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spk03: Good morning, ladies and gentlemen, and welcome to the Finance of America's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. 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.
spk09: Thank you, and good morning, everyone. and welcome to Finance of America's third quarter earnings call. With me today are Patty Cook, Chief Executive Officer, and Johan Gehrig, 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-1 originally filed with the SEC on May 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 Koch.
spk00: Patty? 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-day revenue of $1.4 billion 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 36 cents, and adjusted fully diluted earnings per share of 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 purposefully 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 specially financed 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 specially financed 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 models 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 multi-generational relationships. 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.
spk04: Thanks, Patty. As mentioned earlier, this was a strong quarter for all our businesses. Revenue grew 17% compared to last quarter, and we generated $55 million in pre-tax income. This translated to adjusted net income of $75 million and fully diluted adjusted earnings per share of $0.39, which exceeded expectations. Moving to the balance sheet, cash increased by $35 million 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 million and are heavily focused on recapturing. 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 million, 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 million in pre-tax income. Gain on sale margins were 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 appreciations. This generated quarterly revenue of $111 million, the first time it crossed the $100 million mark, and pre-tax income of $69 million, which grew 30% compared to last quarter. Year-to-date reverse originations generated $168 million in pre-tax 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're processing as many loans as we can. Given that 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% pre-tax income growth relative to last quarter. Year-to-date, this business has contributed $30 million in pre-tax income, compared to $15 million 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 pre-tax 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 models repayment speeds on securitized mortgage assets and MSR flow through this segment. Let me now hand it back to Patty to cover our growth expectations for Q4.
spk00: Thanks, Johan. Before I talk about fourth quarter expectations, I want to address what appears to be the market's 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 pre-tax 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 contributions from specialty finance and services will grow over time. Individual companies like our reverse commercial and lender services businesses have recently traded in 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 Anchor Loans by Credium 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&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&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 earnings. 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 gig 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 home ownership. This should reduce market churning 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 markets. In addition, our unmatched capital market capabilities allow us to grow and maximize the value from non-agency production at attractive prices. Secondly, as shown on page 8, 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 multiples banks and other investors are paying for these businesses. In reverse, the market is massive. Seniors hold almost $8 trillion 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 home buyers who prefer updated homes. Our pipeline keeps growing and margins are expanding as demand outstrips 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 9, 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 multi-generational 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 340 retail offices and more than 2,300 loan officers and broker relationships 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 SF&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 purposefully 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 multi-generational 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 and $190 million and adjusted net income margin between 2% and 4%. For specialty finance and services, we expect revenue between $230 and $250 million and adjusted net income margin between 26% and 28%. 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&A.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Steven Laws with Raymond James. You may go ahead.
spk05: Hi, good morning. Howdy, 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 volume growth we've seen 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.
spk00: Yeah, I think what's playing out in the reverse market, I think, is the tailwinds that we continue to talk about, Stephen. You know, if I look at our growth, it's both in new borrower originations as well as in response. So we continue to see good volume growth and good margins in that sector.
spk05: Great. And can you talk about CRE? You know, 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. You know, your margin's holding up, actually increasing quite a bit. Can you talk about your opportunities there, and are you seeing more competition? 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?
spk00: 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 competition. It's a matter of the structural tailwind available in that market that's creating these opportunities.
spk05: Thanks, Patty. One last one for me. You know, at the higher level, conforming loan limits looks like they're going higher, possibly quite a bit higher. You know, can you talk about how that, you know, impacts your business, the opportunities there across different products, and, you know, how you're positioned for that?
spk00: You know, one of the great things of our 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 complementing 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-agencies. And I think it's the non-agency portion of the market where we are intently focused.
spk05: Great. Well, again, congrats on a nice quarter, and thanks for your time this morning.
spk00: Thanks, Steve, and appreciate your comments.
spk03: Our next question comes from Ryan Nash with Goldman Sachs. You may go ahead.
spk08: Hey, good morning, Patty. Good morning, Johan.
spk03: Good morning, Ryan.
spk08: Good morning. So... Paddy, 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, you know, why not take more aggressive steps to rationalize the mortgage business, you know, materially downsize or even go as extreme as exiting, you know, to move away from being thought of as, you know, a more traditional gain-on-sale lender. And I guess second, when you think about, you know, the specialty finance and services business, Who are you comping your performance against and how do you want us to think about as a peer set for that business? Thanks.
spk00: Yeah, 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 230 offices, the 2,300 LOs and brokers to sell what will increasingly be a growing set of non-mortgage 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 comp set, 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've got to look at each business line, home improvement, and see if you can find a comp that can give you some perspective.
spk08: Got it. Okay, maybe just to ask a follow-up on the mortgage business. So it looks like it's going to be close to break-even next quarter, and I was just wondering, could we see broader changes on the cost side in that business? And then, Johan, on the 261 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 the intermediate term? And I have one follow-up.
spk00: 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 side.
spk04: Yeah, 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. You know, we haven't seen anything in October that indicates a cliff where it's dropping off, you know, and so I'm sitting here cautiously optimistic that things hold, you know, as they are right now.
spk08: Got it. And maybe one last one for Patty. So when I look at the 4Q guidance of $70 million adjusted net income. I guess, Johanna, 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, Patty, 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? Thanks.
spk04: Yeah, 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 disclose in the earnings release. You know, 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 non-recurring pieces. So, you know, you should think of it only as those two aspects that we back out and the rest we, you know, just like essentially put a zero on.
spk00: I think as far as the outlook, we're not going to give specific guidance for next year. But I would say, 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 develops. The more important conversation, though, is that the tailwinds available that are present in those other businesses show no signs of changing. So, you know, we keep looking. You can't predict it quarter over quarter, but I don't see any fundamental reason why those businesses won't continue to grow. They're fueled by things that aren't temporal. Right? High, high equity valuation in 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'll suggest it's going to continue to grow. And if you look at the backup in 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 choose 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.
spk08: Thanks for all the color. Thanks, Ryan.
spk03: Our next question comes from Doug Harder with Credit Suisse. You may go ahead.
spk07: 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?
spk00: Right now, our activities are mostly organic. And I'll give you an example. So one of the areas we're investing in refers 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.
spk07: 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?
spk00: Sure. So there's a couple. I mean, on 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 qualifications. 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.
spk08: Thank you, Patty.
spk03: Our next question comes from Lee Cooperman with Omega Family Office. You may go ahead.
spk10: Thank you. Just a couple of high-level questions. I noticed on your press release of earnings, you refer to yourself as a high-growth consumer and specialty lending business. I think the stock sells at somewhere between two and three times 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 million or $0.39 million. Which do you think, given your knowledge of the business, is the most relevant to your business? You know, 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.
spk00: 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 this story quarter over quarter, show that that SF&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 this 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.
spk10: So to sum up the parts story in your view, is there anything you could do out of GE? Or is that just not in the cards for us that everything is more integrated?
spk00: 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 is mortgage, right? Taking those 230 offices and the 2,300 salespeople and brokers to sell the products that are in SF&S, they are inextricably linked.
spk10: Gotcha. Okay. And which of those three numbers on the cover sheet do you think is the most important for us to look at?
spk04: Yeah, 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 would depend on how much capital we have. available and cash we have available. We're obviously investing heavily in the business today, so there's nothing this quarter.
spk10: Okay, 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?
spk00: 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% returns.
spk10: Thank you, and good luck, and congratulations on a good quarter.
spk00: Thanks, Lee. I appreciate it.
spk03: Our next question comes from James Fawcett with Morgan Stanley. You may go ahead.
spk06: 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 at their enforcement activities around reverse mortgages, and how does that potentially create some opportunities for you?
spk00: Yeah, 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 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, 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 cruising.
spk06: 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 kind of that reach.
spk00: Yeah, 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. You know, 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 and you're bogged down in 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.
spk06: Thank you very much.
spk03: Again, if you have a question, please press star then 1. Our next question comes from Wayne Cooperman with Colbert Capital. You may go ahead.
spk01: 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 try 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?
spk00: 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 not nearly as 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. Right.
spk01: 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, do you have to hold more capital or hold the loan longer? How would you compare the return on capital between one versus the other on a new go-forward basis?
spk04: Yeah. Look, Wayne, I'd say the return on capital on the reverse 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, pre-tax income over revenue, you know, it's north of 60%, so highly profitable. And what we do is we retain the loans, you know, 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 we securitize it, we obviously get the margin, which is pretty...
spk01: Do you have to hold more capital on a reverse securitization than a forward securitization or are they about the same?
spk04: The timeline is different. The timeline is different. The one obviously stays on balance sheet. The other one goes off balance sheet. I'm happy to walk you through the technicalities of it if you're interested. The next story is we don't necessarily have to hold incremental capital over and above the exposure that we have on the balance sheet net of the non-recourse obligation, you know, the liability piece. And the business is obviously highly profitable.
spk01: So is the only, I mean, could you grow the mortgage reverse business? 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?
spk00: No, it's getting, 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 that 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.
spk01: All right, thank you very much.
spk00: Thank you.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Patti Cook for any closing remarks.
spk00: 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.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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