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 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,” “FoA,” the “Company,” “we,” “us,” or “our” refer to the business of Finance of America Companies Inc. and its consolidated subsidiaries. References to “FoA Equity” are to Finance of America Equity Capital LLC, a Delaware limited liability company, that the Company controls in an “UP-C” structure.
Overview
Finance of America Companies Inc. is a financial services holding company which, through its operating subsidiaries, is a modern retirement solutions platform that provides customers with access to an innovative range of retirement offerings centered on the home. In addition, FoA offers capital markets and portfolio management capabilities primarily to optimize the distribution of its originated loans to investors.
FoA was incorporated in Delaware on October 9, 2020 and became a publicly-traded company on NYSE in April 2021, with trading beginning on April 5, 2021 under the ticker symbol “FOA.” FoA has a controlling financial interest in FoA Equity. FoA Equity owns all of the outstanding equity interests in FOAF. FOAF wholly owns FAH and Incenter. FAH is the parent of a lending company, FAR, while Incenter is the parent of operating service companies that provide capital markets and portfolio management capabilities such as secondary markets advisory services, mortgage trade brokerage, and capital management services.
Through the end of the third fiscal quarter of 2022, the Company was principally focused on offering (1) a wide array of loan products throughout the U.S., including reverse mortgage loans, traditional mortgage loans, business purpose loans to residential real estate investors, and home improvement loans, and (2) complementary lender services such as title insurance and settlement services to mortgage businesses. However, during the fourth quarter of 2022 and calendar year 2023, the Company exited multiple business lines, including its traditional mortgage lending segment, its commercial lending segment, its home improvement lending business, and its lender services businesses, and shifted its focus to developing a streamlined retirement solutions business.
Our strategy and long-term growth initiatives are built upon a few key fundamental factors:
•We are focused on growing our core retirement solutions businesses, which benefit from a shared set of demographic and economic tailwinds. We believe we can more effectively dispatch our innovative suite of solutions to help senior homeowners achieve their retirement goals through the use of home equity.
•We seamlessly connect borrowers with investors. Our consumer-facing business leaders interface directly with the investor-facing professionals in our Portfolio Management segment, facilitating the development of attractive lending solutions for our customers with the confidence that the loans we generate can be efficiently and profitably sold to a deep pool of investors, either directly via whole-loan sales or indirectly via the issuance and sale of mortgage-backed securities. We seek to programmatically and profitably monetize our loans, which minimizes capital at risk, while often retaining a future performance-based participation interest in the underlying cash flows of our monetized loans.
•We distribute our products through multiple channels, including through newer channels as a result of the asset acquisition from American Advisors Group, now known as Bloom Retirement Holdings Inc., that closed on March 31, 2023, and utilize flexible technology platforms in order to scale our businesses and manage costs efficiently.
Through FAR, the Company originates, acquires, and services home equity conversion mortgages, which are originated pursuant to the FHA HECM program and are insured by the FHA, and proprietary reverse mortgage loans and hybrid mortgage loans (which combine features of both traditional residential mortgage loans and reverse mortgage loans), which are not insured by the FHA. We originate loans through a retail channel (consisting primarily of a centralized retail platform) and a TPO channel (consisting primarily of a network of mortgage brokers). We have launched several proprietary reverse mortgage loan products (including our hybrid mortgage loan product) to serve the U.S. senior population and have plans for additional innovative products to satisfy this vast and largely underserved market. We also service the loans that we originate, contracting with various third-party subservicers for the subservicing of our loans. We are a leader in this market and we are focused on developing and
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offering products for borrowers with interest in using the reverse mortgage loan product as a retirement planning tool.
Our Portfolio Management segment provides structuring and product development expertise as well as broker/dealer and institutional asset management capabilities, which facilitates innovation and the successful monetization of our loans. We securitize HECM into HMBS, which Ginnie Mae guarantees, and sell the HMBS in the secondary market while retaining the rights to service the HECM. When HECM are not eligible for securitization into HMBS or are required to be bought out of a pool of HECM previously securitized into an HMBS, we securitize them into privately placed mortgage-backed securities or hold them for investment. We both securitize proprietary reverse mortgage loans into mortgage-backed securities sold to investors and sell proprietary reverse mortgage loans as whole loans to investors. We may also decide to strategically hold certain proprietary reverse mortgage loans for investment. The capabilities provided by the Portfolio Management segment allowed us to complete issuances and sales of mortgage-backed securities backed by our loan products in 2023, 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 many economic environments.
See Note 1 - Organization and Description of Business in the Notes to Consolidated Financial Statements for discussion of recent actions affecting the overall go-forward business operations, including details regarding the series of transactions entered into in order to transform our business from a vertically integrated, diversified lending and complementary services platform to a modern retirement solutions platform.
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American Advisors Group Transaction
On March 31, 2023, FAR acquired a majority of the assets and certain of the liabilities of AAG/Bloom, including, among other things, certain residential reverse mortgage loans and the right to service certain HECM, pursuant to (i) an Asset Purchase Agreement, dated as of December 6, 2022 (the “Original Asset Purchase Agreement” and as amended by the Amendment Agreement entered into on March 31, 2023, the “Asset Purchase Agreement”), by and between the Company, FoA Equity, FAR, AAG/Bloom and, for the limited purposes described therein, Reza Jahangiri, an individual residing in the State of California (the “AAG Principal”), (ii) a Servicing Rights Purchase and Sale Agreement, dated as of December 6, 2022 (as amended, the “MSR Purchase Agreement”), by and between FAR and AAG/Bloom and (iii) a Loan Sale Agreement, dated as of December 6, 2022 (as amended, the “Mortgage Loan Purchase Agreement” and collectively with the Asset Purchase Agreement and the MSR Purchase Agreement, the “AAG Purchase Agreements”), by and between FAR and AAG/Bloom (such acquisition, the “AAG Transaction”).
Pursuant to the AAG Purchase Agreements, in consideration for the assets acquired thereunder, on March 31, 2023, (i) FAR paid to AAG/Bloom $5.5 million in cash less cash on hand and issued to AAG/Bloom a promissory note with an aggregate principal amount of $4.5 million (which was paid in July 2023 in accordance with its terms), (ii) FAR paid off, retired, or assumed specified liabilities, (iii) the Company issued to AAG/Bloom one share of Class B Common Stock, par value $0.0001 per share, of the Company (“Company Class B Common Stock”), and (iv) FoA Equity issued to AAG/Bloom 19,692,990 Class A Units of FoA Equity (“Class A LLC Units”). Under the AAG Purchase Agreements, FoA Equity may issue to AAG/Bloom up to 14,200,676 additional Class A LLC Units upon the occurrence of certain events. The maximum number of Class A LLC Units issuable to AAG/Bloom under the AAG Purchase Agreements is 33,893,666 Class A LLC Units.
The aggregate Class A LLC Units issued to AAG/Bloom on March 31, 2023, together with the Class A LLC Units that are issuable to AAG/Bloom pursuant to the Purchase Agreements, would be exchangeable for 33,893,666 shares of Class A Common Stock pursuant to the Exchange Agreement, dated as of April 1, 2021 (the “Exchange Agreement”), by and among FoA, FoA Equity and the holders of Class A LLC Units from time to time, as an “LLC Unitholder” thereunder.
In connection with the AAG Transaction, the Company and FoA Equity entered into an Equity Matters Agreement (the “Equity Matters Agreement”) with AAG/Bloom pursuant to which, among other things, AAG/Bloom joined and became a party to (i) the Amended and Restated Limited Liability Company Agreement, as a “Member” thereunder, (ii) the Exchange Agreement described above, as an “LLC Unitholder” thereunder, and (iii) the Registration Rights Agreement, dated as of April 1, 2021 (the “Registration Rights Agreement”), as an “Other Holder” thereunder. Pursuant to the Exchange Agreement, AAG/Bloom is permitted to exchange its Class A LLC Units for shares of Company Class A Common Stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. The Equity Matters Agreement also provides AAG/Bloom with demand rights under the Registration Rights Agreement, which would obligate the Company to file a registration statement upon a demand by AAG/Bloom starting from the date that is 71 days following the closing date of the AAG Transaction.
Our Segments
In connection with the transformation of our business from a vertically integrated, diversified lending and complementary services platform to a modern retirement solutions platform, we realigned our business to operate through two reportable segments: Retirement Solutions and Portfolio Management. See Note 1 - Organization and Description of Business in the Notes to Consolidated Financial Statements for more information about the realignment of our reportable segments.
Retirement Solutions
The mission of our Retirement Solutions segment is to help senior homeowners achieve their financial goals in retirement. This segment includes all loan origination activity for the Company, including the origination of HECM, proprietary reverse mortgage loans, and hybrid mortgage loans through both the retail and wholesale/TPO channels. The Retirement Solutions segment generates revenue from fees earned at the time of loan origination as well as from the initial estimate of net origination gains, with all originated loans accounted for at fair value. Once originated, the loans are transferred to our Portfolio Management segment, and any future fair value adjustments, including interest earned, on these originated loans are reflected in the revenues of our Portfolio Management segment until final disposition.
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While FAM has sold certain operational assets of its home improvement lending business and expects to substantially complete the process of winding down the operations of the home improvement lending business by the end of March 2024, the operations of the home improvement lending business are reported as part of the Company’s Retirement Solutions segment rather than as discontinued operations. This is because the wind-down of the home improvement lending business is not considered by the Company to be a strategic shift that has or will have a major effect on our operations and financial results.
Portfolio Management
Our Portfolio Management segment provides product development, loan securitization, loan sales, risk management, servicing oversight, and asset management services to the Company. Our Portfolio Management team acts as the connector between borrowers and investors. The direct connections to investors, provided by our FINRA registered broker-dealer, 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 the balance sheet for attractive return opportunities. These retained investments are a source of growing and recurring interest and servicing income categorized within its net fair value gains. The Portfolio Management segment generates revenue from the sale or securitization of loans, fair value gains on portfolio assets, interest income, fee income related to MSR, and mortgage advisory fees earned on various investment and capital markets services we provide to our internal and external customers.
See the Segment Results section below and Note 27 - Business Segment Reporting in the Notes to Consolidated Financial Statements for additional financial information about our segments.
Business Trends and Conditions
There are several key factors and trends affecting our results of operations. A summary of key factors impacting our revenues include:
•prevailing interest rates which impact loan origination volume, with declining interest rates leading to increases in volume, and an increasing interest rate environment leading to decreases in volume;
•our ability to successfully operate the newly integrated lending platform that we acquired from American Advisors Group in March 2023;
•housing market trends which also impact loan origination volume, with a strong housing market leading to higher loan origination volume, and a weak housing market leading to lower loan origination volume;
•demographic and housing stock trends which impact the addressable market size;
•movement of market interest rates and yields required by investors, with the increasing of market interest rates and yields generally having negative impacts on the fair value of our financial assets, and the decreasing of market interest rates and yields generally having positive impacts on the fair value of our financial assets;
•increases or decreases in default status of loans and prepayment speeds; and
•broad economic factors such as the strength and stability of the overall economy, including sustained higher or lower interest rates and inflation, the unemployment level, and real estate values.
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.
Other Recent Events
Due to significant inflationary pressures, the U.S. Federal Reserve raised the federal funds rate during the first three quarters of 2023 and during the same period, reduced its overall purchases and holdings of government and mortgage-related bonds. Higher interest rates generally led to lower mortgage transaction volumes, increased competition, and lower profit margins. Volatility in market conditions resulting from the foregoing events have caused and may continue to cause credit spreads to widen, which reduces, among other things, availability of credit to our Company on favorable terms, liquidity in the market, the fair market value of the assets on our balance sheet, and price transparency of real estate related or asset-backed assets.
Our Company is actively monitoring these events and their effects on the Company’s financial condition, liquidity, operations, industry, and workforce.
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These continuing economic impacts 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 2024 and beyond. See Results of Operations.
For further discussion on the potential impacts of the Federal Reserve’s monetary policies, see “Risks Related to the Business of the Company” and “Our business is significantly impacted by changes in interest rates. Changes in prevailing interest rates due to U.S. monetary policies or other macroeconomic conditions that affect interest rates may have a detrimental effect on our operations, financial performance, and earnings” under the section entitled “Item 1A. Risk Factors,” as such risk factors may be amended or updated in our subsequent periodic reports filed with the SEC.
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations may not be 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.
Discontinued Operations
During the fourth quarter of 2022 and calendar year 2023, the Company entered into a series of transactions, discontinuing certain business lines while enhancing our reverse mortgage loan business, in order to transform our business from a vertically integrated, diversified lending and complementary services platform to a modern retirement solutions platform. This transformation included the wind-down of the previously reported Mortgage Originations segment, other than the home improvement lending business, and sale of the previously reported Commercial Originations and Lender Services segments, with the exception of its Incenter Solutions LLC operating service subsidiary. This constitutes a strategic shift that has or will have a major effect on our operations and financial results. As such, starting with the first fiscal quarter of 2023, results of our previously reported Mortgage Originations, Commercial Originations, and Lender Services segments, excluding the home improvement lending business and Incenter Solutions LLC, are reported as discontinued operations for all periods presented in accordance with ASC 205, Presentation of Financial Statements. During the third fiscal quarter of 2023, the Company sold certain operational assets of the home improvement lending business and began the process of winding down the operations of the home improvement lending business, which is expected to be substantially complete by the end of March 2024. Also during the third fiscal quarter of 2023, the Company ceased the operations of Incenter Solutions LLC. The wind-down of Incenter Solutions LLC was substantially complete by the end of December 2023. The Company’s wind-down of the home improvement lending business and Incenter Solutions LLC is not considered by the Company to be a strategic shift that has or will have a major effect on our operations and financial results. Therefore, the operations of the home improvement lending business and Incenter Solutions LLC are not reported as discontinued operations. Refer to Note 1 - Organization and Description of Business and Note 4 - Discontinued Operations in the Notes to Consolidated Financial Statements for additional information.
Segment Realignment
During 2023, to more closely align with the new business strategy, the Company restructured the reportable segments into the following: Retirement Solutions and Portfolio Management. The prior period segment disclosures have been recast to reflect the new structure. Refer to Note 1 - Organization and Description of Business in the Notes to Consolidated Financial Statements for additional information.
AAG Transaction
On March 31, 2023, the Company completed the acquisition of the assets and liabilities associated with the AAG Transaction. Refer to Note 1 - Organization and Description of Business and Note 3 - Acquisitions in the Notes to Consolidated Financial Statements for additional information.
Components of Our Results of Operations
Revenue
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 components of net fair value gains on
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loans and related obligations. See Note 6 - Fair Value within our Notes to 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. Revenue is recognized when the performance obligations have been satisfied, which is typically at the time of loan origination or over the life of the loans serviced.
In addition to the fees earned from customers, we recognize the changes in fair value of MSR as a component of fee income. To hedge against volatility in the fair value of certain MSR, we may enter into various derivative agreements from time to time, which may include, but are not limited to, interest rate swaps and futures contracts. 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.
Gain (loss) on sale and other income from loans held for sale, net
Gain (loss) on sale and other income from loans held for sale, net, includes realized and unrealized gains and losses on loans held for sale and hedging derivatives. Unrealized gains and losses include fair value gains and losses resulting from changes in fair value in the underlying loans and hedging derivatives from the time of origination to the ultimate sale of the loan or other settlement of those financial instruments.
Interest income and expense
We earn interest income on loans held for sale 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 income and expense is included as a component of net fair value gains on loans and related obligations.
Expenses
Salaries, benefits, and related expenses
Salaries, benefits, and related expenses include commissions, bonuses, equity-based compensation, salaries, benefits, taxes, and all payroll related expenses for our employees.
Loan production and portfolio related expenses
Loan production and portfolio related expenses include loan origination costs, fees related to loan funding, and portfolio expenses associated with our securitizations.
Loan servicing expenses
Loan servicing expenses include costs related to the servicing and sub-servicing of loans.
Marketing and advertising expenses
Marketing and advertising expenses are related to brand marketing and providing loan product information to our customers.
Depreciation and amortization
Depreciation and amortization expenses include depreciation and amortization of fixed assets and leasehold improvements and definite-lived intangible assets.
General and administrative expenses
General and administrative expenses include communications and data processing costs, professional and consulting fees, occupancy, equipment rentals, other office related expenses, and other expenses.
Impairment of Intangibles and Other Assets
Impairment of intangibles and other assets includes impairment charges recognized on indefinite-lived intangible assets and other long-lived assets.
Other, Net
Other, net, primarily includes gains or losses on non-operating assets and liabilities.
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Income Taxes
FoA Equity 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.
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 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 its allocable share of FoA Equity’s reported results, FoA also incurs expenses related to its holding company operations, as well as payments under the TRA, which may be 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 TRA. However, the ability of FoA Equity to make such distributions may be limited due to, among other things, restrictive covenants in its senior notes.
Results of Operations
Overview
The following tables present selected financial data for the years ended December 31, 2023 and 2022.
Consolidated Results
The following table summarizes our consolidated operating results from continuing operations (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Net fair value gains on loans and related obligations $ 322,329 $ 89,489
Loss on sale and other income from loans held for sale, net (24,994) (5,931)
Impairment of intangibles and other assets (9,296) (9,528)
NET LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ (166,842) $ (343,000)
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 (“DCF”) 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 are recorded as a gain or loss in net fair value gains on loans and related obligations in the Consolidated Statements of Operations.
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The following table summarizes the components of net fair value gains on loans and related obligations (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Interest expense on HMBS and nonrecourse obligations (1,273,159) (600,689)
Net fair value gains on loans and related obligations $ 322,329 $ 89,489
(1) Servicing related income, net, is comprised of premiums realized on the securitization of reverse mortgage tails and miscellaneous contractual servicing fees, net of guarantee fees paid.
(2) Fair value changes from portfolio runoff and realization of modeled income and expenses.
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 our outstanding financing lines of credit and non-funding debt, we have not elected to account for these liabilities under the fair value option. Accordingly, interest expense is presented separately in our Consolidated Statements of Operations. Further, interest income on loans held for investment are reflected in net fair value gains on loans and related obligations in the Consolidated Statements of Operations, while the associated interest expense on the warehouse financing for loans held for investment is 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.
The following table provides an analysis of all components of NIM (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Interest expense on HMBS and nonrecourse obligations (1,273,159) (600,689)
Interest expense on warehouse lines of credit (87,839) (90,980)
Non-funding debt and other interest expense (30,889) (27,669)
(1)Amounts include interest income and expense on all reverse and commercial mortgage loans and their related nonrecourse obligations. Interest income on mortgage loans held for sale and interest expense on warehouse lines of credit are classified in net interest expense. See Note 2 - Summary of Significant Accounting Policies within the Notes to Consolidated Financial Statements for additional information on the Company’s accounting related to reverse and commercial mortgage loans.
For the year ended December 31, 2023 versus the year ended December 31, 2022
Net loss from continuing operations before taxes decreased $176.2 million or 51.4% primarily as a result of the following:
•Net fair value gains on loans and related obligations increased $232.8 million primarily as a result of fair value gains from market inputs or model assumptions compared to losses in the 2022 period, partially offset by lower net origination gains and lower net fair value gains from portfolio activity. The improvement in net fair value gains (losses) from changes in market inputs or model assumptions was primarily related to market interest rate volatility, which negatively impacted long-term assets and
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liabilities in the 2022 period compared to the year ended December 31, 2023. See Note 6 - Fair Value within the Notes to Consolidated Financial Statements for additional information on assumptions impacting the value of our loans held for investment.
The Retirement Solutions segment recognized $121.6 million in net origination gains on originations of $1.6 billion of reverse mortgage loans for the year ended December 31, 2023 compared to $283.8 million in net origination gains on originations of $4.8 billion of reverse mortgage loans for the comparable 2022 period. The decrease in net origination gains in the Retirement Solutions segment was due to lower reverse mortgage loan origination volumes, which was partially offset by higher margins associated with the increase in volumes from our newly acquired retail platform from AAG/Bloom during the year ended December 31, 2023. The $54.6 million increase in net interest margin included in net fair value gains on mortgage loans was primarily due to interest rate increases and the increase in the HECM portfolio size from the acquisition of assets from AAG/Bloom during the year ended December 31, 2023 compared to the 2022 period. The $14.0 million increase in servicing income was due to increased servicing portfolio size from the HECM portfolio acquired from AAG/Bloom during the year ended December 31, 2023. The increase in fair value changes from model amortization of $100.8 million was due to a combination of higher realized NIM and servicing income released from the fair value models and lower overall modeled yield from the decreased average net carrying value on the loans held for investment portfolio during the 2023 period.
•Fee income decreased $38.4 million or 46.9% primarily related to lower servicing fee income and lower fair market value gains on the MSR portfolio due to a much lower MSR portfolio balance for the year ended December 31, 2023. This was partially offset with higher origination fee income from increased retail loan originations from our acquired retail platform from AAG/Bloom.
•Loss on sale and other income from loans held for sale, net, increased $19.1 million primarily due to changes in fair value on commercial and home improvement loans sold during the year ended December 31, 2023, compared to the 2022 period due to market interest rate volatility and widening spreads.
•Net interest expense decreased $6.1 million or 5.4% primarily due to lower average outstanding balances on warehouse lines of credit, which was partially offset by higher cost of funds during the year ended December 31, 2023. Interest income on mortgage loans held for sale and other interest income also improved due to interest rate increases during the year ended December 31, 2023.
•Total expenses decreased $26.2 million or 6.3% due to lower salaries, benefits, and related expenses combined with decreased loan production and portfolio related expenses primarily as a result of our lower average headcount, lower origination volume, and general cost-cutting measures for the year ended December 31, 2023. This was partially offset by an increase to marketing and advertising expenses primarily as a result of the onboarding of our retail platform acquired from AAG/Bloom.
•Other, net, decreased $31.8 million or 99.3% primarily due to the significant remeasurement of the TRA obligation that occurred in the year ended December 31, 2022.
SEGMENT RESULTS
Revenues and fees are directly attributed to their respective segments at the time services are performed. Revenues generated on inter-segment services performed are valued based on estimated market value. 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 years ended December 31, 2023 and 2022. Expenses for enterprise-level general overhead, such as executive administration, are not allocated to the business segments.
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Retirement Solutions Segment
The following table summarizes our Retirement Solutions segment’s results (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Gain (loss) on sale and other income from loans held for sale, net (6,303) 367
Net interest expense — (11)
Impairment of intangible assets — (3,500)
NET INCOME (LOSS) BEFORE INCOME TAXES $ (60,251) $ 117,193
Our Retirement Solutions segment generates its revenues primarily from the origination of reverse mortgage loans, including HECM insured by FHA and non-agency reverse mortgage loans. Revenues from our Retirement Solutions segment include both our initial estimate of net origination gains from reverse mortgage loans, 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.
On August 31, 2023, FAM entered into an agreement to sell certain operational assets of the home improvement lending business. This transaction closed on September 15, 2023. In connection with such transaction, the Company began the process of winding down the operations of the home improvement lending business, which is expected to be substantially complete by the end of March 2024. The wind-down of the home improvement lending business is not considered by the Company to be a strategic shift that has or will have a major effect on our operations and financial results. Therefore, the operations of the home improvement lending business are reported as part of the Company’s Retirement Solutions segment rather than as discontinued operations.
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KEY METRICS
The following table provides a summary of our Retirement Solutions segment’s key metrics (dollars in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Reverse mortgage loan origination volume
Total reverse loan origination volume - units 8,763 13,852
Reverse mortgage loan origination volume - by channel(1)
Home improvement loan origination volume
Total loan origination volume - units 11,606 20,306
(1) Loan origination volumes consist of initial reverse mortgage loan borrowing amounts.
(2) Tails consist of subsequent borrower draws, mortgage insurance premiums, service fees, and other advances, which we are able to subsequently pool into a security.
Revenues
In the table below is a summary of the components of our Retirement Solutions segment’s total revenues (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Net origination gains:
Gain (loss) on sale and other income from loans held for sale, net (6,303) 367
Net interest expense — (11)
For the year ended December 31, 2023 versus the year ended December 31, 2022
Total revenues decreased $151.2 million or 50.4% as a result of the following:
•Net origination gains decreased $162.2 million or 57.1% as a result of lower reverse mortgage loan origination volumes, primarily due to higher interest rates, which was partially offset by higher margins associated with the increase in volumes from our retail platform acquired from AAG/Bloom during the year ended December 31, 2023. We originated $1.6 billion of reverse mortgage loans for the year ended December 31, 2023, a decrease of 66.6%, compared to $4.8 billion for the comparable 2022 period. During the year ended December 31, 2023, the weighted average margin on production was 7.53% compared to 5.87% in 2022, an increase of 1.66% due primarily to the increase in retail production mix associated with the onboarding of our retail platform acquired from AAG/Bloom.
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•Fee income increased $17.6 million due to loan origination fees through our retail platform acquired from AAG/Bloom.
Expenses
In the table below is a summary of the components of our Retirement Solutions segment’s total expenses (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Other salary related expenses 9,104 8,991
Total salaries, benefits, and related expenses 96,574 98,706
For the year ended December 31, 2023 versus the year ended December 31, 2022
Total expenses increased $26.5 million or 14.6% as a result of the following:
•Total salaries, benefits, and related expenses decreased $2.1 million or 2.2% primarily due to lower production-related compensation during the year ended December 31, 2023. This was partially offset by an increase in average headcount for the year ended December 31, 2023 at 579 compared to 527 for the 2022 period related to the onboarding of our retail platform acquired from AAG/Bloom.
•Marketing and advertising expenses increased $19.1 million or 152.4% primarily as a result of the onboarding of our retail platform acquired from AAG/Bloom.
•General and administrative expenses increased $8.3 million or 37.3% primarily due to an increase in communications and data processing expenses and other general and administrative expenses from the onboarded infrastructure of our retail platform acquired from AAG/Bloom for the year ended December 31, 2023 when compared to the 2022 period.
Portfolio Management Segment
The following table summarizes our Portfolio Management segment’s results (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Loss on sale and other income from loans held for sale, net (18,691) (6,298)
Impairment of intangible assets (6,400) (3,800)
Other, net — 860
NET INCOME (LOSS) BEFORE INCOME TAXES $ 24,936 $ (347,375)
Our Portfolio Management segment generates its revenues primarily from the sale and securitization of mortgages into the secondary market, fair value gains and losses on loans and MSR that we hold for investment, servicing fee
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income related to the MSR, 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 include fair value adjustments related to the following assets and liabilities:
•Loans held for investment, subject to HMBS related obligations, 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)
•Derivative assets and liabilities
•HMBS related obligations, at fair value; and
•Nonrecourse debt, at fair value.
(1)Net fair value gains and losses in our Portfolio Management segment for loans held for sale only include fair value adjustments related to loans originated.
KEY METRICS
The following table provides a summary of the assets and liabilities under management by our Portfolio Management segment (in thousands):
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The following table provides a summary of our Portfolio Management segment’s key metrics (dollars in thousands):
Reverse Mortgages
Weighted average coupon 7.35 % 6.11 %
Weighted average age (in months) 40 41
Percentage in foreclosure 2.0 % 2.6 %
MSR Portfolio
Weighted average coupon 3.71 % 3.59 %
Weighted average age (in months) 27 18
Weighted average FICO credit score 763 752
90+ day delinquency rate 0.3 % 0.5 %
Total prepayment speed 8.1 % 6.5 %
For the year ended December 31, 2023 For the year ended December 31, 2022
Investment and Capital Markets
Number of structured deals 5 8
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Revenues
In the table below is a summary of the components of our Portfolio Management segment’s total revenues (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
REVENUES
Net fair value gains (losses) on loans and related obligations:
Interest expense on HMBS and nonrecourse obligations (1,273,159) (600,689)
Net fair value gains (losses) on loans and related obligations 200,683 (195,231)
Fee income:
Loss on sale and other income from loans held for sale, net (18,691) (6,298)
(1) Servicing related income, net, is comprised of premiums realized on the securitization of reverse mortgage tails and miscellaneous contractual servicing fees, net of guarantee fees paid.
(2) Fair value changes from portfolio runoff and realization of modeled income and expenses.
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 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 in our Consolidated Statements of Operations. Further, interest income on loans held for investment are reflected in net fair value gains on loans and related obligations in the Consolidated Statements of Operations, while the associated interest expense on the warehouse financing for loans held for investment is included as a component of net interest expense. We evaluate NIM for our outstanding investments through an evaluation of all components of interest income and interest expense.
The following table provides an analysis of all components of NIM (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Interest expense on HMBS and nonrecourse obligations (1,273,159) (600,689)
Interest expense on warehouse lines of credit (87,839) (90,926)
(1) Amounts include interest income and expense on all reverse and commercial mortgage loans and their related nonrecourse obligations. Interest income on mortgage loans held for sale and interest expense on warehouse lines of credit are classified in net interest expense. See Note 2 - Summary of Significant Accounting Policies within the Notes to Consolidated Financial Statements for additional information on the Company’s accounting related to reverse and commercial mortgage loans.
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Certain of our financial instruments are valued using a combination of a DCF 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 in the Consolidated Statements of Operations.
For the year ended December 31, 2023 versus the year ended December 31, 2022
Total revenues improved $335.7 million as a result of the following:
•Net fair value gains (losses) on loans and related obligations improved $395.9 million primarily as a result of fair value gains from market inputs or model assumptions compared to losses in the 2022 period, partially offset by lower net fair value gains from portfolio activity. The improvement in net fair value gains (losses) from changes in market inputs or model assumptions was primarily related to market interest rate volatility, which negatively impacted long-term assets and liabilities in the 2022 period compared to the year ended December 31, 2023. See Note 6 - Fair Value within the Notes to Consolidated Financial Statements for additional information on assumptions impacting the value of our loans held for investment. The $54.6 million increase in net interest margin included in net fair value gains on mortgage loans was primarily due to interest rate increases and the increase in the HECM portfolio size from the HECM portfolio acquired from AAG/Bloom during the year ended December 31, 2023 compared to the 2022 period. The $14.0 million increase in servicing income was due to increased servicing portfolio size from the HECM portfolio acquired from AAG/Bloom during the year ended December 31, 2023. The increase in fair value changes from model amortization of $100.8 million was due to a combination of higher realized NIM and servicing income released from the fair value models and lower overall modeled yield from the decreased average net carrying value on the loans held for investment portfolio during the 2023 period.
•Fee income decreased $56.5 million primarily related to lower servicing fee income and lower fair market value gains on the MSR portfolio due to a much lower MSR portfolio balance for the year ended December 31, 2023 compared to the 2022 period.
•Loss on sale and other income from loans held for sale, net, increased $12.4 million primarily due to changes in fair value on commercial and home improvement loans sold during the year ended December 31, 2023, compared to the 2022 period due to market interest rate volatility and widening spreads.
•Net interest expense decreased $8.7 million primarily due to lower average outstanding balances on warehouse lines of credit, which was partially offset by higher cost of funds during the year ended December 31, 2023 compared to the 2022 period. Interest income on mortgage loans held for sale also improved due to interest rate increases during the year ended December 31, 2023.
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Expenses
In the table below is a summary of the components of our Portfolio Management segment’s total expenses (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Other salary related expenses 3,034 3,861
Total salaries, benefits, and related expenses 19,874 42,147
Marketing and advertising expenses 24 63
Depreciation and amortization 107 319
For the year ended December 31, 2023 versus the year ended December 31, 2022
Total expenses decreased $40.0 million or 32.3% as a result of the following:
•Salaries, benefits, and related expenses decreased $22.3 million primarily due to a decrease in average headcount during the year ended December 31, 2023 compared to 2022. Average headcount was 73 for the year ended December 31, 2023 and 112 for the comparable 2022 period.
•Loan portfolio related expenses decreased $18.7 million or 52.4% due to a decrease in expenses related to the securitization of assets into nonrecourse securitizations as a result of fewer transactions during the year ended December 31, 2023 compared to the 2022 period.
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Corporate and Other
Corporate and Other consists of our 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 Corporate and Other.
The following table summarizes Corporate and Other results (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Impairment of other assets (2,896) (2,228)
In the table below is a summary of the components of Corporate and Other total expenses (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Shared services - payroll allocations (28,992) (90,649)
Total salaries, benefits, and related expenses 61,871 69,594
Marketing and advertising expenses 204 419
Depreciation and amortization 1,691 3,055
Communications and data processing and other expenses 30,066 52,509
Shared services - general and administrative allocations (3,948) (10,523)
Total general and administrative expenses 43,507 65,946
For the year ended December 31, 2023 versus the year ended December 31, 2022
Total revenues decreased $22.1 million as a result of the following:
•Fee income decreased $19.5 million primarily related to the decline in services provided by the Company’s offshore operational fulfillment services team. During the year ended December 31, 2023, the Company ceased the operations of the offshore fulfillment services team.
Total expenses decreased $31.7 million or 22.8% as a result of the following:
•Salaries, benefits, and related expenses, net of allocations, decreased $7.7 million or 11.1% primarily due to a decrease in salaries and bonuses of $61.9 million for the year ended December 31, 2023 compared to the 2022 period as the Company focused on cost-cutting initiatives related to the restructuring of the Company’s strategic vision. Compared to 2022, average onshore headcount declined by 32.6% from 567 for the year ended December 31, 2022 to 382 for the year ended December 31, 2023. The decrease in average onshore headcount was primarily related to groups supporting our operating segments. These
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reductions were partially offset by a $61.7 million decrease in shared services allocations due to the reduction in supported business lines in 2023.
•General and administrative expenses, net of shared services allocations, decreased $22.4 million or 34.0% due to a $22.4 million decrease in communications and data processing and other expenses and a $6.6 million decrease in professional and consulting fees. These reductions are due to general cost-cutting measures associated with the restructuring of the business. This was partially offset by a $6.6 million decrease in shared services allocations due to the reduction in supported business lines in 2023.
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 (Loss), Adjusted EBITDA, and Adjusted Earnings (Loss) 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. GAAP. 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.
These non-GAAP financial measures should not be considered as an alternative to net income (loss), operating cash flows, or any other performance measures determined in accordance with U.S. GAAP. Adjusted Net Income (Loss), Adjusted EBITDA, and Adjusted Earnings (Loss) per Share 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 U.S. GAAP. Some of the limitations of these metrics are: (i) cash expenditures for future contractual commitments; (ii) cash requirements for working capital needs; (iii) cash requirements for certain tax payments; and (iv) all non-cash income/expense items.
Because of these limitations, Adjusted Net Income (Loss), Adjusted EBITDA, and Adjusted Earnings (Loss) per Share 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 U.S. 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 (Loss)
We define Adjusted Net Income (Loss) as consolidated net loss from continuing operations adjusted for:
1.Changes in fair value of loans and securities held for investment and related obligations due to assumption changes, deferred purchase price obligations (including earnouts and TRA obligations), contingent earnout, warrant liability, and minority investments
2.Amortization and impairment of intangibles and other assets
3.Equity-based compensation
4.Certain non-recurring costs
5.Pro-forma income tax provision adjustments to apply an effective combined corporate tax rate to adjusted consolidated pre-tax income (loss) from continuing operations.
Management considers Adjusted Net Income (Loss) 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 (Loss) is not a presentation made in accordance with U.S. GAAP, and our definition and use of this measure may vary from other companies in our industry.
Adjusted Net Income (Loss) 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 (Loss) 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.
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Adjusted EBITDA
We define Adjusted EBITDA as net loss from continuing operations adjusted for:
1.Taxes
2.Interest on non-funding debt
3.Depreciation
4.Change in fair value of loans and securities held for investment and related obligations due to assumption changes, deferred purchase price obligations (including earnouts and TRA obligations), contingent earnout, warrant liability, and minority investments
5.Amortization and impairment of intangibles and other assets
6.Equity-based compensation
7.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 U.S. 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 Earnings (Loss) Per Share
We define Adjusted Earnings (Loss) Per Share as Adjusted Net Income (Loss) (defined above) divided by the weighted average outstanding shares, which includes outstanding Class A Common Stock plus the Class A LLC Units owned by the noncontrolling interest on an if-converted basis.
Analysts, investors, and creditors may use this measure when analyzing our operating performance and comparability to peers. Adjusted Earnings (Loss) Per Share is not a presentation made in accordance with U.S. 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 loss from continuing operations to Adjusted Net Income (Loss) and Adjusted EBITDA (in thousands, except for share data):
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Reconciliation to GAAP
For the year ended December 31, 2023 For the year ended December 31, 2022
Add back: Benefit for income taxes 593 17,132
Net loss from continuing operations before taxes (166,842) (343,000)
Adjustments for:
Amortization and impairment of intangibles and other assets(2) 44,704 46,877
Adjusted Net Income (Loss) before taxes (118,048) 75,861
GAAP PER SHARE MEASURES
Basic Net Loss per Share from Continuing Operations $ (0.75) $ (1.03)
If-converted method net loss from continuing operations $ (61,287) $ (297,838)
Diluted Net Loss per Share from Continuing Operations $ (0.75) $ (1.58)
NON-GAAP PER SHARE MEASURES
Adjusted Earnings (Loss) per Share $ (0.40) $ 0.29
(1) Changes in Fair Value - The adjustment for changes in fair value includes changes in fair value of loans and securities held for investment and related liabilities, deferred purchase price obligations, contingent earnout, warrant liability, and minority investments.
Changes in fair value of loans and securities held for investment and related liabilities due to assumption changes - This adjustment relates to changes in the significant market or model input components of the fair value for loans and securities and related obligations, which are held for investment. We include an adjustment for the significant market or model input components of the change in fair value because, while based on real observable and/or predicted changes in drivers of the valuation of assets, they may be mismatched in any given period with the actual change in the underlying economics or when they will be realized in actual cash flows. We do not record this change as a separate component in our financial records, but have generated this information based on modeling and certain assumptions. Changes in fair value of loans and securities held for investment and related obligations include changes in fair value and related hedge gains and losses for the following MSR, loans held for investment, and related liabilities:
1.Reverse mortgage loans held for investment, subject to HMBS related obligations, at fair value;
2.Mortgage loans held for investment, subject to nonrecourse debt, at fair value;
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3.Mortgage loans held for investment, at fair value;
4.Debt securities, at fair value;
5.MSR, 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 and related obligations due to assumption changes is calculated based on changes in fair value associated with the above assets and liabilities calculated in accordance with U.S. 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 model amortization (i.e. 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 U.S. 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.
Change in Fair Value of Deferred Purchase Price Obligations - We are obligated to pay contingent consideration to sellers of acquired businesses based on future performance of acquired businesses (Earnouts) as well as realization of tax benefits from certain exchanges of Class A LLC units into Class A Common Stock (TRA Obligation). Change in fair value of deferred purchase price obligations represents impacts to revenue or expense due to changes in the estimated fair value of expected payouts as a result of changes in various assumptions, including future performance, timing and realization of tax benefits, and discount rates.
Change in Fair Value of Contingent Earnout - We are entitled to receive certain contingent consideration from the buyers of our disposed businesses based on future performance of those businesses. Change in fair value of contingent earnout represents impacts to revenue or expense due to changes in the estimated fair value of expected payouts as a result of changes in various assumptions, including future performance and discount rates.
Change in Fair Value of the Warrant Liability - The adjustment to the warrant liability is based on the change in its measured fair value. Although the change in fair value of the warrant liability is a recurring part of our business, the change in fair value is unrealized, and we believe the adjustment is appropriate as the fair value fluctuations from period to period may make it difficult to analyze core-operating trends.
Change in Fair Value of Minority Investments - The adjustment to minority equity investments and debt investments is based on the change in their measured fair value. Although the change in fair value of minority equity investments and debt investments is a recurring part of our business, we believe the adjustment is appropriate as the fair value fluctuations from period to period may make it difficult to analyze core-operating trends.
(2)Amortization and impairment of intangibles and other assets - Includes amortization and impairment of intangibles recognized from various business combinations and impairment of certain other long-lived assets.
(3) Equity-based compensation - Includes equity-based compensation for Replacement Restricted Stock Units and Earnout Right Restricted Stock Units, which are funded 100% by existing non-controlling shareholders or outstanding Class A Common Stock. Refer to Note 22 - Equity-Based Compensation in the Notes to Consolidated Financial Statements for additional information.
(4) Certain non-recurring costs - This adjustment relates to various one-time expenses and adjustments that management believes should be excluded as these do not relate to a recurring part of the core business operations. These items include certain one-time charges including amounts recognized for settlement of legal and regulatory matters, acquisition or divestiture related expenses, and other one-time charges.
(5) Provision for income taxes - We applied an effective combined corporate tax rate to adjusted consolidated pre-tax income (loss) for the respective period to determine the tax effect of adjusted consolidated net income (loss).
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Liquidity and Capital Resources
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 Equity Capital Unitholders, in an amount sufficient to cover all applicable taxes at assumed tax rates, payments under the TRA, and dividends, if any, declared by FoA. Deterioration in the financial condition, earnings, or cash flow of FoA Equity and its subsidiaries for any reason could limit or impair FoA Equity’s ability to make such distributions. In addition, 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. Further, our existing financing arrangements include, and any financing arrangement that we enter into in the future may include, restrictions that impact FoA Equity’s ability to make distributions to FoA.
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 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. 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.
TRA
The Company has entered into the TRA with certain TRA Parties. The TRA generally provide for payment by the Company to the TRA Parties of 85% of the cash tax benefits, if any, that the Company is deemed to realize (calculated using certain simplifying assumptions) as a result of (i) tax basis adjustments as a result of sales and exchanges of Class A LLC Units, (ii) the Company’s utilization of certain tax attributes attributable to Blackstone Tactical Opportunities Associates - NQ L.L.C., a Delaware limited partnership, shareholders (“Blocker GP”), and (iii) certain other tax benefits related to entering into the TRA, including tax benefits attributable to making payments under the TRA. 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 Internal Revenue Service may challenge all or part of the validity of that tax basis, and a court could sustain such challenge. The tax basis adjustments upon sales or exchanges of Class A LLC 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 TRA as a result of the use of certain assumptions in the TRA, including the use of an assumed weighted average state and local income tax rate to calculate tax benefits.
The payments under the TRA are not conditioned upon continued ownership of FoA or FoA Equity by the TRA Parties.
The Company accounts for the effects of these increases in tax basis and associated payments under the TRA as follows:
•records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted U.S. federal and state tax rates at the date of the exchange;
•to the extent we estimate that the Company will not realize the full benefit represented by the deferred tax asset, based on an analysis that will consider, among other things, our expectation of future earnings, the Company reduces the deferred tax asset with a valuation allowance; and
•initial measurement of the obligations was at fair value and is remeasured at fair value each reporting period, with any changes in fair value recognized in other, net, in the Consolidated Statements of Operations.
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The Company records obligations under the TRA resulting from applicable future exchanges 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. If the Company determines that it is no longer probable that a related contingent payment will be required based on expected future cash flows, a reversal of the liability will be recorded through earnings. During 2022, the Company determined that the contingent liability portion of the TRA obligation no longer probable of occurring, consistent with the Company’s need to record the associated valuation allowance against the deferred tax assets (for more information regarding the valuation allowance see Note 25 - Income Taxes within the Notes to Consolidated Financial Statements) and recorded an adjustment through other, net, in the Consolidated Statements of Operations to release the previously estimated contingent TRA liabilities.
As of December 31, 2023 and December 31, 2022, the Company had a liability of $4.5 million and $3.8 million, respectively, which is included in deferred purchase price liabilities within payables and other liabilities in the Consolidated Statements of Financial Condition.
Sources and Uses of Cash
Our primary sources of funds for liquidity include: (i) payments received from the sale or securitization of loans; (ii) payments from the liquidation or securitization of our outstanding participating interests in loans; and (iii) advances on 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; and (iv) repayment of borrowings and repurchases or redemptions of outstanding indebtedness.
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
The following table presents net cash provided by (used in) operating activities, investing activities, and financing activities (in thousands):
For the year ended December 31, 2023 For the year ended December 31, 2022
Net cash provided by (used in)(1):
(1) Amounts presented contain results from both continuing and discontinued operations. Refer to Note 4 - Discontinued Operations in the Notes to Consolidated Financial Statements for additional information regarding cash flow associated with the results of discontinued operations.
Our cash decreased by $52.6 million for the year ended December 31, 2023 compared to a decrease of $186.2 million during the comparable period in 2022.
Operating Cash Flow
Cash flows from operating activities decreased by $1.5 billion for the year ended December 31, 2023 compared to the corresponding 2022 period. The decrease was primarily attributable to a $1.5 billion decrease in proceeds from the sale of loans held for sale, net of cash used for originations.
Investing Cash Flow
The increase of $2.0 billion in cash provided by our investing activities during the year ended December 31, 2023 compared to the 2022 period was primarily attributable to a $2.9 billion decrease in cash used for purchases and originations of loans held for investment, net of proceeds/payments. This was offset by a decrease of $456.3 million
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in proceeds on loans held for investment, subject to nonrecourse debt, net of payments, a decrease of $388.2 million in proceeds from the sale of MSR, and a $140.9 million cash outlay for the AAG Transaction.
Financing Cash Flow
The increase of $364.4 million in cash used in financing activities during the year ended December 31, 2023 compared to the 2022 period was primarily driven by a $1.4 billion decrease in proceeds from issuance of nonrecourse debt, net of payments, and a $321.7 million decrease in proceeds from the securitizations of loans, subject to HMBS related obligations, net of payments, partially offset by a $1.4 billion decrease in payments on other financing lines of credit, net of proceeds, and by a $30.0 million issuance of Class A Common Stock.
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 measured at our holding company subsidiary or our operating subsidiaries. The Company was in compliance with or obtained waivers or amendments to the terms of financial covenants as of December 31, 2023.
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 FAR and FAM, which are licensed sellers/servicers of the respective government sponsored entities (“GSE”). As of December 31, 2023, FAM was not in compliance with Fannie Mae’s and Freddie Mac’s capital ratio requirement. Further, as of December 31, 2023, FAM was also in violation of Fannie Mae’s material decline in lender tangible net worth covenants. In connection with the discontinued operations of the Company’s previously reported Mortgage Originations segment, FAM voluntarily surrendered its Fannie Mae selling approval effective June 30, 2023, and further, FAM has agreed with Fannie Mae, Freddie Mac, and Ginnie Mae to surrender its related approvals as well as its HUD mortgagee approval once the transfer of servicing of FAM’s last mortgage loans related to such GSE/agency has been completed, which is expected in the first quarter of 2024 with respect to Ginnie Mae and HUD and the second quarter of 2024 with respect to Fannie Mae and Freddie Mac. As of December 31, 2023 and December 31, 2022, we were in compliance with or had received waivers for all of the other seller/servicer financial requirements for FHA and Ginnie Mae. For additional information see Note 28 - Liquidity and Capital Requirements within the Notes to Consolidated Financial Statements.
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
•Base of $2.5 million plus 25 basis points of outstanding UPB for total loans serviced.
•Tangible Net Worth comprises of total equity less goodwill, intangible assets, affiliate receivables, and certain pledged assets.
The minimum net worth requirement for Ginnie Mae is defined as follows:
•The sum of (i) base of $2.5 million plus 35 basis points of the issuer’s total single-family effective outstanding obligations, and (ii) base of $5.0 million plus 1% of the total outstanding HMBS and unused commitment authority.
•Tangible Net Worth is defined as total equity less goodwill, intangible assets, affiliate receivables, and certain pledged assets.
Minimum Capital Ratio
•In addition to the minimum net worth requirement, we are also required to hold a ratio of Tangible Net Worth to Total Assets (excluding HMBS securitizations) greater than 6%.
•FAR received a waiver for the minimum outstanding capital requirements from Ginnie Mae.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
•3.5 basis points of total Agency Mortgage Servicing, plus
•Incremental 200 basis points times the sum of the following:
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•The total UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is not in forbearance, plus
•The total UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is in forbearance, and which were delinquent at the time it entered forbearance, plus
•30% of the UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is in forbearance, and which were current at the time it entered forbearance.
•This liquidity must only be maintained to the extent this sum exceeds 6% of the total Agency Mortgage Servicing UPB.
•Allowable assets for liquidity may include cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSE, U.S. Treasury Obligations); and unused/available portion of committed servicing advance lines.
The minimum liquidity requirement for Ginnie Mae is defined as follows:
•Maintain liquid assets equal to the greater of $1.0 million or 10 basis points of our outstanding single-family MBS.
•Maintain liquid assets equal to at least 20% of our net worth requirement for HECM MBS.
Liquidity
For the year ended December 31, 2023, the operating results of the Company were negatively impacted by macroeconomic factors including increased market interest rates. These factors significantly reduced customer demand, compressed margins, and resulted in significant fair value adjustments for assets that we hold for investment at fair value. Cash flows have been negatively affected by the above factors and the discontinuation of our previously reported mortgage originations, commercial originations, and lender services businesses.
In light of the conditions noted above, management has taken the actions described in Note 4 - Discontinued Operations and Note 3 - Acquisitions and other actions to reduce our operating expenses within our continuing business lines. In addition, management has increased the credit availability and extended the maturity date for its revolving working capital lines of credit to May 25, 2025.
The Company, in the normal course of operations, continuously evaluates the timing and extent of the monetization of liquid financial assets that can be financed or sold to generate additional liquidity in amounts and at terms consistent with its operating needs.
The Company believes its actions, as described in the prior paragraphs, combined with the Company’s operating results will provide sufficient liquidity for the Company to meet its financial obligations and covenants on an ongoing basis.
Summary of Certain Indebtedness
The following description is a summary of certain material provisions of our outstanding indebtedness. As of December 31, 2023, our debt obligations were approximately $26.6 billion. This summary does not restate the terms of our outstanding indebtedness in its entirety, nor does it describe all of the material terms of our indebtedness.
Warehouse Lines of Credit
Reverse mortgage facilities
As of December 31, 2023, we had $1.0 billion in warehouse lines of credit capacity collateralized primarily by first lien mortgages with a $0.4 billion aggregate principal amount drawn through seven funding facility arrangements with six active lenders. These facilities are generally structured as master repurchase agreements under which ownership of the related eligible loans is temporarily transferred to a lender or as participation arrangements pursuant to which the lender acquires a participation interest in the related eligible loans. The funds advanced to us are generally repaid using the proceeds from the sale or securitization of the loans to, or pursuant to, programs sponsored by Ginnie Mae or private secondary market investors, although prior payment may be required based on, among other things, certain breaches of representations and warranties or other events of default.
When we draw on these facilities, we generally must transfer and pledge eligible loans to the lender and comply with various financial and other covenants. The facilities generally have one-year terms and expire at various times during 2024 and 2026. Under the facilities, loans are generally transferred at an advance rate less than the principal
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balance of the loans (the “haircut”), which serves as the primary credit enhancement for the lender. Six of our warehouse lines of credit are guaranteed by Finance of America Holdings LLC (“FAH”), a consolidated subsidiary of the Company and the parent holding company to the reverse mortgage business. Since the advances to us are generally for less than 100% of the principal balance of the loans, we are required to use working capital to fund the remaining portion of the principal balance of the loans. Upon expiration, management believes it will either renew its existing facilities or obtain sufficient additional lines of credit. The interest rate on all outstanding facilities is the Bloomberg Short-Term Bank Yield Index (“BSBY”) or SOFR, plus applicable margin.
The following table presents additional information about our warehouse facilities as of December 31, 2023 (in thousands):
Reverse Warehouse Facilities Maturity Date Total Capacity Outstanding Balance
Mortgage facility
As of December 31, 2023, we had $12.5 million in warehouse line of credit capacity collateralized by first lien mortgages with $2.1 million aggregate principal amount drawn through one funding facility arrangement with one active lender. This facility is structured as a master repurchase agreement under which ownership of the related eligible loans is temporarily transferred to the lender.
When we draw on this facility, we generally must transfer and pledge eligible loans to the lender and comply with various financial and other covenants. The facility expires in October 2024. Under the facility, loans are generally transferred at a haircut, which serves as the primary credit enhancement for the lender. Our one warehouse line of credit is guaranteed by FAH, a consolidated subsidiary of the Company and the parent holding company to the mortgage business. Since the advances to us are generally for less than 100% of the principal balance of the loans, we are required to use working capital to fund the remaining portion of the principal balance of the loans. Upon expiration, the warehouse facility will either be closed or combined with other facilities. The interest rate on the outstanding facility is the BSBY, plus applicable margin.
The following table presents additional information about our warehouse facility as of December 31, 2023 (in thousands):
Mortgage Warehouse Facility Maturity Date Total Capacity Outstanding Balance
General
With respect to each of our warehouse facilities, we pay certain up-front and/or ongoing fees which can be based on our utilization of the facility. In some instances, loans held by a lender for a contractual period exceeding 45 to 60 calendar days after we originate such loans are subject to additional fees and interest rates.
Certain of our warehouse facilities contain sub-limits for “wet” loans, which allow us to finance loans for a minimal period of time prior to delivery of the note collateral to the lender. “Wet” loans are loans for which the collateral custodian has not yet received the related loan documentation. “Dry” loans are loans for which all the sale documentation has been completed at the time of funding. Wet loans are held by a lender for a contractual period, typically between five and ten business days and are subject to a reduction in the advance amount.
Interest is generally payable at the time the loan is settled off the line or monthly in arrears and the principal is payable upon receipt of loan sale or securitization proceeds or transfer of a loan to another line of credit. The facilities may also require the outstanding principal to be repaid if a loan remains on the line longer than a contractual period of time, which generally ranges from 45 to 365 calendar days.
Interest on our warehouse facilities vary by facility and may depend on the type of asset that is being financed. The interest rate on all outstanding facilities is SOFR or BSBY, plus a spread.
Loans financed under certain of our warehouse facilities are subject to changes in fair value and margin calls. The fair value of our loans depends on a variety of economic conditions, including interest rates and market demand for
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loans. Under certain facilities, if the fair value of the underlying loans declines below the outstanding asset balance on such loans or if the UPB of such loans falls below a threshold related to the repurchase price for such loans, we could be required to (i) repay cash in an amount that cures the margin deficit or (ii) supply additional eligible assets or rights as collateral for the underlying loans to compensate for the margin deficit. Certain warehouse facilities allow for the remittance of cash back to us if the value of the loan exceeds the principal balance.
Our warehouse facilities require our borrowing subsidiaries to comply with various customary operating and financial covenants, including, without limitation, the following tests:
•minimum tangible or adjusted tangible net worth;
•maximum leverage ratio of total liabilities (which may include off-balance sheet liabilities) or indebtedness to tangible or adjusted tangible net worth;
•minimum liquidity or minimum liquid assets; and
•minimum profitability.
In the event we fail to comply with the covenants contained in any of our warehouse lines of credit, or otherwise were to default under the terms of such agreements, we may be restricted from paying dividends, reducing or retiring our equity interests, making investments, or incurring more debt.
Other Secured Lines of Credit
As of December 31, 2023, we collectively had $0.5 billion in additional secured facilities with $0.5 billion aggregate principal amount drawn through credit agreements or master repurchase agreements with six funding facility arrangements and five active lenders. These facilities are secured by, among other things, eligible asset-backed securities, MSR, and HECM tails. In certain instances, these assets are subject to existing first lien warehouse financing, in which case these facilities (i.e., mezzanine facilities) are secured by the equity in these assets exceeding first lien warehouse financing. These facilities are generally structured as master repurchase agreements under which ownership of the related eligible assets is temporarily transferred to a lender. The funds advanced to us are generally repaid using the proceeds from the sale or securitization of the underlying assets or distribution from underlying securities, although prior payment may be required based on, among other things, certain breaches of representations and warranties or other events of default.
When we draw on these facilities, we generally must transfer and pledge eligible assets to the lender and comply with various financial and other covenants. Under our facilities, we generally transfer the assets at a haircut, which serves as the primary credit enhancement for the lender. Four of these facilities are guaranteed by FAH, a consolidated subsidiary of the Company.
The following table presents additional information about our other financing lines of credit as of December 31, 2023 (in thousands):
Other Financing Lines of Credit Maturity Date Total Capacity Outstanding Balance
We pay certain up-front and ongoing fees based on our utilization with respect to many of these facilities. We pay commitment fees based upon the limit of the facility and unused fees are paid if utilization falls below a certain amount.
Interest is payable either at the time the loan or securities are settled off the line or monthly in arrears, and principal is payable upon receipt of asset sale or securitization proceeds, principal distributions on the underlying pledged securities or transfer of assets to another line of credit, and upon the maturity of the facility.
Under these facilities, we are generally required to comply with various customary operating and financial covenants. The financial covenants are similar to those under the warehouse lines of credit. The Company was in compliance with or has received waivers for all financial covenants as of December 31, 2023.
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HMBS related obligations
FAR is an approved issuer of HMBS securities that are guaranteed by Ginnie Mae and collateralized by participation interests in HECM insured by the FHA. We originate HECM insured by the FHA. Participations in the HECM are pooled into HMBS securities which are sold into the secondary market with servicing rights retained. We have determined that loan transfers in the HMBS program do not meet the accounting definition of a participating interest because of the servicing requirements in the product that require the issuer/servicer to absorb some level of interest rate risk, cash flow timing risk, and incidental credit risk due to the buyout of HECM assets as discussed below. As a result, the transfers of the HECM do not qualify for sale accounting, and we, therefore, account for these transfers as financings. Holders of participating interests in the HMBS have no recourse against assets other than the underlying HECM loans, remittances, or collateral on those loans while they are in the securitization pools, except for standard representations and warranties and our contractual obligation to service the HECM and the HMBS.
Remittances received on the reverse loans, if any, and proceeds received from the sale of real estate owned, and our funds used to repurchase reverse loans are used to reduce the HMBS related obligations by making payments to the securitization pools, which then remit the payments to the beneficial interest holders of the HMBS. The maturity of the HMBS related obligations is directly affected by the liquidation of the reverse loans or liquidation of real estate owned properties and events of default as stipulated in the reverse loan agreements with borrowers. As an HMBS issuer, FAR assumes certain obligations related to each security it issues. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once they reach certain limits set at loan origination for the maximum UPB allowed. Performing repurchased loans are generally conveyed to HUD, and nonperforming repurchased loans are generally liquidated in accordance with program requirements.
As of December 31, 2023, we had HMBS-related borrowings of $17.4 billion and HECM pledged as collateral to the pools of $17.5 billion, both carried at fair value.
Additionally, as the servicer of reverse mortgage loans, we are obligated to fund additional borrowing capacity primarily in the form of undrawn lines of credit on floating rate reverse mortgage loans. We rely upon our operating cash flows to fund these additional borrowings on a short-term basis prior to securitization. The additional borrowings are generally securitized within 30 days after funding. The obligation to fund these additional borrowings could have a significant impact on our liquidity.
Nonrecourse Debt
We securitize and issue interests in pools of loans that are not eligible for the Ginnie Mae securitization program. These include reverse mortgage loans that were previously repurchased out of a HMBS pool, which are referred to as HECM buyouts, commercial mortgage loans, and non-agency reverse mortgages. The transactions provide investors with the ability to invest in these pools of assets. The transactions provide us with access to liquidity for these assets, ongoing servicing fees, and potential residual returns for the residual securities we retain at the time of securitization. The transactions are structured as secured borrowings with the loan assets and liabilities, respectively, included in the Consolidated Statements of Financial Condition as loans held for investment, subject to nonrecourse debt, at fair value, and nonrecourse debt, at fair value. As of December 31, 2023, we had nonrecourse debt-related borrowings of $7.9 billion.
Notes Payable
Senior unsecured notes
On November 5, 2020, Finance of America Funding LLC (“FOAF”), a consolidated subsidiary of the Company, issued $350 million aggregate principal amount of senior unsecured notes due November 15, 2025 (the “Notes”). The Notes bear interest at a rate of 7.875% per year, payable semi-annually in arrears on May 15 and November 15 beginning on May 15, 2021. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by FoA and each of FoA’s material existing and future consolidated domestic subsidiaries, excluding FOAF and subsidiaries.
In accordance with the agreement, FOAF may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount thereof, plus the applicable premium as of the redemption date under the terms of the indenture and accrued and unpaid interest. The redemption price during the twelve-month period following November 15, 2023 and at any time after November 15, 2024 is 101.969% and 100%, respectively, of the principal amount plus accrued and unpaid interest thereon. Upon the occurrence of a change of control, the holders of the Notes will have the right to require FOAF to make an offer to repurchase each holder’s Notes at a price equal to
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101% of their principal amount, plus accrued and unpaid interest. FOAF has not redeemed any of the Notes since they were issued in November 2020.
The Notes contain covenants limiting, among other things, FOAF and its restricted subsidiaries’ ability to incur certain types of additional debt or issue certain preferred shares, incur liens, make certain distributions, investments and other restricted payments, engage in certain transactions with affiliates, and merge or consolidate or sell, transfer, lease or otherwise dispose of all or substantially all of FOAF’s assets. These incurrence-based covenants are subject to exceptions and qualifications. Many of these covenants will cease to apply during any time that the Notes have investment grade ratings and no default with respect to the Notes has occurred and is continuing. The Company was in compliance with all required covenants related to the Notes as of December 31, 2023.
FoA’s existing owners or their affiliated entities, including Blackstone and Brian L. Libman, FoA’s founder and chairman, purchased notes in the offering in an aggregate principal amount of $135.0 million.
Related-party notes
The Company had two Revolving Working Capital Promissory Note Agreements (the “Working Capital Promissory Notes”) outstanding with BTO Urban Holdings and Libman Family Holdings, LLC, a Delaware limited liability company which are deemed affiliates of the Company. Amounts under the Working Capital Promissory Notes may be re-borrowed and repaid from time to time until the related maturity date. The Working Capital Promissory Notes accrue interest monthly at a rate of 10.0% per annum, which will increase to 15.0% per annum on May 15, 2024, and mature in November 2024. The Working Capital Promissory Notes were amended subsequent to the balance sheet date increasing the borrowing capacity and extending the maturity dates through May 25, 2025. Refer to Note 34 - Subsequent Events in the Notes to Consolidated Financial Statements for additional information.
Contractual Obligations and Commitments
The following table provides a summary of obligations and commitments outstanding as of December 31, 2023 (in thousands):
Total Less than 1 year 1- 3 years 3 - 5 years More than 5 years
Contractual cash obligations:
(1) The $59.1 million of Working Capital Promissory Notes were amended subsequent to the balance sheet date increasing the borrowing capacity and extending the maturity dates through May 25, 2025. Refer to Note 34 - Subsequent Events in the Notes to Consolidated Financial Statements for additional information.
In addition to the above contractual obligations, we have also been involved with several securitizations of HECM loans, which were structured as secured borrowings. These structures resulted in us carrying the securitized loans in the Consolidated Statements of Financial Condition and recognizing the asset-backed certificates acquired by third parties as HMBS related obligations. The timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans and liquidation of real estate owned properties. The outstanding principal balance of loans held for investment, subject to HMBS related obligations, was $16.9 billion as ofDecember 31, 2023.
The Company’s TRA obligation will require payments to be made that may be significant and are not reflected in the contractual obligations tables set forth above.
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CRITICAL ACCOUNTING ESTIMATES
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and other subjective assessments. In particular, we have identified several policies that, due to the judgment, estimates, and assumptions inherent in those policies, are critical to an understanding of the consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 6 - Fair Value in the Notes to Consolidated Financial Statements. We believe that the judgment, estimates, and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the consolidated financial statements to these critical accounting policies, the use of other judgments, estimates, and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs include (i) the valuation of loans held for investment, subject to HMBS related obligations, at fair value, (ii) the valuation of loans held for investment, subject to nonrecourse debt, at fair value, (iii) the valuation of loans held for investment, at fair value, (iv) the valuation of HMBS related obligations, at fair value, and (v) the valuation of nonrecourse debt, at fair value. For the impact of changes in estimates on these fair value measurements, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Fair Value Measurements
Reverse Mortgage Loans Held for Investment, at Fair Value
We have elected to account for all outstanding reverse mortgage loans held for investment at fair value. Outstanding reverse mortgage loans held for investment, at fair value, include originated or purchased reverse mortgage loans that are expected to be sold or securitized in the secondary market, reverse mortgage loans that were previously securitized into either an HMBS or private securitization, or repurchased reverse loans out of Ginnie Mae securitization pools.
We have determined that HECM loans transferred under the current Ginnie Mae HMBS securitization program do not meet the requirements for sale accounting and are not derecognized upon date of transfer. The Ginnie Mae HMBS securitization program includes certain terms that do not meet the participating interest requirements and require or provide an option for the Company to reacquire the loans prior to maturity. Due to these terms, the transfer of the loans does not meet the requirements of sale accounting. As a result, the Company accounts for HECM loans transferred into HMBS securitizations as secured borrowings and continues to recognize the loans as held for investment, along with the corresponding liability for the HMBS related obligations.
Non-agency reverse mortgage loans, which can complement the FHA HECM for higher value homes, are designated for homeowners aged 55 or older, depending on the loan product and state that the homeowner resides. The maximum non-agency loan amount is $4 million. Non-agency reverse mortgage loans are not insured by the FHA and will not be placed into a Ginnie Mae HMBS; however, the Company may transfer or pledge these assets as collateral for securitized nonrecourse debt obligations.
Reverse mortgage loans held for investment, at fair value, also include claims receivable that have been submitted to HUD awaiting reimbursement. These amounts are recorded net of amounts the Company does not expect to recover through outstanding claims.
The Company, as an issuer of HMBS, is required to repurchase reverse loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount (referred to as HECM buyouts). Performing repurchased loans are generally conveyed to HUD and payment is received from HUD typically within 45 days of repurchase. Nonperforming repurchased loans are generally liquidated through foreclosure, subsequent sale of the real estate owned, and claim submissions to HUD.
We recognize reverse mortgage loans held for investment at fair value with all changes in fair value recorded in net fair value gains on loans and related obligations in the Consolidated Statements of Operations. We estimate the fair value of these loans using a process that combines the use of a DCF model and analysis of current market data. The cash flow assumptions and prepayment assumptions used in the model are based on various factors. Refer to Note 6 - Fair Value in the Notes to Consolidated Financial Statements for further discussion of the key assumptions and valuation techniques.
Commercial Mortgage Loans Held for Investment, at Fair Value
We have elected to account for all outstanding commercial mortgage loans held for investment at fair value. Outstanding commercial mortgage loans held for investment, at fair value, primarily include commercial mortgage
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loans that were previously securitized into trusts. Commercial mortgage loans held for investment also consist of short-term commercial loans.
We recognize commercial loans held for investment at fair value with all changes in fair value recorded in net fair value gains on loans and related obligations in the Consolidated Statements of Operations. We estimate the fair value of these loans using a process that combines the use of a DCF model and analysis of current market data. The cash flow assumptions and prepayment assumptions used in the model are based on various factors. Refer to Note 6 - Fair Value in the Notes to Consolidated Financial Statements for further discussion of the key assumptions and valuation techniques.
HMBS Related Obligations, at Fair Value
We have elected to account for all outstanding HMBS related obligations at fair value. This liability includes the Company’s obligation to repay the secured borrowing from the FHA-insured HECM cash flows and the obligations as issuer and servicer of the HECM loans and HMBS. Monthly cash flows generated from the HECM loans are used to service the outstanding HMBS.
As an issuer of HMBS, the Company is obligated to service the HECM loan and associated HMBS, which includes funding the repurchase of the HECM loans or pass through of cash due to the holder of the beneficial interests in the Ginnie Mae HMBS upon maturity events and certain funding obligations related to monthly guarantee fees, mortgage insurance proceeds, and partial month interest.
We recognize HMBS related obligations at fair value with all changes in fair value recorded in net fair value gains on loans and related obligations in the Consolidated Statements of Operations. We estimate the fair value of these obligations using a process that combines the use of a DCF model and analysis of current market data. The cash flow assumptions and prepayment assumptions used in the model are based on various factors. Refer to Note 6 - Fair Value in the Notes to Consolidated Financial Statements for further discussion of the key assumptions and valuation techniques.
Nonrecourse Debt, at Fair Value
We have elected to account for all outstanding nonrecourse debt at fair value. We securitize and issue interests in pools of loans that are not eligible for the Ginnie Mae securitization program. These securitizations include non-agency reverse mortgages, HECM buyouts, and commercial mortgage loans. The transactions provide investors with the ability to invest in these pools of assets. The transactions provide us with access to liquidity for these assets, ongoing servicing fees, and potential residual returns for the residual securities we retain at the time of securitization. The principal and interest on the outstanding debt is paid using the cash flows from the underlying securitized loans, which serve as collateral for the debt.
We recognize our outstanding nonrecourse debt at fair value with all changes in fair value recorded in net fair value gains on loans and related obligations in the Consolidated Statements of Operations. We estimate the fair value of this debt using a process that combines the use of a DCF model and analysis of current market data. The cash flow assumptions and prepayment assumptions used in the model are based on various factors. Refer to Note 6 - Fair Value in the Notes to Consolidated Financial Statements for further discussion of the key assumptions and valuation techniques.
We use various internal financial models that use market participant data to value these loans. These models are complex and use asset specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of loans are complex because of the high number of variables that drive cash flows associated with the loans. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. On a quarterly basis, we obtain external market valuations from independent third-party valuation experts in order to validate the reasonableness of our internal valuation.
New Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies within the Notes to Consolidated Financial Statements for a summary of recently adopted and recently issued accounting standards and their related effects or anticipated effects in the consolidated financial statements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal market risk is interest rate risk, primarily to changes in long-term Treasury rates and mortgage interest rates due to their impact on mortgage-related assets. Changes in short-term interest rates will also have an impact on our financing lines of credit.
Interest Rate Risk
Changes in interest rates will, in general, impact our operating segments as follows:
Retirement Solutions
•an increase in prevailing interest rates could adversely affect our loan origination volume as new loans or refinancing an existing loan will be less attractive to borrowers.
Portfolio Management
•an increase in interest rates could generate an increase in delinquency, default, and foreclosure rates resulting in an increase in both servicing costs and interest expense on our outstanding debt.
•an increase in interest rates will lead to a higher cost of funds on our financing lines of credit.
•an increase in interest rates and market spreads may cause a reduction in the fair value of our long-term assets.
•a decrease in interest rates may increase prepayment speeds of our long-term assets which could lead to a reduction in the fair value of our long-term assets.
Earnings on our held for investment assets depend largely on our interest rate spread, represented by the relationship between the yield on our interest-earning assets, primarily securitized assets, and the cost of our interest-bearing liabilities, primarily securitized borrowings. Interest rate spreads are impacted by several factors, including forward interest rates, general economic factors, and the quality of the loans in our portfolio.
Sensitivity Analysis
We utilize a sensitivity analysis to assess our market risk associated with changes in interest rates. This sensitivity analysis attempts to assess the potential impact to earnings based on hypothetical changes in interest rates.
We estimate the fair value of the outstanding mortgage loans and related liabilities using a process that combines the use of a DCF model and analysis of current market data. The cash flow assumptions and prepayment assumptions used in the model are based on various factors. Refer to Note 6 - Fair Value in the Notes to Consolidated Financial Statements for further discussion of the key assumptions and valuation techniques.
Our total market risk is impacted by a variety of other factors including market spreads and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time.
The sensitivities presented are hypothetical and should be evaluated with care. The effect on fair value of a 25 bps variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
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The following table summarizes the estimated change in the fair value of our significant assets and liabilities sensitive to interest rates as of December 31, 2023 (in thousands).
Down 25 bps Up 25 bps
Increase (decrease) in assets
Loans held for investment, subject to nonrecourse debt:
Commercial mortgage loans 218 (217)
Loans held for investment:
Increase (decrease) in liabilities
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Item 8. Financial Statements and Supplementary Data
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Index to Consolidated Financial Statements:
Notes to Consolidated Financial Statements 107
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Finance of America Companies Inc.
Plano, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Finance of America Companies Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 15, 2024, expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Fair Value of Certain Reverse Mortgage Loans and Related Obligations
As described in Note 6 to the Company’s consolidated financial statements, the Company’s balance of reverse mortgage loans classified as Loans Held for Investment, Subject to Nonrecourse Debt, at Fair Value, was $8.1 billion, and the Company’s balance of Nonrecourse Debt, at Fair Value was $7.9 billion as of December 31, 2023. The Company has elected to account for these assets and liabilities at fair value and determines the fair value by estimating the fair value of future cash flows associated with the assets and liabilities.
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The fair value of the reverse mortgage loans and the related obligations are classified as Level 3 in the valuation hierarchy, and a significant unobservable assumption used in the valuation of the reverse mortgage loans and related obligations is the yield spread component of the discount rates.
We have identified the yield spread component of the discount rates used in the valuation of the non-agency reverse mortgage loans and related obligations as a critical audit matter because of (i) the significant judgments made by management in determining the yield spread component of the discount rates and (ii) the high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the appropriateness of the yield spread component of the discount rates, including specialized skill and knowledge needed.
The primary procedures we perform to address this critical audit matter included:
•Testing the design and operating effectiveness of controls relating to the determination and evaluation of the discount rates (and yield spread component of the discount rates) used in the valuation of the reverse mortgage loans and related obligations.
•Utilizing personnel with specialized skill and knowledge in valuation to assist in assessing the reasonableness of the methodology utilized by management to determine the discount rate, including the basis for the yield spread component.
•Assessing the reasonableness of the yield spreads by (i) by evaluating the relevancy and reliability of the sources of the yield spread information, (ii) agreeing the yield spread information to supporting documentation, (iii) testing the completeness and accuracy of the transactional details, and (iv) validating the arithmetic accuracy of the calculation of the yield spreads utilized in the determination of the discount rate.
•Assessing the reasonableness of the yield spreads by (i) comparing the yield spreads utilized to yield spreads implied by observed transactions, (ii) comparing the yield spreads utilized to third-party yield spread information, and (iii) by comparing changes in yield spreads over time to changes in relevant benchmark spreads.
/s/ BDO USA, P.C.
We have served as the Company’s auditor since 2021.
Philadelphia, Pennsylvania
March 15, 2024
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Consolidated Financial Statements
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ASSETS
LIABILITIES AND EQUITY
Commitments and Contingencies (Note 21)
EQUITY (Note 33)
Accumulated other comprehensive loss (249) (273)
See accompanying Notes to Consolidated Financial Statements
99
The following table presents the assets and liabilities of the Company’s consolidated variable interest entities (“VIEs”), which are included in the Consolidated Statements of Financial Condition above, and excludes retained bonds and beneficial interests that eliminate in consolidation.
ASSETS
LIABILITIES
Payables and other liabilities 546 757
NET CARRYING VALUE OF ASSETS SUBJECT TO NONRECOURSE DEBT $ 585,796 $ 413,605
See accompanying Notes to Consolidated Financial Statements
100
For the year ended December 31, 2023 For the year ended December 31, 2022
REVENUES
Net fair value gains on loans and related obligations $ 322,329 $ 89,489
Loss on sale and other income from loans held for sale, net (24,994) (5,931)
Net interest expense:
EXPENSES
Loan production and portfolio related expenses 26,490 52,079
IMPAIRMENT OF INTANGIBLES AND OTHER ASSETS (9,296) (9,528)
NET LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (166,842) (343,000)
Benefit for income taxes from continuing operations (593) (17,132)
NET LOSS FROM DISCONTINUED OPERATIONS (51,909) (389,660)
NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST $ (80,088) $ (190,682)
EARNINGS PER SHARE (Note 32)
Basic net loss per share from continuing operations $ (0.75) $ (1.03)
Basic net loss per share $ (0.98) $ (3.06)
Diluted net loss per share from continuing operations $ (0.75) $ (1.58)
Diluted net loss per share $ (0.98) $ (3.12)
See accompanying Notes to Consolidated Financial Statements
101
For the year ended December 31, 2023 For the year ended December 31, 2022
COMPREHENSIVE INCOME (LOSS) ITEM:
Impact of foreign currency translation adjustment 24 (163)
COMPREHENSIVE LOSS ATTRIBUTABLE TO CONTROLLING INTEREST $ (80,079) $ (190,736)
See accompanying Notes to Consolidated Financial Statements
102
Class A Common Stock Class B Common Stock Noncontrolling Interest
Noncontrolling interest contributions — — — — — — — — 42 42
Noncontrolling interest distributions — — — — — — — — (248) (248)
Equity-based compensation, net — — — — 48,342 — — — — 48,342
Class B share retirement — — (1) — — — — — — —
Foreign currency translation adjustment — — — — — — (163) — — (163)
See accompanying Notes to Consolidated Financial Statements
103
Class A Common Stock Class B Common Stock Noncontrolling Interest
Equity-based compensation, net — — — — 24,667 — — — — 24,667
Foreign currency translation adjustment — — — — — — 24 — — 24
See accompanying Notes to Consolidated Financial Statements
104
For the year ended December 31, 2023 For the year ended December 31, 2022
Operating Activities(1)
Change in fair value of mortgage servicing rights (“MSR”) 3,067 (23,026)
Change in fair value of nonrecourse MSR financing liability (748) 8,162
Impairment of intangibles and other assets 13,751 192,509