Massive names come under the spotlight
There was more bad news for the mortgage industry this month after it emerged that two lenders were downgraded by the Fitch ratings agency.
Provident Funding was downgraded to ‘B’ from ‘B+’, while the rating for Finance of America (FOA) dropped further to ‘B-’ from ‘B+’.
The rating actions, which also included a review of Home Point, UWM and Freedom Mortgage Corporation, were taken as part of a periodic peer review of non-bank mortgage companies.
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Bonds carrying a rating lower than ‘BB’ are considered speculative-grade or a junk bond, which serves as a red flag to investors.
According to Investopedia, letter grades from credit agencies such as Fitch represent the financial viability of the company and the likelihood that the contract terms of the bond terms will be honored.
Regarding FOA and its subsidiaries, Fitch pointed to the company’s “relatively weak earnings” and the impact of higher rates for the downgrade.
FOA, a non-bank mortgage originator and leader in the reverse lending sector, reported a pretax loss of $246 million in the first half of the year.
The agency noted recent covenant breaches resulting from reduced profitability and higher leverage for the negative outlook, which raised “some concern for the company’s ability to extend debt maturities and secure future funding”.
Fitch nonetheless stressed that FOA had “sufficient reserves” to cover potential repurchase claims.
Meanwhile, Provident Funding’s downgrade and revised negative outlook reflected “weakened profitability expectations in the near term” for the wholesale channel-focused originator.
However, although Provident would experience lower origination volumes in the coming months, Fitch said the lender had weathered the challenging operating environment well through the first half of 2022, earning a pretax return on average assets of 3.8%.
Fitch also affirmed a negative outlook for Home Point, regarded as the country’s third largest wholesale lending firm and the seventh biggest non-bank mortgage lender.
Home Point reported a pre-tax operating loss during the first half of the year, driven by a major drop in origination volume.
The agency said the negative outlook reflected Home Point’s “weaker than expected financial performance” due to rising interest rates and the increased competition in the mortgage origination market.
Significantly, it added that there was an execution risk associated with the lender’s recently announced initiatives to right-size the business, as well as its plan to specialize in the wholesale lending channel.
Read more: Home Point Capital hit by multi-million loss
The agency also revised Freedom Mortgage Corporation’s outlook to negative, citing its “elevated exposure” to Ginnie Mae loans and repurchase or indemnification claims from third parties.
By contrast, UWM’s outlook was stable, according to the agency. The Pontiac-based wholesale lender retained its ‘BB-’ rating, confirming its “strong market position and corporate profile as a leader in the wholesale residential mortgage segment”, Fitch added.
Neither Finance of America nor Freedom Mortgage Corporation responded to requests for comment.
Home Point declined to comment, however. A spokesperson for the Michigan-based wholesale lender told Mortgage Professional America (MPA) that it could not make a statement prior to its upcoming earnings release.
The latest ratings come as mortgage rates topped 7% last week, with the 30-year fixed rate hitting the highest level in 20 years, sparking concerns over affordability, which in turn has caused house prices to fall and would-be homebuyers to stay away from the market.
Meanwhile, homebuilder sentiment has now fallen to the lowest level since 2012, according to data from the National Association of Home Builders (NAHB).