Finance of America, Ocwen turn to reverse mortgages as margins shrink

As mortgage companies broadly wrestle with normalizing revenues for traditional loans, reverse products are becoming more prominent in some lenders’ earnings.

Finance of America, for example, recorded $53 million in second-quarter pre-tax income from the reverse mortgage segment alone. That was up nearly 61% year-over-year and almost 18% from the previous fiscal period. In comparison, it generated a loss of $6 million on standard loans due to a mix of margin compression and elevated costs as it integrated Parkside Lending’s wholesale channel into its operations, executives said during the company’s earnings call.

That upward trajectory in reverse loans — which at FoA was in contrast to a decline in traditional mortgage results compared to $96 million in income the previous quarter and $117 million a year ago — shows why reverse loans have become more of a focal point in recent industry earnings.

“The reverse business is less correlated to the direction of interest rates than the forward mortgage market, and we believe the segment is well positioned to generate strong and sustainable growth,” Finance of America CEO Patricia Cook said in a press release.

Overall, the company, which went public through a special purpose acquisition company merger in April, took a net loss of $15 million, due to fair value changes, non-recurring charges and, to a lesser degree, the decline in mortgage income. It reported that its overall earnings were comparable to a 111% decline from the previous quarter and up 110% from a year ago.

To be sure, reverses — which are equity withdrawal loans used by seniors — require specialized operations and compliance that not every company wants to invest in long-term. So the relative attractiveness of such products has divided traditional lenders into buyers, like FoA and Ocwen, and sellers, such as Mr. Cooper.

Influencing this decision is the fact that the Federal Housing Administration, which insures most reverse mortgages, has been wary of a relative drag the loans have put on its finances over the years. That has prompted speculation that it could one day choose to distance itself from them. However, the loans have since gone through several waves of reform and their financial performance showed marked improvement in that agency’s most recent annual actuarial report.

Ocwen recently reported that pre-tax income from reverse originations ran at a rate that is, on average, six times that of traditional mortgages, which may encourage more lenders to take a harder look at these equity withdrawal products.

That said, because of their complexities, few companies are turning exclusively to reverses for growth but more commonly using them as part of broader diversification strategies. In addition to reverses, FoA’s diversified platform includes an industry fee-for-service business, commercial and recently added home improvement loans.

In FoA’s second quarter, however, reverse mortgages were clearly a diversification strategy that stood out. Reverses were the biggest contributor to pre-tax income at $53 million, compared to the $8 million from lender services and $3 million from commercial.