Finance Of America Companies - Earnings Call - Q3 2021

Transcript

Speaker 0

Good morning, ladies and gentlemen, and welcome to the Finance of America's Third Quarter twenty twenty Earnings Conference Call. As a reminder, this call will be recorded. I would now like to turn the conference over to Michael Font, Senior Vice President of Finance at Finance of America. Please go ahead, Michael.

Speaker 1

Thank you, and good morning, everyone, and welcome to Finance of America's third quarter earnings call. With me today are Patti Cook, Chief Executive Officer and Johan Gerrick, Chief Financial Officer. As a reminder, this call is being recorded, and you can find the earnings release and presentation on our Investor Relations website at www.financeofamerica.com. In addition, we will refer to certain non GAAP financial measures on this call. You can find reconciliations of non GAAP to GAAP financial measures to the extent available without unreasonable effort discussed on today's call in our earnings press release and on the Investor Relations page of our website.

Also, I would like to remind everyone that comments on this conference call may be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations and are subject to the Safe Harbor statement for forward looking statements that you will find in yesterday's earnings release. Actual results for future periods may differ materially from those expressed or implied by these forward looking statements due to a number of risks or other factors, including those that are described in the Risk Factors section of Finance of America's Form S-one originally filed with the SEC on 05/25/2021, as well as our subsequent filings with the SEC. We are not undertaking any commitment to update these statements if conditions change. Please note these are interim period financials and are unaudited.

On today's call, Patty will begin with a discussion of our strategic priority, Johan will cover the financial results, and Patty will close by providing insight into how we view our growth opportunities. Now I would like to turn the call over to Finance of America's Chief Executive Officer, Patty Cook. Patty?

Speaker 2

Thanks, Michael, and good morning, everyone. Thank you for joining us for our third quarter call. We're going to spend a little more time than usual as we want to discuss our strategic priorities and opportunities for growth. First off, let me start by saying that I could not be prouder of our performance this quarter, as well as the hard work of the entire Finance of America team. Every segment of our business grew revenue and increased profitability compared to last quarter.

In fact, our year to date revenue of $1,400,000,000 is up 7% compared to the same period last year. This is a remarkable achievement if you consider the huge bar that mortgage set in 2020. And it's a testament to not only the strong growth we have seen in our non mortgage businesses, but also our unique operating model. As a result, we generated basic earnings per share of $0.36 and adjusted fully diluted earnings per share of $0.39 which is up 30% compared to last quarter. Our growth can be attributed to two fundamental pillars that our businesses stand upon, product innovation and capital markets expertise.

No other non bank consumer lending company can match the breadth of our products and distribution. And underpinning our broad product range are very sophisticated capital markets capabilities. These not only maximize the value we get for our production, but also rapidly take advantage of opportunities the market presents. This combination is unmatched in the consumer lending arena and has allowed us to continue growing profitably despite an anticipated slowdown in the mortgage market. Our business model is purposely different from mortgage companies that are generally designed around a single lending platform that offers one size fits all mortgages with an eye toward maximizing transaction value.

We are a specialty finance company built to capture lifetime household value. Yet unlike many fintechs that carry massive valuations, but lose hundreds of millions of dollars, we are profitable today and will remain focused on profitable growth going forward. As you will see when Johan covers the segment results, our non mortgage businesses now account for 49% of our revenue and 80% of our adjusted net income. More importantly, I expect those ratios to increase in the future. I will talk more about our growth expectations towards the end of this call.

We are cognizant of the economic outlook. And as a result are focused on three immediate strategic priorities. First, we will continue to optimize the mortgage business in a way that allows us to disproportionately benefit from the expected growth of the purchase and non agency market, yet remain able to take advantage of the episodic refinance opportunities as we did in 2020. We are laser focused on capitalizing on the strength of our large and successful purchase centric distribution network and introducing new products like Flex, our non agency mortgage. Secondly, we will continue making significant investments in our specialty finance businesses such as reverse, commercial and home improvement to further accelerate growth.

I will cover this in-depth at the end of the call when I talk about our growth prospects. Lastly, and this is something I am really excited about, we are investing heavily in our technology, data and operating model to capture the substantial lifetime household value inherent in our franchise. We talk about lifetime household value rather than lifetime consumer value since our products not only allow us to deliver an enduring personalized experience that meets customers' specific financing needs at various stages of life, but also capture multigenerational relationship. We believe that customers and their families benefit when lending is treated holistically in the context of their ongoing financial journey, not as random one off transactions. No other consumer lending platform can offer a student loan all the way to a reverse mortgage at the scale that Finance of America can.

With that, I'll hand it over to Johan to walk through the financials before I close out with some important remarks on growth and our expectations for the fourth quarter. Thanks, Patty. As mentioned earlier, this was a strong quarter for all our businesses. Revenue grew 17% compared to last quarter,

Speaker 3

and we generated $55,000,000 in pretax income. This translated to adjusted net income of $75,000,000 and fully diluted adjusted earnings per share of $0.39 which exceeded expectations. Moving to the balance sheet. Cash increased by $35,000,000 in Q3 despite retaining and growing our MSR balances. This was largely due to the successful execution of four securitizations by our capital markets team.

Three securitizations were related to FOA originated loans, and the team also acted as co manager on a third party securitization. We grew our MSR balances by $50,000,000 and are heavily focused on recapture rate. Currently, we are recapturing greater than 70% in our retail channel and greater than 60% for our mortgage business overall. Lastly, we grew tangible equity by $64,000,000 or 17% quarter over quarter as we continue to strengthen our balance sheet to fund future growth. As we look at our individual reporting segments, revenue in mortgage originations grew by 8% relative to the second quarter, and it generated $15,000,000 in pretax income.

Gain on sale margins was stable in our retail channel and a modest quarterly decline in overall margin was due to channel mix from growth in the TPO channel as our recent Parkside acquisition impacted the full quarter. Our reverse origination segment set a second consecutive quarterly funding record. The strength in this market is driven by both new originations and cash out refinances due to recent home price appreciation. This generated quarterly revenue of $111,000,000 the first time it crossed the $100,000,000 mark and pretax income of $69,000,000 which grew 30% compared to last quarter. Year to date, reverse originations generated $168,000,000 in pretax income, a 127% increase as compared to the same period in 2020.

Our commercial originations business also continued its growth trajectory, producing record quarterly origination volume and revenue growth of 22% quarter over quarter. Our pipeline is higher than it was last quarter, and we are processing as many loans as we can. Given the demand is outstripping supply, we saw an increase in revenue margins quarter over quarter. Lender Services had another strong quarter with 9% revenue growth and 13% pretax income growth relative to last quarter. Year to date, this business has contributed $30,000,000 in pretax income compared to $15,000,000 last year, a 100% increase.

If you combine the impact of these three businesses, reverse, commercial and lender services, you'll see that year to date revenue increased by 94% and pretax income increased by 148%, respectively, compared to 2020. Turning to our Portfolio Management segment. The capital markets team completed three securitizations of Finance of America originated loans, resulting in growth in our assets under management. In addition, we continue to retain MSR originated in our retail channel and sell MSR in our CPO channel. The latter is sold to a third party fund, which allows us to retain the right to market to those customers.

Also note that fair value marks related predominantly to higher modeled repayment speeds on securitized mortgage assets and MSR flow through this segment. Let me now hand it back to Patti to cover our

Speaker 2

growth expectations for Q4. Thanks, Johan. Before I talk about fourth quarter expectations, I want to address what appears to be the market misperception of our company. I don't believe the market is properly rewarding Finance of America for the underlying value of the different segments of our business. Our comparison set appears to be mortgage companies.

Yet 49% of our revenue and 80% of our pretax income this quarter were generated by segments other than mortgage originations. For purposes of this discussion, I will refer to these other non mortgage segments as specialty finance and services collectively. Importantly, I expect that the relative revenue and profit contribution from specialty finance and services will grow over time. Individual companies like our reverse commercial and lender services businesses have recently traded at multiples substantially higher than where Finance of America's stock is currently trading. As I read through these announcements, the transaction values are always underscored by expectations of sector growth.

For example, the acquisition of Banker Loans by Pareteum a week ago. The market is clearly not rewarding Finance of America for the superior growth in comparable sectors inherent in our Specialty Finance and Services business. To address these misperceptions, we have prepared a presentation, which is available on our Investor Relations website. In this presentation, we split the company into two parts: mortgage versus specialty finance and services, which includes everything other than mortgage as mentioned earlier. Looking now at Page six of the presentation.

Specialty finance and services has delivered consistent strong growth over the past two years. And revenue from SF and S is expected to grow by over 60% for full year 2021. When you combine robust revenue growth with operating leverage, we expect adjusted net income for SF and S to grow by 168% for the full year. I mentioned earlier on the call that we are focused on three strategic priorities. Starting on Page seven, we will leverage our strong distribution, comprehensive product set and capital markets capabilities to drive consistent mortgage journey.

It is this combination of products and talent that allows us to identify significant gaps in the market where customers are not being served by existing products. For example, the nature of work has changed and millions of people are self employed through the economy. We are uniquely positioned to create and launch lending products like Flex, our non agency loan, to help these customers achieve their dream of homeownership. This should reduce mortgage earnings volatility compared to an agency based refi dependent mortgage model. As the market has shown, agency refi business generally has low margins, is highly competitive and volumes are very volatile.

Instead, our distribution platform is ideally suited to capture the more stable, generally less price sensitive purchase market. In addition, our unmatched capital markets capabilities allow us to grow and maximize the value from non agency production at attractive prices. Secondly, as shown on Page eight, we are going to double down on investments in our reverse, commercial and home improvement businesses. These lending businesses have structural tailwinds that will fuel continued growth, as is evidenced by the substantial multiple banks and other investors are paying for these businesses. In reverse, the market is massive.

Seniors hold almost $8,000,000,000,000 in home equity, and research has shown that the majority of seniors have not saved enough for retirement. We have a few tests ongoing to increase market awareness and position a reverse mortgage as a very efficient retirement tool. Initial results are very encouraging. The recent elevated home price appreciation, coupled with the increased desire by older Americans to age in place, has created a unique window of opportunity for us to leverage our scale and expertise to lean into this business, which is exactly what we are doing. In commercial, several factors are driving the substantial demand for investor loans, including the aging housing stock, strong growth in household formation outpacing housing supply and a large number of millennial first time homebuyers who prefer updated homes.

Our pipeline keeps growing and margins are expanding as demand outstrip supply. We have an opportunity to further enhance our growth by moving experienced underwriters and processors from our mortgage business to our commercial business. And if you look at revenue margins, we are getting paid almost twice as much on average for a commercial loan as we are for a mortgage loan. In Home Improvement, several macro trends favor ongoing growth, aging home stock, the shift to work from home and the recent mortgage refinance wave that locked in historically low rates for most borrowers. This is another window of opportunity we are well positioned to take advantage of through our acquisition of a digital point of sale and fulfillment solution from Renovate America.

This infrastructure connects us to thousands of contractors that served more than 15,000 customers this year alone. Our third priority, as shown on Page nine, is to leverage our substantial mortgage infrastructure, technology and data to increase the lifetime household value of our customers. We have only scratched the surface on this and see opportunity to unlock multigenerational value from our customers as they migrate from student loans to personal loans to mortgage to home improvement and ultimately to a reverse mortgage. We have three forty retail offices and more than 2,300 loan officers and broker relationship through which we can sell our extensive product suite. Only a fraction of our sales force offers all of our products today, and the opportunity to leverage our mortgage infrastructure to grow our non mortgage business is substantial.

Turning to Page 10. You can see how our mortgage infrastructure contributes to revenue in our specialty finance and services businesses today. It is important to note, despite doubling year over year, revenue from our mortgage infrastructure is still a small portion of overall revenue for our SS and S businesses. I expect that our concerted efforts and targeted investments to leverage existing infrastructure will create a whole new avenue of growth for the company. We have purposely designed our company to be a thoughtful balance of technology and human consultation with the customer at the center of everything we do.

This creates an enduring relationship and allows us to offer a personalized solution to meet their specific financing needs at each stage of life. Through our various channels, whether in person, online, over the phone or through our thousands of third party originators, we can interact with customers in the manner they prefer. Being a trusted multigenerational advisor that offers personalized proactive advice in a frictionless way will not only drive customer value, but ultimately deliver substantial value to our shareholders. To close this call, I want to provide a glimpse of what we see for the fourth quarter. On Page 12, you will see that we divide our guidance into two parts, mortgage and specialty finance and services, which as mentioned earlier, is everything except mortgage originations.

Going forward, we will provide a view on those parts for the quarter ahead. For mortgage, we expect revenue between 170,000,000 and $190,000,000 and adjusted net income margin between 24%. For specialty finance and services, we expect revenue between $230,000,000 and $250,000,000 and adjusted net income margin between 2628%. We have also included the corresponding third quarter metrics to give you a sense of the direction we're heading in. A reduction in revenue and profitability in our mortgage origination business, in line with industry expectations and seasonal cyclicality, offset by continued highly profitable growth in our Specialty Finance and Services segment.

I will now hand it back to the operator as we open for Q and A.

Speaker 0

We will now begin the question and answer session. Our first question comes from Stephen Laws with Raymond James. You may go ahead.

Speaker 4

Hi, good morning. First off, Patty, Johan and team congrats on a nice quarter. I think you guys exceeded my volume and margin numbers across all the product lines. So nice quarter. And to follow-up some questions on that, can you talk about your outlook for what's driving the significant reverse margin growth or sorry, reverse volume growth we've seen in the past two quarters?

I know that's been kind of one of the key conversations I have with investors is with that being a penetration story as opposed to market share story, what drives the penetration? It seems like you guys have made a lot of success there in the last couple of quarters and curious what your outlook there is and key focus to continue to drive that penetration higher.

Speaker 2

Yes. I think what's playing out in the reverse market, I think is the tailwinds that we continue to talk about, Steven. If I look at our growth, it's both in new borrower originations as well as in re cost. So we continue to see good volume growth and good margin in that sector.

Speaker 4

Great. And can you talk about CRE? Certainly, we've seen some platform acquisitions by some others in the last couple of quarters as people continue to look for ways to enter that sector. Your margins holding up actually increasing quite a bit. Can you talk about your opportunities there?

And are you seeing more competition? Or I know you mentioned your pipeline, as I think you said, is higher than it was last quarter. But how is that competition impacting you, at all?

Speaker 2

I mean, honestly, at this point, our pipeline is growing, and it's as large as we've ever seen it. For us, it's a matter of trying to be able to keep up with that supply, which is why I referenced in my remarks, the opportunity for us to move people to commercial to be able to take advantage of that pipeline. And I think, again, the reason you're seeing new entrants is that the fundamentals of that market is so strong. So it's not really, from my perspective, a matter of the competition. It's a matter of the structural tailwinds available in that market that's creating a huge opportunity.

Speaker 4

Thanks, Patty. One last one for me. Can you at the higher level, conforming loan limits looks like they're going higher, possibly quite a bit higher. Can you talk about how that impacts your business, the opportunities there across different products and how you're positioned for that?

Speaker 2

One of the great things platform is the capital markets expertise that we have to complement what's going on in the agency business. So when I think about what the agencies are doing, we pick up the opportunity via our capital markets to always be supplementing or supplementing what the agencies are doing. So initially, I don't really see a huge change in what we'll do. There's always going to be a shift between what goes to the agencies and what goes non agency. And I think it's the non agency portion of the market where we are intently focused.

Speaker 4

Great. Well, again, congrats on a nice quarter and thanks for your time this morning.

Speaker 2

Thanks, Steve, and appreciate your comments.

Speaker 0

Our next question comes from Ryan Nash with Goldman Sachs. You may go ahead.

Speaker 5

Hey, good morning, Patty. Good morning, Yahan.

Speaker 3

Good morning, Ryan.

Speaker 2

Good morning. So

Speaker 5

Bobby, clearly, there's a big shift in the message today to moving away from being thought of as a mortgage company. I guess to maybe take that a step further, why not take more aggressive steps to rationalize the mortgage business materially downsize or even go as extreme as exiting to be move away from being thought of as a more traditional gain on sale lender? And I guess second, when you think about the specialty finance and services business, who you're comping your performance against? And how should how do you want us to think about as a peer set for that business? Thanks.

Speaker 2

Yes. I think on the mortgage franchise, Ryan, that that franchise has huge intrinsic value for us. Because if you think about it, it's always going to be well poised to take advantage of the opportunity that's in the mortgage, and that's worth it by itself. But more importantly, we can leverage the two thirty offices, the 2,300 LOs and brokers to sell what will increasingly be a growing set of nonmortgage products. So it's the distribution in that channel that's very valuable to us.

It's the perfect place for us to distribute more non agency proprietary products. I think the concept when you go to specialty finance and services is not going to be an aggregated one. We're not going to be able to name one company that you can compare it to. I think you're going to have to look at each one of them individually and construct your comp set, whether that's for commercial, it's a little hard to do in reverse. But I think you can't look at it in aggregate.

You got to look at each business line, home improvement, and see if you can find a comp that can give you some perspective.

Speaker 6

Got it.

Speaker 5

Okay. Maybe just to ask a follow-up on mortgage business. So it looks like it's going to be close to breakeven next quarter. And I was just wondering, could we see broader changes on the cost side in that business? And then Johan, on the 2.61% margin in the mortgage business, can you maybe just talk about where we are by channel in terms of margins?

And where do you think they're headed in both the short and intermediate term? And I have one follow-up.

Speaker 2

On costs, we're intently focused on costs. We actually had some terminations just this week. The balance for us is what is the volume we want to be able to put through that channel relative to the margin and what can we do to optimize it. I mean, that is going to be a huge priority for us now and as we go forward. As the mortgage market is uncertain, it is incumbent upon us to make sure we keep that business right sized.

Speaker 3

Yes, Ryan. And as it relates to the margin, as I alluded to in the comments, margins in the retail channel were relatively flat quarter over quarter, didn't see a lot of meaningful movement there. They were ever so modestly better in the wholesale channel and modestly worse in the direct channel. And so the big change there really is the mix just in terms of higher volume through the wholesale channel. We haven't seen anything in October that indicates a cliff where it's dropping off.

And so I'm sitting here cautiously optimistic that things hold as they are right now.

Speaker 5

Got it. And maybe one last one for Patti. So when I look at the 4Q guidance of $70,000,000 adjusted net income, I guess, Johan, are there any adjustments to think about beyond what we saw this quarter to the adjusted net income? And then second, do you think we're at a trough for adjusted net income? And maybe just talk to the intermediate term expectations for where you see adjusted net income or revenues could go for mortgage and specialty finance?

And what type of growth rates could we see out of specialty finance over the intermediate term? Yes.

Speaker 3

So let me tackle the first one. In terms of adjustments, I'd say the only things that we really know that are going to happen is the amortization of intangibles and the share based compensation that we disclosed in the earnings release. Obviously, we don't know what the fair value marks are going to be. Those are a little bit harder to judge. And we hope that there are no nonrecurring pieces.

So you should think of it only as those two aspects that we back out and the rest we essentially put a zero on.

Speaker 2

And I think as far as the outlook, we're not going to give specific guidance for next year. But I would see here's what I'd say about mortgage. Mortgage is going to do what it's going to do. Rates could rise, rates could go down, and we are poised to optimize whatever scenario develop. The more important conversation though is that the tailwinds available that are present in those other businesses show no signs of changing.

So we keep looking. You can't predict it quarter over quarter, but I don't see any fundamental reasons why those businesses won't continue to grow. They're fueled by things that aren't temporal, right? High equity valuation or reverse, people haven't saved enough, they want to stay in their home, high home price appreciation. Those are strong fundamentals for that business that will suggest it's going to continue to grow.

And if you look at the backup and sort of demand in commercial, I'd say the same thing. Home improvement, everybody's locked in low rates. Where are they going to go when they want to do something for their home? So I think the difference between mortgage, which gets whipped around by interest rates and these other businesses is the structural tailwinds that are available in those businesses. They'll continue to grow.

Speaker 5

Thanks for all the color.

Speaker 3

Thanks, Ryan.

Speaker 0

Our next question comes from Doug Harter with Credit Suisse. You may go ahead.

Speaker 6

Thanks. Patty, you talked about wanting to continue to invest in the specialty finance businesses. Do you think that's going to be organic? Or do you see acquisition opportunities in those businesses?

Speaker 2

Right now, our activities are mostly organic. And I'll give you an example. So one of the areas we're investing in reverse right now is in our direct channel with some pretty sophisticated and targeted marketing that is yielding good results. So I think it's looking at and in home improvement, we've acquired this great point of sale system. We have a great product, it's investing in that technology, getting it out to the sales force so that we can sell those products.

So in my comments and in our strategic objectives, it's primarily focused on organic investment.

Speaker 6

Got it. And then do you see are there any kind of product gaps or any products that you want to add to your suite that you feel will allow you to kind of better utilize that mortgage infrastructure you talked about?

Speaker 2

Sure. So there's a couple. I mean, the one hand, within Flex, we're going to continue to build out that product. And basically what that product does is it looks around the edges of agency and say, where can we grab a borrower who might not have gotten an agency loan. And this isn't generally by going down in credit, it's usually by looking at the income qualification, maybe something that the GSEs don't count, our investors, because remember, we're selling these loans are willing to consider.

So we're going to continue to expand out Flex. I think when you look at the point of sale platform and home improvement, that is a great opportunity for us to offer, I'm going to say ancillary products to home improvement. It could be a personal loan. It could be solar. It will be direct to consumer lending that we can leverage that platform for.

I mean, we love the opportunity for new products. It's a great time in the market because there's a lot of demand for investments.

Speaker 5

Thank you, Betty.

Speaker 0

Our next question comes from Lee Cooperman with Omega Family Office.

Speaker 7

Just a couple of high level questions. I noticed on your press release of earnings, you referred to yourself as a high growth consumer and specialty lending business. I think the stock sells at somewhere between 2x and 3x earnings, which doesn't suggest high growth. I know you spent a lot of time this morning discussing why. Do you think the market are you going to rely upon the market just to wake up and change its expectations?

Or are there proactive things you could do? I noticed, for example, that GE is breaking themselves up into three companies. So that would be question number one. And related to that question is, forget about the next quarter, but on a five year basis, when you refer to yourself as a high growth consumer specialty lending business, what kind of growth do you think the company could support on a five year basis per annum? And secondly, on the cover sheet, there are three earnings numbers.

There's the basic $0.36 there's the fully diluted $0.22 and then there's the adjusted net income of $75,000,000 or $0.39 Which do you think, given your knowledge of the business, the most relevant to your business, the kind of number that would shape dividend policy going forward or other kind of activities? Those two questions. And congratulations on a good quarter.

Speaker 2

Thanks, Lee. Look, I think that what we tried to do on this call is draw attention to what we think is a big distinction between the way the market is looking at us and the way we ought to be valued. So I think it is up to us to continue to get out there, tell the story quarter over quarter, show that that SF and S business is growing at a rapid and consistent rate because of the tailwinds that exist. So for me, we're still a relatively new company. We've got to push for more analysts to follow us and for them to get the story.

And if they start doing comps on that portion of the business relative to some of the action that is taking place in the market, they ought to be applying a higher multiple to that business than they are to mortgage.

Speaker 7

So it's a sum of the parts story in your view, is there anything you could do a la GE? Or is that just not in the cards for us that everything is more integrated?

Speaker 2

We love the elegance of the model and the integrated aspect of it. So if you start pulling the puzzle apart, the picture is not as clear. So what mortgage, right, taking those two thirty offices or the 2,300 salespeople and brokers to sell the products that are in SF and S, they are inextricably linked.

Speaker 7

Got you. Okay. And which of those three numbers on the cover sheet do you think is the most important for us to look at?

Speaker 3

Yes. We look at adjusted net income because it normalizes for fluctuations in fair value marks and other things that are a little bit out of our control. I would say, as it relates to your follow on question in terms of what shape and dividend policy, obviously, that will depend on how much capital we have available and cash we have available. We're obviously investing heavily in the business today. So it's not in this quarter, but Okay.

Speaker 7

And getting away from the next quarter, which doesn't interest me, on a five year basis, when you refer to yourself as a high growth consumer, especially lending business, do you think you could double the size of the company in five years, 15% compound? Is that a reasonable guesstimate, assuming no major recessions, stuff like that?

Speaker 2

I mean, I'd like to say that we can achieve 15% given the current dynamics of today's market going forward, right? If this growth rate continues in our non mortgage businesses, I would say we should be generating 15%

Speaker 7

Thank you and good luck and congratulations on a good quarter.

Speaker 2

Thanks, Lee. I appreciate it.

Speaker 0

Our next question comes from James Faucette with Morgan Stanley. You may go ahead.

Speaker 8

Hey, thank you very much and thanks for the detail and color on your focus in some of these other areas. I'm wondering on reverse mortgage, you've highlighted the tailwinds and that kind of thing. Can you kind of talk about what, if any, headwinds may that you've got to navigate through or around to take advantage of the structural opportunities in Reverse? And then also as part of that question on reverse, the CFPB last month took action against one of your competitors around their advertising space or their advertising practices in the mortgage space. Do you see a trend of regulators looking more closely at their enforcement activities around reverse mortgages?

And how does that potentially create some opportunities for you?

Speaker 2

Yes. Thank you. So I think the biggest headwind when I think of the reverse market is adoption. It's education, right? You've got this huge population out there.

You've got a great product that satisfies one of their biggest needs. It's really it's getting to them. And because Reverse is still a bit of a niche market, it's hard to do on our own. So really, it's the collective of us and our competitors working with what I'll call some industry think tanks to really try and increase the uptake of potential borrowers into a reverse. I think on your second question on the regulatory environment, like we welcome that scrutiny.

And I mean it sincerely. We take our customer relationship in the reverse mortgage seriously, and we have a demonstrated track record of doing the right thing. We have a good relationship with the CFPB. And like I said, I welcome the increased scrutiny.

Speaker 8

Thanks. And then just quickly on the home improvement. Can you quickly run through again, and I think you kind of talked about this, but I'm not sure I captured it entirely. Your customer acquisition and engagement in that home improvement area and how you're thinking about expanding the kind of that reach?

Speaker 2

Yes, so right now that business is organized at point of sale. So the contractor is offering the home improvement loan to the borrower. The opportunity for us that comes from that platform and that relationship is several. First of all, we're acquiring 15,000 based on last year's production, new potential borrowers. So you're going to immediately ask yourself, well, what does the rest of their lending portfolio look like?

And is there an opportunity for us to refi a loan, offer them something else? So it's the borrower, it's the customer acquisition on the one hand and the other things we might be able to advise them on. The second opportunity is taking the technology that underpins the home improvement model and putting other products on it. Solar would be a good example or a home equity like product that's not a mortgage, that's a personal loan, this would be another platform to be able to do it. The distinguishing factor about the platform is that it's basically an automated underwrite.

So unlike when you do a mortgage, then you're bogged down and everything you need to do to underwrite the loan, the loans that we can put through this platform will largely be an automated underwrite. So it puts us in the personal loan space in a way we're not today.

Speaker 7

Our

Speaker 0

next question comes from Wayne Cooperman with Colbert Capital.

Speaker 9

Hello, good morning. I was wondering you were talking about comping to other companies. I wondered if you could just comp the reverse business to the forward business and just trying to understand the returns on capital on each business, if they're separable or if the cost structures are so intertwined that it's really not feasible to do that.

Speaker 2

So first of all, the cost is not intertwined. So we do manage them as a separate segment. So if we're going to talk about cost to originate, there's a cost to originate a mortgage loan and there's a cost to originate a reverse loan. I think so that's what I'd say about the cost side. I think the non mortgage businesses generally have higher margins, right?

They're niche businesses. They are it's not nearly competitive. So you can see by looking at the data in the release, the revenue numbers for Reverse and mortgage that Reverse is going to have higher margins.

Speaker 9

Right. I know in the forward business, you don't have a lot of capital tied up because you originate the mortgage and sell it pretty quickly. On the reverse side, I mean, do you have to hold more capital or hold the loan longer? Like how would you compare the return on capital between one versus the other on a new go forward basis?

Speaker 3

Yes. Look, Wayne, I'd say the return on capital on the reverse business is pretty high. We don't disclose obviously the amount of capital we have allocated to each segment. But if you just look at the operating margin, pretax income over revenue, it's not the 60%, so highly profitable. And what we do is we retain the loans for three months, we aggregate them until we securitize them.

So we have a little bit of cost of holding those. But I don't think we have a negative carry on that. And then when securitize it, we obviously get the margin, which is pretty profitable business for us, yes.

Speaker 9

Do you have to hold more capital on a reverse securitization than a forward securitization? Or are they about the same?

Speaker 2

The time line is different. Yes.

Speaker 3

I mean the time line is different. The one obviously stays on balance sheet. Other one goes off balance sheet. When you I'm happy to walk you through the technicalities of it, you know, if if you're interested. But the the net story is we don't necessarily have to hold incremental capital over and above the exposure that we have on the on the balance sheet net of the nonrecourse obligation, the liability piece.

And the business is obviously highly profitable.

Speaker 9

So is the only I mean, could you grow the mortgage reverse business that is it just you seem like you have the capacity to grow it, it's just you need to grow that market more. It's not really a supply issue, right?

Speaker 2

No, it's getting it we refer to it as the uptake in that market, getting more people to take out a reverse. And we're starting to see it happen. Like if I even look at the past couple of years and the growth in that sector, you see the evidence, two things are happening. More people are taking out a reverse and then people that have taken out a reverse are also watching home price appreciation and continuing to monetize the equity they have in their home, which would continue. So house price appreciation is a great tailwind in reverse as well.

Speaker 9

All right. Thank you very much.

Speaker 2

Thank you.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Patty Cook for any closing remarks.

Speaker 2

Well, thank you all for joining us today, and we look forward to continuing our discussion with you about Finance of America. Please reach out if you have any questions. We'd love to chat. Thanks.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.