management depth has been reduced through recent turnover, including the departure of Chief Financial Officer Mark E. Elbaum. Elbaum submitted his resignation in February, effective April 3.

Elbaum has since been hired by Pennymac. The company confirmed Tuesday that Elbaum was hired earlier this month to serve as managing director of strategic initiatives.

In addition to Elbaum's departure, Home Point President of Originations Phil Shoemaker, a mortgage industry veteran of more than 25 years, will leave the company to serve as CEO The Loan Store.

Fitch said the RWN reflects continued uncertainty about the financial impact of the transaction, including on Home Point’s leverage and profitability, if any, as well as on future strategic actions. 

In March, Home Point reported its second-consecutive quarterly loss. For the full year of 2022, Home Point reported a net loss of $163.7 million, or $1.18 per share, compared to net income of $166.3 million, or $1.19 per share, for all of 2021.

Fitch said it expects to resolve the RWN once more information is available regarding the financial impacts, if any, from the transaction, and Home Point’s strategic direction and execution plan.

The B- IDR remains supported, Fitch said, by Home Point's continued market position as a large servicer with an outsourced servicing operation; the absence of any near-term debt maturities; adequate liquidity to cover any operational needs over the Outlook horizon; an appropriate risk control framework; and strong asset quality performance.

As of the end of 2022, Home Point had $97 million in unrestricted cash, $392 million of available capacity on its mortgage servicing right (MSR) facility (considering covenants and borrowing base requirements), and no available capacity on its operating line of credit, Fitch said. 

In addition, Home Point has $2.3 billion of unused capacity under its warehouse lines of credit and $67.4 million of available capacity on its servicing advance facility to support ongoing origination and servicing activities. The proposed transaction is unlikely to impact the company's liquidity position, Fitch said..

he unsecured debt rating is one notch below the Long-Term IDR reflecting below-average recovery prospects, given the subordination to substantial secured debt in the capital structure, and a limited pool of unencumbered assets mostly consisting of MSRs, which could have significant valuation volatility, Fitch said.

Fitch added that it believes the RWN could be resolved if Home Point demonstrates sufficient financial benefits from the transaction, “including an immediate improvement in its profitability outlook through expense structure resizing, reduction in leverage below 1.5x and maintenance of an appropriate liquidity position.” 

Fitch continued, “While there is limited potential for further positive rating actions in the near term, growth of the business that enhances Home Point's franchise, improved profitability and earnings consistency, a continuation of strong asset quality, a sustained reduction in total leverage below 1.0x, an increase in longer-duration funding, and a stronger liquidity profile, including an increase in committed funding and maintenance of the proportion of unsecured funding, could drive positive rating momentum over time.”

Apr 11, 2023
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