Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations (“MD&A”) should be read together with our consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors. Except where the context otherwise requires, the terms “Finance of America Companies,” “Finance of America,”“FoA,” “we,” “us,” or “our” refer to the business of Finance of America Companies Inc. and its consolidated subsidiaries.
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Overview
Finance of America Companies Inc. is a vertically integrated, consumer and specialty lending platform that connects borrowers with investors. We offer a diverse set of high quality consumer loan products and distribute financial risk to investors for an
up-front
cash profit and often retain a future performance-based participation. We believe we have a differentiated, less volatile strategy than mono-line mortgage lenders who focus on originating interest rate sensitive traditional mortgages and retain significant portfolios of mortgage servicing rights with large potential future advancing obligations. In addition to our profitable lending operations, we provide a variety of services to lenders through our Lender Services segment, which augments our lending profits with an attractive
fee-oriented
revenue stream. Our differentiated strategy is built upon a few key fundamental factors:
Today, we are principally focused on (1) residential mortgage loan products throughout the U.S., offering traditional mortgage loans, reverse mortgage loans, home improvement loans, and (2) business purpose loans to real estate investors. We have built a distribution network that allows our customers to interact with us through their preferred method: in person, via a broker or digitally. Our product offering diversity makes us resilient in varying rate and origination environments, and differentiates us from traditional mortgage lenders. Our Lender Services segment supports a range of financial institutions, including our lending companies, with services such as title insurance and settlement services, appraisal management, valuation and brokerage services, fulfillment services, and technology platforms for student and consumer loans. In addition to creating recurring third party revenue streams, these service business lines allow us to better serve our lending customers and maximize our revenue per lending transaction. Furthermore, our Portfolio Management segment provides structuring and product development expertise, allowing innovation and improved visibility of execution for our originations, as well as broker/dealer and institutional asset management capabilities. These capabilities allow us to complete profitable securitization of our originated loans, including 1 securitization during the Predecessor period from January 1, 2021 to March 31, 2021, and 10 securitizations during the Successor period from April 1, 2021 to December 31, 2021. During an otherwise volatile 2020, 10 securitizations were completed, demonstrating the high quality and liquidity of the loan products we originate, the deep relationships we have with our investors and the resilience of our business model in any market environment.
The Business Combination
On October 12, 2020, FoA, a Delaware corporation and wholly owned subsidiary of Replay, Replay Acquisition Corp. (“Replay”), a publicly traded special purpose acquisition company, and FoA Equity agreed to a business combination that would result in FoA becoming a publicly traded company. FoA Equity, Replay, FoA; RPLY
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Merger Sub LLC, a Delaware limited liability company and wholly owned subsidiary of FoA (“Replay Merger Sub”); RPLY BLKR Merger Sub LLC, a Delaware limited liability company and wholly owned subsidiary of FoA (“Blocker Merger Sub”); Blackstone Tactical Opportunities Fund (Urban Feeder) – NQ L.P., a Delaware limited partnership (“Blocker”); Blackstone Tactical Opportunities Associates – NQ L.L.C., a Delaware limited liability company (“Blocker GP”); BTO Urban Holdings L.L.C., a Delaware limited liability company (“BTO Urban”), Blackstone Family Tactical Opportunities Investment Partnership – NQ – ESC L.P., a Delaware limited partnership (“ESC”), Libman Family Holdings LLC, a Connecticut limited liability company (“Family Holdings”), The Mortgage Opportunity Group LLC, a Connecticut limited liability company (“TMO”), L and TF, LLC, a North Carolina limited liability company (“L&TF”), UFG Management Holdings LLC, a Delaware limited liability company (“Management Holdings”), and Joe Cayre (each of BTO Urban, ESC, Family Holdings, TMO, L&TF, Management Holdings and Joe Cayre, a “Seller” and, collectively, the “Sellers” or the “Continuing Unitholders”); and BTO Urban and Family Holdings, solely in their joint capacity as the representative of the Sellers pursuant to Section 12.18 of the Transaction Agreement (as defined below) (the “Seller Representative”), entered into a Transaction Agreement (the “Transaction Agreement”) pursuant to which Replay agreed to combine with FoA Equity in a series of transactions (collectively, the “Business Combination”) that resulted in FoA becoming a publicly-traded company on the New York Stock Exchange (“NYSE”) as of April 1, 2021, with trading beginning on April 5, 2021 under the ticker symbol ‘FOA’ and controlling FoA in an
“UP-C”
structure.
Our Segments
We manage our Company in five reportable segments: Mortgage Originations, Reverse Originations, Commercial Originations, Lender Services, and Portfolio Management. A description of the business conducted by each of these segments is provided below:
Mortgage Originations
Our Mortgage Originations segment originates residential mortgage loans through our FAM subsidiary. This segment generates revenue through
fee-based
mortgage loan origination services and the origination and sale of agency and
non-agency
mortgage loans into the secondary market. We generally sell originated mortgage loans into the secondary market within 30 days of origination and elect whether to sell or retain the rights to service the underlying mortgage loans based on the economics in the market and Company portfolio investment strategies. Whether the Company elects to sell or retain the rights to service the underlying loans, the Mortgage Originations segment realizes the fair value of the mortgage servicing rights in gain on sale and other income from loans held for sale, net until the date of loan sale. Subsequent fair value changes of the retained mortgage servicing rights are accounted for within fee income in the Portfolio Management segment results.
The Mortgage Originations segment includes four channels:
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Our mortgage lending activities primarily consist of the origination and sale of residential mortgage loans to the government sponsored entities (“GSEs”), including Fannie Mae Freddie Mac, and Ginnie Mae, as well as the origination and sale of residential mortgage loans to private investors. The Mortgage Originations segment generates revenue and earnings in the form of gains on sale of loans, fair value gains, interest income, and fees earned on the successful origination of mortgage loans.
Reverse Originations
Our Reverse Originations segment originates or acquires reverse mortgage loans through our FAR subsidiary. This segment originates HECM and
non-agency
reverse mortgages.
We securitize HECMs into HMBS, which Ginnie Mae guarantees, and sell them in the secondary market while retaining the rights to service.
Non-agency
reverse mortgages, which complement the FHA HECM for higher value homes, may be sold as whole loans to investors or held for investment and pledged as collateral to securitized nonrecourse debt obligations.
Non-agency
reverse mortgage loans are not insured by the FHA.
We originate reverse mortgage loans through the following channels:
The Reverse Originations segment generates revenue and earnings in the form of fair value gains at the time of origination (“Net origination gains”) and origination fees earned on the successful origination of reverse mortgage loans.
Commercial Originations
Our Commercial Originations segment originates or acquires commercial mortgage loans through our FACo subsidiary. The segment provides business purpose lending solutions for residential real estate investors in two principal ways: short-term loans to provide rehab and construction of investment properties meant to be sold upon completion, and investor rental loans collateralized by either a single property or portfolio of properties. The segment also provides government-insured agricultural lending solutions to farmers to fund their inputs and operating expenses for the upcoming growing season. The segment does not provide financing for consumer-purpose, owner occupied loans or
non-residential
purpose commercial lending.
We originate commercial mortgage loans through the following channels:
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The Commercial Originations segment generates revenue and earnings in the form of fair value gains at the time of origination (“Net origination gains”) and origination fees earned on the successful origination of commercial mortgage loans.
Lender Services
Our Lender Services segment provides complementary business services around the residential mortgage, student lending, and commercial lending industries. These complementary services include; title agency and title insurance services, MSR valuation and trade brokerage, transactional fulfillment services, and appraisal management services to our retail customers. The team is primarily based in St. Paul, MN and Charlotte, NC. The segment also operates a foreign branch in the Philippines for transactional fulfillment and administrative support.
Our Lender Services segment generates revenue and earnings in the form of
fee-for-service
revenue and commissions on successful MSR trades.
Portfolio Management
Our Portfolio Management segment provides product development, loan securitization, loan sales, risk management, servicing oversight, and asset management services to the enterprise and third party funds. The team is primarily based in St. Paul, MN and New York, NY.
As part of the vertical integration of our business, our Portfolio Management team acts as the connector between borrowers and investors. Our deep experience in product development and innovation allows us to assist borrowers in new and unique ways by connecting their needs with our proprietary products. The direct connections to investors, provided by our FINRA registered broker-dealer, complete the lending lifecycle in a way that allows us to innovate and manage risk through better price and product discovery. Given our scale, we are able to work directly with investors and where appropriate, retain assets on balance sheet for attractive return opportunities. These retained investments are a source of growing and recurring earnings.
The retained asset portfolio generally consists of two classifications of assets: short-term investments and long-term investments. Short-term investments are primarily proprietary whole loans and securities that are held for sale and loans bought from HECM securitizations prior to assignment to Ginnie Mae. Long-term investments are primarily made up of mortgage servicing rights, securitized HECM loans, securitized proprietary whole loans (including retained securities and residual interests in securitization trusts), and whole loans not yet securitized.
The retained assets are initially recorded to the portfolio at a designated fair-value-based transfer price, if originated by any of the Company’s origination segments (“Net origination gains” recognized by the origination segments), or at the price purchased from external parties. Retained financial assets are adjusted to their current fair value on an ongoing basis.
The Portfolio Management segment generates revenue and earnings in the form of gains on sale of loans, fair value gains on portfolio assets, interest income, and fee income related to mortgage servicing rights, underwriting, advisory, valuation, and other ancillary services.
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Business Trends and Conditions
There are a number of key factors and trends affecting our results of operations. A summary of key factors impacting our revenue include:
Other factors that may affect our cost base include trends in salaries and benefits costs, sales commissions, technology, rent, legal, compliance and other general and administrative costs. Management continually monitors these costs through operating plans.
Evaluation of recorded value of goodwill and intangible assets
The Company estimated the fair value of all reporting units utilizing a market approach and the significant assumptions used to measure fair value include discount rate, terminal factors, market multiples, and control premiums. As a result of its annual impairment test, the Company recognized an impairment to goodwill and intangible assets of $1,045.1 million. During the fourth quarter, the Company’s stock price experienced an additional sustained decline, triggering an interim impairment analysis as of December 31, 2021, which resulted in recognition of additional impairment of the remaining goodwill of $335.5 million. This impairment charge was recognized in impairment of goodwill and intangible assets in the Consolidated Statements of Operations, but does not negatively impact tangible book value.
The Company did not identify any impairment for the Predecessor periods from January 1, 2021 to March 31, 2021 or the Predecessor years ended December 31, 2020 and 2019.
Impact of
COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus
(“COVID-19”)
and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified the
COVID-19
outbreak as a pandemic (the
“COVID-19
pandemic”), continue to evolve, including with respect to current and future variants of
COVID-19.
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The
COVID-19
pandemic has materially impacted and continues to materially impact the markets in which the Company operates. It has caused significant volatility in market liquidity as well as fluctuations in yields required by market investors in the type of financial instruments originated by the Company’s primary operating subsidiaries. While vaccine availability and uptake has increased, the longer-term macro-economic effects of the pandemic on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the industries in which our Company and its subsidiaries operate. Moreover, with the potential for new strains of
COVID-19
to emerge, governments and businesses may
re-impose
aggressive measures to help slow its spread in the future. For this reason, among others, as the
COVID-19
pandemic continues, the potential global impacts are uncertain and difficult to assess.
In the U.S., significant fiscal stimulus measures, monetary policy actions and other relief measures have helped to moderate the negative economic impacts of
COVID-19.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. In March 2021, the U.S. federal government passed a $1.9 trillion American Rescue Plan Act (“ARPA”), which together with the CARES Act and other fiscal stimulus measures- enacted by the federal government, provided for, among other things, funding to state and local governments, direct payments to households, support for small businesses, renter assistance and funding for transport, airlines, healthcare and education. Monetary policy decisions included quantitative easing and the provision of liquidity to financial institutions and credit markets. In addition, housing measures, such as forbearance on mortgages and suspension of foreclosures and evictions enacted by federal, state and local governments, and various executive orders have helped to provide relief. However, many of the forbearance on mortgages, foreclosure and eviction measures have lapsed or are set to lapse in 2022. Further, certain moratoria have been successfully challenged in lawsuits. In response to the expiration of certain of these measures, on June 28, 2021 the Consumer Financial Protection Bureau issued a final rule, which went into effect on August 31, 2021, amending certain provisions in Regulation X regarding additional assistance for borrowers on mortgage loans secured by their principal residence experiencing a
COVID-19-related
hardship. This rule includes temporary provisions imposing further restrictions on foreclosure and providing for streamlined loan modification, among other features. Given the scheduled expiration of, and legal challenges to, relief measures, there can be no assurance as to the extent to which relief will continue to be granted in the future.
The full impact of the
COVID-19
pandemic continues to evolve as of the date of this report. The Company’s
work-from-home
environment is anticipated to continue, with certain exceptions for employees whose job functions or other considerations require them to be in a physical office from time to time. The Company’s management is actively monitoring the global situation relating to
COVID-19
and its effect on the Company’s financial condition, liquidity, operations, industry, and workforce. Further, the Company cannot estimate the length or gravity of the impact that the
COVID-19
pandemic on the residential mortgage and commercial lending industries. As of December 31, 2021, the
COVID-19
pandemic continues to impact the economic environment in which the Company conducts business. As of December 31, 2021, approximately 0.25% of units and 0.26% of unpaid principal balance of the Company’s total residential mortgage servicing portfolio is in forbearance as a result of the economic impacts caused by
COVID-19.
These continuing economic impacts, and the continuation of the pandemic itself, may cause additional volatility in the financial markets and may have an adverse effect on the Company’s results of future operations, financial position, intangible assets and liquidity in 2022 and beyond. See Results of Operations.
For further discussion on the potential impacts of the
COVID-19
pandemic reference Risks Related to
COVID-19”
under “Risk Factors” (Part I, Item IA of this Annual Report on Form
10-K).
Reorganization Transactions
FoA was incorporated in October 2020 and is a financial services holding corporation, the principal asset of which is a controlling interest in FoA Equity. The business, property and affairs of FoA Equity are managed by a board of managers, appointed by FoA at its sole discretion. In periods subsequent to the April 1, 2021 closing of
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the Business Combination, FoA consolidates FoA Equity and reports a
non-controlling
interest related to the Class A LLC Units held by the Continuing Unitholders in FoA’s Consolidated Financial Statements.
In connection with the consummation of the Business Combination, we executed several reorganization transactions, as a result of which the limited liability company agreement of FoA Equity was amended and restated to, among other things, reclassify its outstanding limited liability company units into a single new class of units that are referred to as “Class A LLC Units.”
FoA, FoA Equity and the Continuing Unitholders entered into an exchange agreement (the “Exchange Agreement”) under which they (or certain permitted transferees) have the right (subject to the terms of the Exchange Agreement) to exchange their Class A LLC Units for shares of FoA Class A Common Stock on a
one-for-one
basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.
The Continuing Unitholders hold all of the issued and outstanding shares of FoA’s Class B Common Stock. The shares of Class B Common Stock have no economic rights, but entitle each holder, without regard to the number of shares of Class B Common Stock held by such holder, to a number of votes that is equal to the aggregate number of Class A LLC Units held by such holder on all matters on which shareholders of FoA are entitled to vote generally. Holders of shares of FoA’s Class B Common Stock vote together with holders of FoA’s Class A Common Stock as a single class on all matters on which shareholders are entitled to vote generally, except as otherwise required by law.
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors that may impact the comparability of our results of operations in future periods.
Impact of the Business Combination
FoA is a corporation for U.S. federal and state income tax purposes. FoA Equity was and is treated as a flow-through entity for U.S. federal income tax purposes, and as such, entity level taxes at FoA Equity are not and have not been significant. Accordingly, provision for income taxes prior to the Business Combination consisted of tax expense related only to certain of the consolidated subsidiaries of FoA Equity that are structured as corporations and subject to U.S. federal income taxes as well as state taxes. Subsequent to the Business Combinations, FoA (together with certain corporate subsidiaries through which it owns its interest in FoA Equity) pays U.S. federal and state income taxes as a corporation on its share of FoA Equity’s taxable income.
The Business Combination was accounted for as a business combination using the acquisition method of accounting. Accordingly, the assets and liabilities, including any identified intangible assets, of FoA Equity were recorded at their fair values at the date of the consummation of the Business Combination, with any excess of the purchase price over the estimated fair value recorded as goodwill. The application of business combination accounting required the use of significant estimates and assumptions.
As a result of the application of business combination accounting, the historical Consolidated Financial Statements of FoA Equity are not necessarily indicative of FoA’s future results of operations, financial position and cash flows. For example, increased tangible and intangible assets resulting from adjusting the basis of tangible and intangible assets to their fair value have resulted in increased depreciation and amortization expense in the periods following the consummation of the Business Combination.
Additionally, in connection with the Business Combination, FoA entered into Tax Receivable Agreements (“TRA”) with the TRA Parties that provide for the payment by FoA to such owners of 85% of the benefits that
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FoA is deemed to realize as a result of (i) tax basis adjustments that will increase the tax basis of the tangible and intangible assets of FoA as a result of sales or exchanges of Class A LLC Units in connection with or after the Business Combination or distributions with respect to the Class A LLC Units prior to or in connection with the Business Combination, (ii) FoA’s utilization of certain tax attributes attributable to the Blocker or the Blocker Shareholders, and (iii) certain other tax benefits related to entering into the TRAs, including tax benefits attributable to payments under the TRAs.
Impact of Becoming a Public Company
We have incurred and expect to incur additional costs associated with operating as a public company. These costs include additional personnel, legal, consulting, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules adopted by the SEC and national securities exchanges, requires public companies to implement specified corporate governance practices that are not applicable to a private company. These additional rules and regulations increase our legal, regulatory and financial compliance costs and make some activities more time-consuming and costly.
Components of Our Results of Operations
Revenue
Gain on sale and other income from loans held for sale, net
Gain on sale and other income from loans held for sale, net includes realized and unrealized gains and losses on loans held for sale, interest rate lock commitments, hedging derivatives, and originated mortgage servicing rights. The Company sells mortgage loans into the secondary market, including, but not limited to, sales to the GSEs on a servicing-released basis, where the loans are sold to an investor with the associated MSRs transferred to the investor or to a separate third party investor. In addition, the Company may opportunistically sell loans on a servicing-retained basis, where the loan is sold and the Company retains the rights to service that loan. Unrealized gains and losses include fair value gains and losses resulting from changes in fair value in the underlying mortgages, interest rate lock commitments, hedging derivatives, and originated MSRs, from the time of origination to the ultimate sale of the loan or other settlement of those financial instruments.
Net fair value gains on loans and related obligations
The majority of our outstanding financial instruments are carried at fair value. The yield recognized on these financial instruments and any changes in estimated fair value are recorded as a component of net fair value gains on loans and related obligations. See Note 5—Fair Value within our consolidated financial statements for a discussion of fair value measurements.
Fee Income
We earn various fees from our customers during the process of origination and servicing of loans as well as providing services to third party customers. These fees include loan servicing and origination fees, title and closing service fees, title underwriting servicing fees, settlement fees, appraisal fees and broker fees. Revenue is recognized when the performance obligations have been satisfied, which is typically at the time of loan origination or when the service to the third-party has been provided.
In addition to the fees earned from customers, we recognize the changes in fair value of MSRs as current period income (loss). To hedge against volatility in the fair value of MSRs, we enter into various derivative agreements, which may include but are not limited to interest rate swap futures. Changes in the fair value of such derivative instruments and the related hedging gains and losses are also included as a component of fee income.
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Net interest income (expense)
We earn interest income on mortgage loans and incur interest expense on our warehouse lines of credit and
non-funding
debt. Interest income and interest expense also accrues to loans held for investment, including securitized loans subject to HMBS and other nonrecourse debt. Such interest is included as a component of net fair value gains on loans and related obligations.
Operating Expenses
Salaries, benefits and related expenses
Salaries, benefits and related expenses includes commissions, bonuses, equity based compensation, salaries, benefits, taxes and all payroll related expenses for our employees.
Occupancy, equipment rentals and other office related expenses
Occupancy, equipment rentals and other office related expenses includes rent expense on office space and equipment, and other occupancy related costs.
General and administrative expenses
General and administrative expenses primarily include loan origination expenses, loan portfolio expenses, professional fees, business development costs, communications and data processing costs, title and closing costs, depreciation and amortization and other expenses.
Other, Net
Other, net, primarily includes gains or losses on
non-operating
assets, revaluation of the warrant liability, and remeasurement of the TRA obligations.
Income Taxes
FoA Equity was and is treated as a flow-through entity for U.S. federal income tax purposes. As a result, entity level taxes at FoA Equity are not significant. Prior to the Business Combination, provision for income taxes consisted of tax expense related only to certain of the consolidated subsidiaries of FoA Equity that are structured as corporations and subject to U.S. federal income taxes as well as state taxes.
Subsequent to the Business Combination, FoA (together with certain corporate subsidiaries through which it owns its interest in FoA Equity) is treated as a corporation for U.S. federal and state income tax purposes and is subject to U.S. federal income taxes with respect to its allocable share of any taxable income of FoA Equity and is taxed at the prevailing corporate tax rates. FoA is a holding company and its only material asset is its direct and indirect interest in FoA Equity. Accordingly, a provision for income taxes is recorded for the anticipated tax consequences of FoA’s allocable share of FoA Equity’s reported results of operations for federal income taxes. In addition to tax expenses, FoA also incurs expenses related to its operations, as well as payments under the TRAs, which are significant. FoA Equity may distribute amounts sufficient to allow FoA to pay its tax obligations and operating expenses, including distributions to fund any payments due under the TRAs. See “Certain Agreements Related to the Business Combination—Tax Receivable Agreements.” However, the ability of FoA Equity to make such distributions may be limited due to, among other things, restrictive covenants in its financing lines of credit and senior notes.
Results of Operations
Overview
The following tables present selected financial data for the Successor period from April 1, 2021 to December 31, 2021, and for the Predecessor period from January 1, 2021 to March 31, 2021. Additionally, we have presented the Predecessor selected financial data for the years ended December 31, 2020 and 2019.
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We have prepared our discussion of the results of current year operations by comparing the results of the combined Successor period from April 1, 2021 to December 31, 2021 and Predecessor period from January 1, 2021 to March 31, 2021 with the Predecessor year ended December 31, 2020. The core business operations of the Predecessor and Successor were not significantly impacted by the consummation of the Business Combination. Therefore we believe the combined results for the Successor period from April 1, 2021 to December 31, 2021 and the Predecessor period from January 1, 2021 to March 31, 2021 are comparable to the year ended December 31, 2020 and provide enhanced comparability to the reader about the current year’s results. We believe this approach provides the most meaningful basis of comparison and is useful in identifying current business trends for the periods presented. The combined results of operations included in our discussion below are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved had the Business Combination occurred at the beginning of 2021, and should not be viewed as a substitute for the results of operations of the Predecessor and Successor periods presented in accordance with U.S. GAAP.
Consolidated Results
The following table summarizes our consolidated operating results for the periods indicated (in thousands):
Successor Predecessor
Impairment of goodwill and intangible assets (1,380,630 ) — — —
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Net fair value gains on loans and related obligations
Certain of our financial instruments are valued utilizing a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment and repayment assumptions used in the model are based on various factors, with the key assumptions being prepayment and repayment speeds, credit loss frequencies and severity, and discount rate assumptions. Any changes in fair value on these financial instruments is recorded as a gain or loss in net fair value gains on loans and related obligations on the Consolidated Statements of Operations.
The following table summarizes the components of net fair value gains on loans and related obligations for the periods indicated (in thousands):
Successor Predecessor
Principally, all of our outstanding financial instruments are carried at fair value. The yield recognized on these financial instruments and any changes in estimated fair value are recorded as a component of net fair value gains on loans and related obligations in the Consolidated Statements of Operations. However, for certain of our outstanding financing lines of credit, we have not elected to account for these liabilities under the fair value option. Accordingly, interest expense is presented separately on our Consolidated Statements of Operations. Further, interest income on collateralized loans may be reflected in net fair value gains on loans and related obligations on the Consolidated Statements of Operations, while the associated interest expense on the pledged loans will be included as a component of net interest expense. We evaluate net interest margin (“NIM”) for our outstanding investments through an evaluation of all components of interest income and interest expense.
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The following table provides an analysis of all components of NIM for the periods indicated (in thousands):
Successor Predecessor
For the year ended December
31, 2021 (Successor and Predecessor) versus the year ended December
31, 2020 (Predecessor)
Net income (loss) before taxes decreased $1.7 billion or 339.1% primarily as a result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Net income before taxes increased $422.7 million or 544.8% as a result of higher gain on sale and other income from loans held for sale, net, and fee income on originated mortgage loans and from our Lender Services segment, offset partially by lower net fair value gains on loans and related obligations and higher expenses.
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SEGMENT RESULTS
Revenue generated on inter-segment services performed are valued based on estimated market value. Revenue and fees are directly allocated to their respective segments at the time services are performed. Expenses directly attributable to the operating segments are expensed as incurred. Other expenses are allocated to individual segments based on the estimated value of services performed, total revenue contributions, personnel headcount or the equity invested in each segment based on the type of expense allocated. The allocation methodology is reviewed annually. There were no changes to methodology during the year ended December 31, 2021. Expenses for enterprise-level general overhead, such as executive administration, are not allocated to the business segments.
Mortgage Originations Segment
The following table summarizes our Mortgage Origination segment’s results for the periods indicated (in thousands):
Successor Predecessor
Impairment of goodwill and intangible assets (774,524 ) — — —
Our Mortgage Originations segment generates its revenues primarily from the origination and sale of residential mortgages, including conforming mortgages, government mortgages insured by the FHA, VA and USDA,
non-conforming
products such as jumbo mortgages,
non-qualified
mortgages,
closed-end
second mortgages and home improvement loans into the secondary market. Revenue from our Mortgage Originations segment includes cash gains recognized on the sale of mortgages, net of any estimated repurchase obligations, realized hedge gains and losses, fair value adjustments on loans held for sale, and any fair value adjustments on our outstanding interest rate lock pipeline and derivatives utilized to mitigate interest rate exposure on our outstanding mortgage pipeline. We also earn origination fees on the successful origination of mortgage loans which are recorded at the time of origination of the associated loans.
We utilize forward loan sale commitments, To Be Announced (“TBA”), and other forward delivery securities to fix the forward sales price that we will realize in the secondary market and to mitigate the interest rate risk to loan prices that we may be exposed to from the date we enter into rate locks with our customers until the date the loan is sold. We realize hedge gains and losses based on the value of the change in price in the underlying securities. When the position is closed, these amounts are recorded as realized hedge gains and losses.
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KEY METRICS
The following table provides a summary of some of our Mortgage Origination segment’s key metrics (dollars in thousands):
Successor Predecessor
Loan origination volume (dollars)
Loan origination volume by type (dollars)
Loan origination volume by channel (dollars)
Loan origination volume by type (dollars)
Loan origination volume (units)
Home improvement 15,798 — — —
Loan origination volume by type (units)
Home improvement 15,798 — — —
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Successor Predecessor
Loan origination volume by channel (units)
Home improvement 15,798 — — —
Loan origination volume by type (units)
Home improvement 15,798 — — —
Loan sales by investor (dollars)
Loan sales by type (dollars)
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Revenue
In the table below is a summary of the components of our Mortgage Origination segment’s total revenue for the periods indicated (in thousands):
Successor Predecessor
Net interest income was comprised of the following (in thousands):
Successor Predecessor
WAC—loans held for sale 3.3 % 2.9 % 2.9 % 3.9 %
WAC—warehouse lines of credit 3.3 % 3.0 % 3.1 % 3.7 %
For the year ended December
31, 2021 (Successor and Predecessor) versus the year ended December
31, 2020 (Predecessor)
Total revenue decreased $332.1 million or 25.7% as a result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Total revenue increased $764.8 million or 145.2% as a result of higher gain on sale, net.
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Expenses
In the table below is a summary of the components of our Mortgage Originations segment’s total expenses for the periods indicated (in thousands):
Successor Predecessor
For the year ended December
31, 2021 (Successor and Predecessor) versus the year ended December
31, 2020 (Predecessor)
Total expenses increased $31.9 million or 3.8% as a result of the following:
For the year ended December 31, 2020 versus the year ended December 31, 2019
Total expenses increased $324.7 million or 64.1% as a result of higher salaries, benefits and related expenses combined with an increase in general and administrative expenses.
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Reverse Originations Segment
The following table summarizes our Reverse Originations segment’s results for the periods indicated (in thousands):
Successor Predecessor
Gain on mortgage loans — — — —
Impairment of goodwill and intangible assets (408,241 ) — — —
Our Reverse Originations segment generates its revenues primarily from the origination of reverse mortgage loans, including loans insured by FHA, and
non-agency
reverse mortgage loans. Revenue from our Reverse Originations segment include both our initial estimate of fair value gains on the date of origination (“Net origination gains”), which is determined by utilizing quoted prices on similar securities or internally-developed models utilizing observable market inputs, in addition to fees earned at the time of origination of the associated loans. We elect to account for all originated loans at fair value. The loans are immediately transferred to our Portfolio Management segment, and any future fair value adjustments, including interest earned, on these originated loans are reflected in revenues of our Portfolio Management segment until final disposition.
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KEY METRICS
The following table provides a summary of some of our Reverse Originations segment’s key metrics (dollars in thousands):
Successor Predecessor
Loan origination volume
Loan origination volume — new originations by channel (dollars)(3)
Revenue
In the table below is a summary of the components of our Reverse Originations segment’s total revenue for the periods indicated (in thousands):
Successor Predecessor
Net origination gains
Net interest income — — — —
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For the year ended December
31, 2021 (Successor and Predecessor) versus the year ended December
31, 2020 (Predecessor)
Total revenue increased $195.3 million or 100.6% as a result of the following:
For the year ended December 31, 2020 versus the year ended December 31, 2019
Total revenue increased $49.6 million or 34.3% as a result of higher net origination gains.
Expenses
In the table below is a summary of the components of our Reverse Originations segment’s total expenses for the periods indicated (in thousands):
Successor Predecessor
For the year ended December
31, 2021 (Successor and Predecessor) versus the year ended December
31, 2020 (Predecessor)
Total expenses increased $58.9 million or 67.5% as a result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Total expenses increased $7.7 million or 9.7% as a result of higher salaries, benefits and related expenses combined with an increase in general and administrative expenses.
Commercial Originations Segment
The following table summarizes our Commercial Originations segment’s results for the periods indicated (in thousands):
Successor Predecessor
Impairment of goodwill and intangible assets (75,768 ) — — —
Our Commercial Originations segment generates its revenues primarily from the origination of loans secured by
1-8
family residential properties, which are owned for investment purposes as either long-term rentals (“SRL”), “fix and flip” properties which are undergoing construction or renovation. Revenue from our Commercial Originations segment include both our initial estimate of fair value gains on the date of origination (“Net origination gains”), which is determined by utilizing quoted prices on similar securities or internally-developed models utilizing observable market inputs, in addition to fees earned at the time of origination of the associated loans. We elect to account for all originated loans at fair value. The loans are immediately transferred to our Portfolio Management segment, and any future fair value adjustments, including interest earned, on these originated loans are reflected in revenues of our Portfolio Management segment until final disposition.
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KEY METRICS
The following table provides a summary of some of our Commercial Originations segment’s key metrics (dollars in thousands):
Successor Predecessor
Loan origination volume (dollars)(1)
Loan origination volume (units)(1)
Revenue
In the table below is a summary of the components of our Commercial Originations segment’s total revenue for the periods indicated (in thousands):
Successor Predecessor
For the year ended December 31, 2021 (Successor and Predecessor) versus the year ended December 31, 2020 (Predecessor)
Total revenue increased $57.9 million or 155.6% as result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Total revenue decreased $29.4 million or 44.1% as result of lower net origination gains combined with lower fee income.
Expenses
In the table below is a summary of the components of our Commercial Originations segment’s total expenses for the periods indicated (in thousands):
Successor Predecessor
Occupancy, equipment rentals and other office related expenses 979 538 673 788
For the year ended December 31, 2021 (Successor and Predecessor) versus the year ended December 31, 2020 (Predecessor)
Total expenses increased $36.1 million or 87.3% as a result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Total expenses decreased 10.5 million or 20.3% as a result of lower general and administrative expenses combined with a decrease in salaries, benefits and related expenses.
Lender Services Segment
The following table summarizes our Lender Services segment’s results for the periods indicated (in thousands):
Successor Predecessor
Impairment of goodwill and intangible assets (110,188 ) — — —
Our Lender Services segment generates its revenues primarily from fee income. Revenue from our Lender Services include both the title agent closing and underwriting services. These services are directly tied to the number of closings and orders that are processed throughout the period. In addition, student and consumer loan processing, fulfillment services, and MSR valuation services all contribute to our total revenue in the Lender Services segment.
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KEY METRICS
The following table provides a summary of some of our Lender Services segment’s key metrics:
Successor Predecessor
Revenue
In the table below is a summary of the components of our Lender Services segment’s total revenue for the periods indicated (in thousands):
Successor Predecessor
For the year ended December
31, 2021 (Successor and Predecessor) versus the year ended December
31, 2020 (Predecessor)
Total revenue increased $123.3 million or 60.1% as a result of the following:
For the year ended December 31, 2020 versus the year ended December 31, 2019
Total revenue increased $95.0 million or 86.3% as a result of higher title agent closings, title agent orders, and an increase in insurance underwriting services.
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Expenses
In the table below is a summary of the components of our Lender Services segment’s total expenses for the periods indicated (in thousands):
Successor Predecessor
Fair value change in deferred purchase price liability — — 1,900 (2,195 )
For the year ended December
31, 2021 (Successor and Predecessor) versus the year ended December
31, 2020 (Predecessor)
Total expenses increased $106.8 million or 57.6% as a result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Total expenses increased $80.2 million or 76.2% as a result of higher salaries, benefits and related expenses combined with an increase in general and administrative expenses.
Portfolio Management Segment
The following table summarizes our Portfolio Management segment results for the periods indicated (in thousands):
Successor Predecessor
Impairment of goodwill and intangible assets (11,909 ) — — —
Our Portfolio Management segment generates its revenues primarily from the sale and securitization of residential mortgages into the secondary market, fair value gains and losses on loans and MSRs that we hold to maturity, servicing fee income related to the MSRs, and mortgage advisory fees earned on various investment and capital markets services we provide to our internal and external customers. The fair value gains and losses include the yield we recognize on the contractual interest income that is expected to be collected based on the stated interest rates of the loans and related liabilities, and any contractual service fees earned while servicing these assets.
Net fair value gains and losses in our Portfolio Management segment includes fair value adjustments related to the following assets and liabilities:
• Loans held for investment, subject to HMBS liabilities, at fair value
• Loans held for investment, subject to nonrecourse debt, at fair value
• Loans held for investment, at fair value
• Loans held for sale, at fair value(1)
• HMBS liabilities, at fair value; and
• Nonrecourse debt, at fair value.
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KEY METRICS
The following table provides a trend in the assets and liabilities under management by our Portfolio Management segment (in thousands):
Successor Predecessor
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The following table provides a summary of some of our Portfolio Management segment’s key metrics (dollars in thousands):
Successor Predecessor
Mortgage Servicing Rights Portfolio
Average unpaid principal balance $ 321 $ 321
Weighted average coupon 3.01 % 3.15 %
Weighted average age (in months) 11 4
Weighted average FICO credit score 756 760
90+ day delinquency rate 0.1 % 0.1 %
Total prepayment speed 8.3 % 12.1 %
Reverse Mortgages
Average unpaid principal balance $ 267 $ 245
Weighted average coupon 3.92 % 4.30 %
Weighted average age (in months) 43 44
Percentage in foreclosure 3.8 % 2.4 %
Commercial (SRL/Portfolio/Fix & Flip)
Average unpaid principal balance $ 216 $ 248
Weighted average coupon 7.43 % 8.50 %
Weighted average loan age (in months) 8 12
SRL conditional prepayment rate 1.4 % 2.9 %
SRL non-performing (60+ days past due) 1.3 % 2.2 %
F&F single month mortality 8.9 % 8.8 %
F&F non-performing (60+ days past due) 13.6 % 6.5 %
Agricultural Loans
Average unpaid principal balance $ 1,804 $ 1,646
Weighted average coupon 7.14 % 7.70 %
Weighted average loan age (in months) 7 5
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Successor Predecessor
Investment and Capital Markets
Number of structured deals 10 1 11 7
Number of whole loan trades 30 8 11 12
Revenue
In the table below is a summary of the components of our Portfolio Management segment’s total revenue for the periods indicated (in thousands):
Successor Predecessor
REVENUE
Net fair value gains:
Fee income:
Principally, all of our outstanding financial instruments are carried at fair value. The yield recognized on these financial instruments and any changes in estimated fair value are recorded as a component of net fair value gains on loans and related obligations in the Consolidated Statements of Operations. However, for certain of our outstanding financing lines of credit, we have not elected the fair value option. Accordingly, interest expense is presented separately on our Consolidated Statements of Operations. Further, interest income on collateralized loans may be reflected in net fair value gains on loans and related obligations on the Consolidated Statements of Operations, while the associated interest expense on the pledged loans will be included as a component of net interest expense. We evaluate net interest margin (“NIM”) for our outstanding investments through an evaluation of all components of interest income and interest expense.
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The following table provides an analysis of all components of NIM for the periods indicated (in thousands):
Successor Predecessor
Interest income on mortgage loans held for sale 890 138 714 367
Certain of our financial instruments are valued using a combination of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment and repayment assumptions used in the model are based on various factors, with the key assumptions being prepayment speeds, credit loss frequencies and severity, and discount rate assumptions. Any changes in fair value on these financial instruments is recorded as a gain or loss in net fair value gains on loans and related obligations on the Consolidated Statements of Operations.
For the year ended December 31, 2021 (Successor and Predecessor) versus the year ended December 31, 2020 (Predecessor)
Total revenue decreased $51.6 million or 75.0% as a result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Total revenue decreased $4.3 million or 5.9% as a result of negative fair value adjustments recognized in 2020 primarily driven by higher required cost of funds for securitizations early during the
COVID-19
pandemic. These losses were partially offset by $21.7 million decrease in warehouse interest expense.
Expenses
In the table below is a summary of the components of our Portfolio Management segment’s total expenses for the periods indicated (in thousands):
Successor Predecessor
For the year ended December 31, 2021 (Successor and Predecessor) versus the year ended December 31, 2020 (Predecessor)
Total expenses increased $25.7 million or 28.3% as a result of the following:
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For the year ended December 31, 2020 versus the year ended December 31, 2019
Total expenses increased $26.9 million or 42.2% as a result of higher salaries, benefits and related expenses combined with an increase in general and administrative expenses.
Corporate and Other
Our Corporate and Other segment consists of our BXO and other corporate services groups. These groups support our operating segments, and the cost of services directly supporting the operating segments are allocated to those operating segments on a cost of service basis. Enterprise-focused Corporate and Other expenses that are not incurred in direct support of the operating segments are kept unallocated within our Corporate and Other segment.
The following table summarizes our Corporate and Other segment’s results for the periods indicated (in thousands):
Successor Predecessor
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In the table below is a summary of the components of our Corporate and Other segment’s total expenses for the periods indicated (in thousands):
Successor Predecessor
For the year ended December 31, 2021 (Successor and Predecessor) versus the year ended December 31, 2020 (Predecessor)
Net loss increased $55.0 million or 91.3% as a result of the following:
For the year ended December 31, 2020 versus the year ended December 31, 2019
Net loss increased $21.8 million or 56.5% as a result of higher salaries, benefits and related expenses, net of allocations, combined with higher general and administrative expenses, net of allocations.
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NON-GAAP
FINANCIAL MEASURES
The Company’s management evaluates performance of the Company through the use of certain
non-GAAP
financial measures, including Adjusted Net Income, Adjusted EBITDA and Adjusted Diluted Earnings per Share.
The presentation of
non-GAAP
measures is used to enhance the investors’ understanding of certain aspects of our financial performance. This discussion is not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). These key financial measures provide an additional view of our performance over the long-term and provide useful information that we use in order to maintain and grow our business.
These
non-GAAP
financial measures should not be considered as an alternate to (i) net (loss) income or any other performance measures determined in accordance with GAAP or (ii) operating cash flows determined in accordance with GAAP. Adjusted Net Income and Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations of this metric are:
• cash expenditures for future contractual commitments;
• cash requirements for working capital needs;
• cash requirements for certain tax payments; and
Because of these limitations, Adjusted Net Income and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or distribute to shareholders. We compensate for these limitations by relying primarily on our GAAP results and using our
non-GAAP
financial measures only as a supplement. Users of our consolidated financial statements are cautioned not to place undue reliance on our
non-GAAP
financial measures.
Adjusted Net Income
We define Adjusted Net Income as consolidated net income (loss) adjusted for:
2. Amortization and other impairment of goodwill and intangible assets
3. Equity based compensation
5. Certain non-recurring costs
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6. Pro-forma tax provision attributable to noncontrolling interest
7. Pro-forma tax effects of adjustments
Management believes these key financial measures provide an additional view of our performance over the long
term and provide useful information that we use in order to maintain and grow our business. Management considers Adjusted Net Income important in evaluating our Company as a whole. This supplemental metric is utilized by our management team to assess the underlying key drivers and operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use this measure when analyzing our operating performance and comparability to peers. Adjusted Net Income is not a presentation made in accordance with GAAP, and our definition and use of this measure may vary from other companies in our industry.
Adjusted Net Income provides visibility to the underlying operating performance by excluding the impact of certain items that management does not believe are representative of our core earnings. Adjusted Net Income may also include other adjustments, as applicable based upon facts and circumstances, consistent with our intent of providing a supplemental means of evaluating our operating performance.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) adjusted for:
1. Taxes
2. Interest on non-funding debt
3. Depreciation
5. Amortization and other impairment of goodwill and intangible assets
6. Equity based compensation
8. Certain non-recurring costs
We evaluate the performance of our company and segments through the use of Adjusted EBITDA as a
non-GAAP
measure. Management considers Adjusted EBITDA important in evaluating our business segments and the Company as a whole. Adjusted EBITDA is a supplemental metric utilized by our management team to assess the underlying key drivers and operational performance of the continuing operations of the business and our operating segments. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance. Adjusted EBITDA is not a presentation made in accordance with GAAP, and our use of this measure and term may vary from other companies in our industry.
Adjusted EBITDA provides visibility to the underlying operating performance by excluding the impact of certain items that management does not believe are representative of our core earnings. Adjusted EBITDA may also include other adjustments, as applicable based upon facts and circumstances, consistent with our intent of providing a supplemental means of evaluating our operating performance.
Adjusted Diluted Earnings Per Share
We define Adjusted Diluted Earnings Per Share as Adjusted Net Income (defined above) divided by the weighted average diluted shares, which includes issued and outstanding Class A Common Stock plus the Class A LLC Units owned by the noncontrolling interest on an
if-converted
basis.
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Analysts, investors, and creditors may use this measure when analyzing our operating performance and comparability to peers. Adjusted Net Income is not a presentation made in accordance with GAAP, and our definition and use of this measure may vary from other companies in our industry.
The following table provides a reconciliation of net income to Adjusted Net Income and Adjusted EBITDA (in thousands, except for share data):
Reconciliation to GAAP
Successor Predecessor
Reconciliation of Net income (loss) to Adjusted Net Income and Adjusted EBITDA
Adjustments for:
Change in fair value of warrant liability (12,472 ) — — —
GAAP PER SHARE MEASURES
Net loss attributable to controlling interest $ (371,800 ) N/A N/A N/A
Weighted average shares outstanding 59,849,638 N/A N/A N/A
Basic earnings per share (6.21 ) N/A N/A N/A
If-converted method net income $ (1,243,621 ) N/A N/A N/A
Weighted average diluted shares 190,597,249 N/A N/A N/A
Diluted earnings per share $ (6.52 ) N/A N/A N/A
NON-GAAP PER SHARE MEASURES
Adjusted Diluted Earnings per Share $ 1.06 $ 0.56 $ 2.25 $ 0.44
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3. Mortgage loans held for investment, at fair value;
4. Debt Securities;
5. Mortgage servicing rights, at fair value;
6. HMBS related obligations, at fair value; and
7. Nonrecourse debt, at fair value.
The adjustment for changes in fair value of loans and securities held for investment due to assumption changes is calculated based on changes in fair value associated with the above assets and liabilities calculated in accordance with GAAP, excluding the
period-to-date
estimated impact of the change in fair value attributable to current period additions and the change in fair value attributable to portfolio
run-off,
net of hedge gains and losses and any securitization expenses incurred in securitizing our mortgage loans held for investment, subject to nonrecourse debt. This adjustment represents changes in accounting estimates that are measured in accordance with US GAAP. Actual results may differ from those estimates and assumptions due to factors such as changes in the economy, interest rates, secondary market pricing, prepayment assumptions, home prices or discrete events affecting specific borrowers, and such differences could be material. Accordingly, this number should be understood as an estimate and the actual adjustment could vary if our modeling is incorrect.
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Liquidity and Capital Resources
Impact of the Business Combination
FoA is a holding company and has no material assets other than its direct and indirect ownership of Class A LLC Units. FoA has no independent means of generating revenue. FoA Equity may make distributions to its holders of Class A LLC Units, including FoA and the Continuing Unitholders, in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the TRAs and dividends, if any, declared by it. Deterioration in the financial condition, earnings or cash flow of FoA Equity and its subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, the terms of our financing arrangements, including financing lines of credit and senior notes, contain covenants that may restrict FoA Equity and its subsidiaries from paying such distributions, subject to certain exceptions. In addition, one of our subsidiaries, FAM, is subject to various regulatory capital and minimum net worth requirements as a result of their mortgage origination and servicing activities. Further, FoA Equity is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of FoA Equity (with certain exceptions) exceed the fair value of its assets. Subsidiaries of FoA Equity are generally subject to similar legal limitations on their ability to make distributions to FoA Equity.
Our cash flows from operations, borrowing availability and overall liquidity are subject to risks and uncertainties. We may not be able to obtain additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and to fund our capital requirements are dependent on our future financial performance, which is subject to general economic, financial, and other factors that are beyond our control. Accordingly, our business may not generate sufficient cash flow from operations and future borrowings may not be available from additional indebtedness or otherwise to meet our liquidity needs. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which would result in additional expenses or dilution.
Tax Receivable Agreements
In connection with the Business Combination, concurrently with the Closing, the Company entered into TRA with certain owners of FoA Equity prior to the Business Combination (the “TRA Parties”). The TRAs generally provide for the payment by the Company to the TRA Parties of 85% of the cash tax benefits, if any, that the Company is deemed to realize as a result of (i) tax basis adjustments as a result of sales and exchanges of units in connection with or following the Business Combination and certain distributions with respect to units, (ii) the Company’s utilization of certain tax attributes attributable to Blackstone Tactical Opportunities Associates—NQ L.L.C., a Delaware limited partnership, Blocker GP, and (iii) certain other tax benefits related to entering into the TRAs, including tax benefits attributable to making payments under the TRAs. These tax basis adjustments generated over time may increase (for tax purposes) the depreciation and amortization deductions available to the Company and, therefore, may reduce the amount of U.S. federal, state and local tax that the Company would otherwise be required to pay in the future, although the IRS may challenge all or part of the validity of that tax
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basis, and a court could sustain such challenge. The tax basis adjustments upon sales or exchanges of units for shares of Class A Common Stock and certain distributions with respect to Class A LLC Units may also decrease gains (or increase losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Actual tax benefits realized by the Company may differ from tax benefits calculated under the Tax Receivable Agreements as a result of the use of certain assumptions in the TRAs, including the use of an assumed weighted average state and local income tax rate to calculate tax benefits.
The payments that FoA may make under the TRAs are expected to be substantial. The payments under the TRAs are not conditioned upon continued ownership of FoA or FoA Equity by the Continuing Unitholders.
The Company accounts for the effects of these increases in tax basis and associated payments under the TRAs arising from exchanges in connection with the Business Combination as follows:
The Company records obligations under the TRAs resulting from exchanges subsequent to the Business Combination, as they occur, at the gross undiscounted amount of the expected future payments as an increase to the liability along with the deferred tax asset and valuation allowance (if any) with an offset to additional
paid-in
capital.
As of December 31, 2021, the Company had a liability of $34.6 million related to its projected obligations under the TRA, which is included in deferred purchase price liabilities within payables and other liabilities on the Consolidated Statements of Financial Condition.
Sources and Uses of Cash
Our primary sources of funds for liquidity include: (i) payments received from sale or securitization of loans; (ii) payments from the liquidation or securitization of our outstanding participating interests in loans; and (iii) advance and warehouse facilities, other secured borrowings and the unsecured senior notes.
Our primary uses of funds for liquidity include: (i) funding of borrower advances and draws on outstanding loans; (ii) originations of loans; (iii) payment of operating expenses; (iv) repayment of borrowings and repurchases or redemptions of outstanding indebtedness, and (v) distributions to shareholders for the estimated taxes on pass-through taxable income.
Our cash flow from operating activities when combined with net proceeds from our portfolio financing activities, as well as capacity through existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs.
Cash Flows
As a result of the Business Combination, certain compensation expenses were considered to have been incurred “on the line”. These “on the line” expenses resulted in a decrease in cash on the opening balance sheet as of
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April 1, 2021 when compared to the ending balance as of March 31, 2021. For the Successor period from April 1, 2021 to December 31, 2021, the beginning cash balance reflects the decrease in cash due to these expenses and, as such, these expenses have been appropriately excluded from the reconciliation to the ending cash balance.
The following table presents net cash provided by (used in) operating activities, investing activities and financing activities for the period from April 1, 2021 to December 31, 2021 (Successor), January 1, 2021 to March 31, 2021 (Predecessor), for the year ended December 31, 2020 (Predecessor), and for the year ended December 31, 2019 (Predecessor) (in thousands):
Successor Predecessor
Net cash provided by (used in):
Our cash decreased $163.2 million for the nine months from April 1, 2021 to December 31, 2021 (Successor), increased $113.7 million for the three months from January 1, 2021 to March 31, 2021 (Predecessor), increased $156.7 million for the year ended December 31, 2020 (Predecessor), and increased $143.4 million for the year end December 31, 2019 (Predecessor). The decrease in cash flows for the year ended December 31, 2021 (Successor and Predecessor) period was primarily driven distributions to members and CRNCI redemption related to the Business Combination, net cash invested in loans held for investment and MSRs, net of proceeds from nonrecourse and other secured financing, and acquisition of fixed assets and subsidiaries. These cash outflows were partially offset by proceeds on sales of mortgage loans held for sale, net of origination activity and net proceeds from other financing lines of credit.
Operating Cash Flow
Net cash provided by (used in) operating activities totaled $(214.6) million for the nine months from April 1, 2021 to December 31, 2021 (Successor), $118.0 million for the three months from January 1, 2021 to March 31, 2021 (Predecessor), $(686.1) million for the year ended December 31, 2020 (Predecessor), and $101.1 million for the year ended December 31, 2019 (Predecessor).
Cash flows from operating activities improved $589.5 million for the year ended December 31, 2021 (Successor and Predecessor) compared to the year ended December 31, 2020 (Predecessor). The improvement was primarily attributable to higher proceeds from sale of loans held for sale, net of cash used for originations, partially offset by a decrease in Other assets, net. Proceeds from the sale of loans held for sale were $31.3 billion and $29.6 billion million during the year ended December 31, 2021 (Successor and Predecessor) and for the year ended December 31, 2020 (Predecessor), respectively. Cash used for originations of loans held for sale was $30.4 billion and $29.4 billion as of the year ended December 31, 2021 (Successor and Predecessor) and for the year ended December 31, 2020 (Predecessor), respectively. Additionally, there was an approximate $20.0 million decrease in Net (loss) income adjusted for non-cash items. Net (loss) income decreased $1.7 billion, mostly offset by changes in non-cash items, such as gain on sale and other income from loans held for sale (change of $323 million), unrealized changes on loans, related obligations and derivatives (change of ($109 million)) and impairment of goodwill and intangible assets (change of $1.4 billion).
Cash flows from operating activities decreased for the year ended December 31, 2020 (Predecessor) compared to the year ended December 31, 2019 (Predecessor). The decrease was primarily attributable to $572.0 million decrease in net proceeds from sale of loans held for sale. We originated $29.4 billion in loans held for sale during the year compared to $15.6 billion in the prior year. Weighted average margins on originated loans were 3.88% for 2020 (Predecessor) compared to 2.80% for 2019 (Predecessor). The higher origination volumes were partially
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offset by an increase in proceeds on the sale of loans held for sale and the corresponding gain on loans held for sale during the period. We sold $29.6 billion in loans during 2020 (Predecessor) compared to $16.4 billion in 2019 (Predecessor).
Investing Cash Flow
Net cash used in investing activities totaled $1,103.4 million for the nine months from April 1, 2021 to December 31, 2021 (Successor), $312.0 million for the three months from January 1, 2021 to March 31, 2021 (Predecessor), $875.1 million for the year ended December 31, 2020 (Predecessor), and $2,025.6 million for the year ended December 31, 2019 (Predecessor).
The increase of $540.4 million in cash used in our investing activities during the year ended December 31, 2021 (Successor and Predecessor), compared to the year ended December 31, 2020 (Predecessor), was primarily attributable to higher purchases/advances net of proceeds/payments on loans held for investment and higher cash used for acquisitions of subsidiaries and fixed assets. We originated $4.8 billion and $3.2 billion of reverse mortgage loans for the year ended December 31, 2021 (Successor and Predecessor) and for the year ended December 31, 2020 (Predecessor), respectively. Reverse mortgage loans originated consist of initial reverse mortgage loan borrowing amounts, and additional participations and accretions of reverse mortgage loans, including subsequent borrower draws, mortgage insurance premiums, service fees and other advances which we are able to subsequently pool into a security.
The decrease in cash used in investing activities during the year ended December 31, 2020 (Predecessor), compared to the year ended December 31, 2019 (Predecessor), was primarily attributable to higher proceeds on mortgage loans held for investment during 2020 (Predecessor) compared to 2019 (Predecessor). We originated $3,186.7 million of reverse mortgage loans during 2020 (Predecessor) compared to $2,989.5 million in 2019 (Predecessor).
Financing Cash Flow
Net cash provided by financing activities totaled $1,155.0 million for the nine months from April 1, 2021 to December 31, 2021 (Successor), $307.7 million for the three months from January 1, 2021 to March 31, 2021 (Predecessor), $1,717.9 million for the year ended December 31, 2020 (Predecessor), and $2,067.9 million for the year ended December 31, 2019 (Predecessor).
The decrease of $255.2 million in cash provided by our financing activities during the year ended December 31, 2021 (Successor and Predecessor) compared to the year ended December 31, 2020 (Predecessor) period was primarily driven by a $707.3 decrease in proceeds from issuance, net of payments on nonrecourse debt and the $203 million payment to settle CRNCI. This was partially offset by an increase in net cash proceeds from HMBS obligations and other financing lines of credit.
The decrease in cash provided by financing activities during the year ended December 31, 2020 (Predecessor), compared to the year ended December 31, 2019 (Predecessor), was primarily attributable to net proceeds from financing lines of credit of $246.3 million for 2020 (Predecessor) compared to $959.5 million for 2019 (Predecessor). The decrease in net proceeds provided from financing lines of credit was partially offset by higher proceeds on issuance of HMBS related obligations and nonrecourse debt. Additionally, in November 2020 (Predecessor), we issued $350.0 million of senior unsecured notes, less debt issuance costs of $13.4 million and made member distributions of $380.4 million.
Financial Covenants
Our credit facilities contain various financial covenants, which primarily relate to required tangible net worth amounts, liquidity reserves, leverage ratio requirements, and profitability requirements. These covenants are
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measured at our operating subsidiaries. As a result of impacts from the Business Combination, FAM was not in compliance with the lender adjusted tangible net worth quarterly and
two-consecutive
quarter requirements by FNMA as detailed below. The Company received a waiver for the covenant violations from FNMA. As of
December 31, 2021, the Company had obtained waivers for these covenant violations and was in compliance with all other financial covenants.
During the fourth quarter of 2021, as a result of the goodwill and intangible assets impairment and the impact to net income, FACo and FAM were not in compliance with profitability covenants as of December 31, 2021. The Company obtained waivers or revisions to terms of the affected covenants was in compliance with all other financial covenants as of December 31, 2021.
Seller/Servicer Financial Requirements
We are also subject to net worth, capital ratio and liquidity requirements established by FHA for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers. In both cases, these requirements apply to our operating subsidiaries, FAM and FAR, which are licensed sellers/servicers of the respective GSEs. As of December 31, 2021, we were in compliance with or had received waivers for all of our seller/servicer financial requirements for FHA and Ginnie Mae. For additional information see Note 34—Liquidity and Capital Requirements within the consolidated financial statements.
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
The minimum net worth requirement for Ginnie Mae is defined as follows:
Minimum Capital Ratio