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Fast-rising interest rates hit Finance of America Companies hard in the first quarter of 2022 and the company cut almost 600 jobs compared to one year ago.  

Like many of its competitors, the lender reported that its traditional mortgage business saw reduced originations and margins from January to March, mainly due to a drop-off in refinance volumes and an increase in spreads on non-agency mortgage products, which resulted in a reduction in revenues.

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. Meanwhile, gain-on-sale margins declined from 3.41% in Q1 2021 to 2.52% in Q4 2021 and then to 2.11% in Q1 2022.

“The devastating war in Ukraine and rapidly rising inflation resulted in the fastest increase in interest rates in decades,” said Patti Cook, FoA’s CEO, to analysts. “We don’t expect interest rates to return to the level we’ve seen earlier in the year.”

The executive said refinance, as a percentage of overall volumes in the company, reached 45% in the first quarter, still not reflecting the roughly 50 basis point increase in rates during March. As a result, the lender expects the percentage to be much lower in the second quarter.

To manage the business during the storm, FoA has reduced its headcount. The company cut 598 jobs onshore and offshore compared to one year ago. According to Cook, the company will keep the headcount aligned with the volume of business.

The executive mentioned that recently the company consolidated the wholesale channels in mortgage and commercial businesses to bring efficiency and enhance cross-sell. The direct-to-consumer channels also were reduced in one operation to lower fixed and variable costs. 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.

On the positive side, FoA is diversifying its portfolio, increasing the share of non-agency products, which grew to 22% of the overall mortgage volumes in the first quarter, from 18% in the previous quarter. Also, purchase loan origination grew 4% quarter over quarter.

The company is diversifying beyond traditional mortgage products, with the best performance in reverse originations for the quarter. The product’s funded volume increased from $1.32 billion in Q4 2021 to $1.47 billion in Q1 2022, up 12%. Compared to the same period in 2021, when the volume was $769 million, it increased 92%.

Commercial originations increased 68% year-over-year, to $573 million, but declined 1% quarter over quarter.

“Our reverse and commercial originations businesses faced pressures in the first quarter as rates and spreads rose at the fastest pace in decades; however, the pipeline for reverse and commercial originations continues to be strong,” said Cook. “Our reverse pipeline has never been bigger, driven by strong home price appreciation over the past couple of years.”

In total, FoA funded $7.1 billion in the first quarter of 2022, considering traditional and nontraditional mortgage products, down 19% quarter over quarter and 25% year over year. 

On paper, FoA posted a $64 million loss from January to March, improving from a $1.33 billion loss in the previous quarter. However, in the first quarter of 2021, the company had a $124 million profit.

The company said the spreads on triple-A mortgage-backed securities (MBS) 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,” said Cook to analysts. “While we are hedged against rising interest rates, we cannot efficiently hedge our balance sheet against widened spreads.”

For the second quarter, the company forecasts total revenue for the traditional mortgage business to be between $125 million and $145 million, with an adjusted net income margin between 0-2%. Meanwhile, for the specialty finance and services, the company forecasts $195 million to $215 million in revenues and a 12%-14% margin.

Finance of America shares closed at $2.46 on Monday, down 1.20% from the previous close.

In April 2021, the company made its public debut by merging with the special purpose acquisition company Replay Acquisition Company valued at $1.9 billion. It began trading at $10 a share. On Monday, its market value was $153 million. 

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