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With several top 10 reverse mortgage lenders now active in some form within the U.S. stock market, companies like Finance of America (FOA) and Ellington Financial — the parent of reverse lender Longbridge Financial — have recently released their third-quarter 2024 earnings results.
In the case of FOA — the current industry leader — the earnings results were robust. Executive leaders there pointed to the performance of the company’s proprietary loan products and trends in the Home Equity Conversion Mortgage (HECM) space as favorable.
While Ellington’s results were softer in comparison, company leaders remain bullish on profitability prospects for Longbridge and the wider industry. They also mentioned the proprietary product suite at their company as a bright spot.
To get a better idea of what investors might be most closely interested in with these results, along with the outlook for these companies and the industry, HousingWire’s Reverse Mortgage Daily (RMD) sat down with UBS equity research analyst Douglas Harter.
Company performance
When asked about the recent earnings results for these companies, Harter said that FOA has done an effective job of cleaning up its balance sheet as evidenced by its debt exchange agreement and the implementation of a reverse stock split. These moves, he said, helped demonstrate to investors that the company had its priorities clearly in mind.
“That was job one — making sure they had the runway for the integration with AAG to continue and for the financial metrics to improve,” Harter explained. “Over the past couple of quarters, they’ve gotten back to break-even, and this quarter, they posted a nice profit, both from the revenue side and the cost side.”
This brings earnings potential from the brand integration between FOA and American Advisors Group (AAG), he said, making for a much healthier position. Interest rates will be a determinant of future performance, but FOA is in a “better position to handle market volatility going forward, and I think the next things people are watching for are how volumes continue to trend and what the outlook looks like,” Harter said.
In the case of Ellington, it works a little differently, since Longbridge is only one component of its larger business.
“They’ve managed to continue securitizing across their platforms, which has allowed them to grow their portfolio, increase earnings, and get back to covering the dividend from an earnings-available-for-distribution standpoint this quarter, which was a positive development,” Harter said.
While the company’s book value may have come in below investors’ expectations when considering the broader health of the credit markets, the reverse mortgage business has trended positively.
“In the reverse business, there’s been a nice improvement in core profitability, though the book value was a bit volatile this quarter due to rates,” he said.
Investor attitudes on reverse
Considering that reverse mortgage volume is only a fraction of what it once was when looking back to the immediate aftermath of the financial crisis, Harter was asked how that factors into investor attitudes about the space. There remains a lot of unrealized potential for the industry, he said, which is intriguing for investors.
“People have looked at the demographics, the under-savings of seniors and the significant amount of home equity seniors hold as a potentially large opportunity,” he said. “That potential has existed for a long time, but it hasn’t truly translated into volume. There’s always that push and pull between the long-term potential and the challenges the industry has faced, especially after regulatory changes affecting the amount of draws and more recently, the RMF bankruptcy.”
Such changes have made it challenging for investors to “gain traction” in a way that matches the perceived potential, which has led to diverse investment outlooks in the space.
“Some investors remain skeptical, seeing it as a space that’s long been promised as beneficial due to demographic trends but hasn’t delivered at scale,” he said. “For many investors, given the current state of volumes, it remains a niche market that doesn’t demand much attention.”
Investors are also more likely to view each new regulation that could be handed down for the HECM program based on the impact it could have on companies. The 2017 reduction in principal limit factors (PLFs) is largely seen as a negative from investors, while they cite the impending release of “HMBS 2.0” as a potential positive.
Regarding the forthcoming complementary HMBS program, Harter said investors are watching what ultimately happens there, particularly as it pertains to FOA.
“On the liquidity side, what happens with HMBS 2.0 — [investors are watching to see if it will] free up more liquidity for them to continue improving their balance sheet,” he said. “FOA is making the right steps, the ones I think we and investors have been looking for.”
Ellington and FOA have engaged in different levels of business with UBS over the past 12 months, Harter said, with Ellington having been a client for investment and non-investment banking services. FOA and Ellington have each compensated UBS or its affiliates within the past 12 months.
