Exhibit 99.1

INDEX TO FINANCIAL STATEMENTS

Audited Consolidated Financial Statements of Finance of America Equity Capital LLC as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018

 

Report of Independent Registered Public Accounting Firm

     F-2  

Consolidated Statements of Financial Condition

     F-5  

Consolidated Statements of Operations and Comprehensive Income

     F-6  

Consolidated Statements of Changes in Members’ Equity

     F-7  

Consolidated Statements of Cash Flows

     F-8  

Notes to Consolidated Financial Statements

     F-10  

 

F-1


Report of Independent Registered Public Accounting Firm

To the Members of the Audit Committee

Finance of America Equity Capital LLC and its Subsidiaries

Dallas, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial condition of Finance of America Equity Capital LLC and Subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, changes in members’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Fair Value of Certain Level 3 Financial Instruments

As described in Note 2 and 5 to the consolidated financial statements, the Company has $16.5 billion of its assets, and $15.1 billion of its liabilities, measured at fair value on a recurring basis and are classified as level 3 within the fair value hierarchy as they contain one or more inputs into the valuation which are unobservable and significant to their fair value measurement. The Company utilized internally developed valuation models and unobservable inputs to estimate the fair value of these level 3 financial instruments.

 

F-2


We have identified the fair value of mortgage loans held for investment and nonrecourse debt, which are Level 3 financial instruments, as a critical audit matter. There was significant judgment and estimation by management in determining the unobservable inputs used to estimate the fair value of these mortgage loans and related obligations, including prepayment and repayment speed, loss frequency, default and loss severity, home price appreciation, and draw curve assumptions. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including specialized skill and knowledge needed.

The primary procedures we perform to address this critical audit matter included:

 

   

Testing the accuracy of a sample of the unpaid principal balance of the mortgage loan data utilized in the valuation model by confirming balances with borrowers, comparing data to the loan origination documents, and obtaining and inspecting supporting documentation for loan activity.

 

   

Testing the completeness and accuracy of the mortgage loan activity and historical results underlying the loss frequency, default and loss severity, prepayment and repayment speeds, and draw curve assumptions.

 

   

Utilizing professionals with specialized skill and knowledge in valuation to assist in:

 

   

Testing the reasonableness of the valuation methodologies used and assessing the accuracy of the Company’s valuation models by independently calculating the fair value using the Company’s inputs.

 

   

Evaluating the reasonableness of a sample of appraisal reports and developing an independent estimate of home price appreciation rates.

 

   

Testing the unobservable inputs used by the Company by comparing to current industry, market data and economic trends.

Fair Value of Mortgage Servicing Rights Assets

As described in Note 2, 5, and 11 to the consolidated financial statements, the Company has elected to account for the Company’s mortgage servicing rights assets at fair value, with a balance of $180.7 million as of December 31, 2020. Management estimates the fair value of mortgage servicing rights using a discounted cash flow model, which forecasts cash flows over the life of the loans in conjunction with the Company’s prepayment model, and then discounts these cash flows to present value using static discount rates. The key economic assumptions used to determine the fair value of mortgage servicing rights are prepayment speeds and discount rates.

We identified the valuation of mortgage servicing rights assets as a critical audit matter. There was significant judgment and estimation by management in determining the fair value of mortgage servicing rights, including the determination of prepayment speed and discount rate assumptions. Auditing these elements involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including specialized skill and knowledge needed.

The primary procedures we perform to address this critical audit matter included:

 

   

Testing the completeness and accuracy of the prepayment speed and discount rate assumptions.

 

   

Utilizing professionals with specialized skill and knowledge in valuation to assist in testing and evaluating the reasonableness of prepayment speeds and discount rate assumptions, including utilizing information obtained from market participants and recent market activity on other mortgage servicing right transactions to test management’s assumptions and identify potential sources of contradictory information.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2020.

Philadelphia, Pennsylvania

March 26, 2021

 

F-3


Consolidated Financial Statements

 

 


Finance of America Equity Capital LLC and Subsidiaries

Consolidated Statements of Financial Condition

(Dollars in thousands)

 

 

 

     December 31,  
     2020     2019  

ASSETS

    

Cash and cash equivalents

   $ 233,101     $ 118,083  

Restricted cash

     306,262       264,581  

Reverse mortgage loans held for investment, subject to HMBS related obligations, at fair value

     9,929,163       9,480,504  

Mortgage loans held for investment, subject to nonrecourse debt, at fair value

     5,396,167       3,511,212  

Mortgage loans held for investment, at fair value

     730,821       1,414,073  

Mortgage loans held for sale, at fair value

     2,222,811       1,251,574  

Debt securities, $— and $102,110 held at fair value, respectively

     10,773       114,701  

Mortgage servicing rights, at fair value

     180,684       2,600  

Derivative assets

     92,065       15,553  

Fixed assets and leasehold improvements, net

     24,512       26,686  

Goodwill

     121,233       121,137  

Intangible assets, net

     16,931       18,743  

Due from related parties

     2,559       2,814  

Other assets, net

     298,073       241,840  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 19,565,155     $ 16,584,101  
  

 

 

   

 

 

 

LIABILITIES, CONTINGENTLY REDEEMABLE NONCONTROLLING INTEREST (“CRNCI”) AND MEMBERS’ EQUITY

    

HMBS related obligations, at fair value

   $ 9,788,668     $ 9,320,209  

Nonrecourse debt, at fair value

     5,257,754       3,490,196  

Other financing lines of credit

     2,973,743       2,749,413  

Payables and other liabilities

     414,146       326,176  

Notes payable, net

     336,573       27,313  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     18,770,884       15,913,307  
  

 

 

   

 

 

 

Commitments and contingencies (Note 26)

    

CRNCI

     166,231       187,981  

MEMBERS’ EQUITY

    

FoA Equity Capital LLC members’ equity

     628,176       482,719  

Accumulated other comprehensive income (loss)

     9       (51

Noncontrolling interest

     (145     145  
  

 

 

   

 

 

 

TOTAL MEMBERS’ EQUITY

     628,040       482,813  
  

 

 

   

 

 

 

TOTAL LIABILITIES, CRNCI AND MEMBERS’ EQUITY

   $ 19,565,155     $ 16,584,101  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

F-5


Finance of America Equity Capital LLC and Subsidiaries

Consolidated Statements of Financial Condition

(Dollars in thousands)

 

 

 

The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, which are included on the Consolidated Statements of Financial Condition above, and excludes intercompany balances and other retained beneficial interests that eliminate in consolidation.

 

     December 31,  
     2020      2019  

ASSETS

     

Restricted cash

   $ 293,580      $ 226,408  

Mortgage loans held for investment, subject to nonrecourse debt, at fair value:

     

2019 FASST JR2

     488,760        505,009  

2019 FASST JR3

     450,703        460,344  

2018 FASST JR1

     449,069        506,786  

2020 FASST HB2

     398,480        —    

2019 FASST JR4

     377,265        367,380  

2020 FASST JR3

     372,015        —    

2020 FASST JR2

     341,439        —    

2019 FASST JR1

     331,244        348,919  

2020 FASST S3

     316,774        —    

2020 FASST S2

     311,721        —    

2020 FASST HB1

     265,923        —    

2018 FASST JR2

     264,622        276,125  

2020 FASST JR1

     263,266        —    

2020 FASST-JR4

     237,100        —    

2020 FASST S1

     189,243        —    

2020 RTL1 ANTLR

     137,989        —    

2019 RTL1 ANTLR

     118,161        221,143  

2018 RTL1 ANTLR

     82,393        222,099  

2018 FASST HB1

     —          206,586  

2019 FASST HB1

     —          201,382  

2019 FAHB 19-1

     —          195,439  

Other assets

     79,528        75,115  
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 5,769,275      $ 3,812,735  
  

 

 

    

 

 

 

LIABILITIES

     

Nonrecourse debt, at fair value

     

2020 FASST HB2

   $ 472,074        —    

2019 FASST JR2

     463,568        474,134  

2018 FASST JR1

     450,268        507,516  

2019 FASST JR3

     423,406        427,264  

2019 FASST JR4

     350,514        343,172  

2020 FASST JR3

     337,024        —    

2019 FASST JR1

     326,367        332,829  

2020 FASST HB1

     298,913        —    

2020 FASST S2

     298,435        —    

2020 FASST JR2

     297,046        —    

2020 FASST S3

     294,226        —    

2018 FASST JR2

     265,695        274,139  

2020 FASST JR1

     238,438        —    

2020 FASST JR4

     217,362        —    

2020 FASST S1

     181,630        —    

2020 RTL1 ANTLR

     140,441        —    

2019 RTL1 ANTLR

     121,580        206,176  

2018 RTL1 ANTLR

     80,767        210,738  

2018 FASST HB1

     —          224,053  

2019 FASST HB1

     —          236,726  

2019 FAHB 19-1

     —          253,449  

Payables and other liabilities

     291        13  
  

 

 

    

 

 

 

TOTAL LIABILITIES

   $ 5,258,045      $ 3,490,209  
  

 

 

    

 

 

 

Net fair value of assets subject to nonrecourse debt

   $ 511,230      $ 322,526  
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements

 

F-6


Finance of America Equity Capital LLC and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands)

 

 

 

     For the year ended December 31,  
     2020     2019     2018  

REVENUES

      

Gain on sale and other income from mortgage loans held for sale, net

   $ 1,178,995     $ 464,308     $ 400,302  

Net fair value gains on mortgage loans and related obligations

     311,698       329,526       310,864  

Fee income

     386,752       201,628       151,602  

Net interest expense:

      

Interest income

     42,584       37,323       35,334  

Interest expense

     (123,001     (138,731     (108,840
  

 

 

   

 

 

   

 

 

 

Net interest expense

     (80,417     (101,408     (73,506
  

 

 

   

 

 

   

 

 

 

TOTAL REVENUES

     1,797,028       894,054       789,262  
  

 

 

   

 

 

   

 

 

 

EXPENSES

      

Salaries, benefits and related expenses

     868,265       529,250       485,463  

Occupancy, equipment rentals and other office related expenses

     29,621       32,811       37,957  

General and administrative expenses

     398,885       254,414       218,311  
  

 

 

   

 

 

   

 

 

 

TOTAL EXPENSES

     1,296,771       816,475       741,731  
  

 

 

   

 

 

   

 

 

 

NET INCOME BEFORE INCOME TAXES

     500,257       77,579       47,531  

Provision for income taxes

     2,344       949       286  
  

 

 

   

 

 

   

 

 

 

NET INCOME

     497,913       76,630       47,245  

CRNCI

     (21,749     21,707       15,244  

Noncontrolling interest

     1,274       511       (61
  

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO FOA EQUITY CAPITAL LLC

     518,388       54,412       32,062  

COMPREHENSIVE INCOME (LOSS) ITEM:

      

Impact of foreign currency translation adjustment

     60       47       (44
  

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO FOA EQUITY CAPITAL LLC

   $ 518,448     $ 54,459     $ 32,018  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

F-7


Finance of America Equity Capital LLC and Subsidiaries

Consolidated Statements of Changes in Members’ Equity

(Dollars in thousands)

 

 

 

     FoA
Members’
Equity
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
    Total  

Balance at December 31, 2017

   $ 393,827     $ (54   $ 109     $ 393,882  

Members’ contributions

     1,162       —         —         1,162  

Share based compensation

     341       —         —         341  

Net income (loss) attributable to FoA Equity Capital LLC

     32,062       —         (61     32,001  

Foreign currency translation adjustment

     —         (44     —         (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

     427,392       (98     48       427,342  

Members’ contributions

     795       —         —         795  

Distributions to members

     (2,799     —         —         (2,799

Noncontrolling interest contributions

     —         —         25       25  

Noncontrolling interest distributions

     —         —         (439     (439

Share based compensation

     2,919       —         —         2,919  

Net income attributable to FoA Equity Capital LLC

     54,412       —         511       54,923  

Foreign currency translation adjustment

     —         47       —         47  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2019

     482,719       (51     145       482,813  

Members’ contributions

     7,500       —         —         7,500  

Distributions to members

     (380,431     —         —         (380,431

Noncontrolling interest contributions

     —         —         104       104  

Noncontrolling interest distributions

     —         —         (1,668     (1,668

Net income attributable to FoA Equity Capital LLC

     518,388       —         1,274       519,662  

Foreign currency translation adjustment

     —         60       —         60  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

   $ 628,176     $ 9     $ (145   $ 628,040  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

F-8


Finance of America Equity Capital LLC and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

     For the year ended December 31,  
     2020     2019     2018  

Operating activities

      

Net income

   $ 497,913     $ 76,630     $ 47,245  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

      

Gain on sale and other income from mortgage loans held for sale, net

     (1,178,995     (464,308     (400,302

Unrealized changes on mortgage loans, related obligations and derivatives

     (275,485     (280,662     (286,594

Change in fair value of mortgage servicing rights

     (4,562     1,357       (1,730

Depreciation and amortization

     19,327       19,341       14,355  

Impairment of ROU asset

     702       1,689       2,824  

Change in fair value of nonrecourse MSR financing liability

     (798     —         —    

Impairment of goodwill

     —         422       —    

Deferred tax assets

     (231     (96     (18

Change in fair value of deferred purchase price liabilities

     3,014       (1,804     (1,525

Change in fair value of equity securities

     —         (1,429     (2,168

Loss on investments

     3,838       —         —    

Share based compensation

     —         2,919       341  

Non-cash expense related to leases

     3,824       5,658       —    

Provision for claims

     3,520       1,417       277  

Interest rate swap settlements

     (15,922     (18,338     (1,696

Originations/purchases of mortgage loans held for sale

     (29,407,723     (15,695,648     (14,867,264

Proceeds from sale of mortgage loans held for sale

     29,628,177       16,488,142       16,031,316  

Changes in operating assets and liabilities:

      

Other assets, net

     33,058       (72,203     93,088  

Payables and accrued expenses

     4,253       38,038       (22,268
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (686,090     101,125       605,881  
  

 

 

   

 

 

   

 

 

 

Investing activities

      

Purchases and originations of mortgage loans held for investment

     (3,637,299     (3,547,544     (2,012,443

Proceeds/payments received on mortgage loans held for investment

     1,822,409       920,768       1,086,166  

Purchases and originations of mortgage loans held for investment, subject to nonrecourse debt

     (44,705     (45,782     (18,723

Proceeds/payments received on mortgage loans held for investment, subject to nonrecourse debt

     913,824       760,013       137,453  

Purchases of debt securities

     (39,264     (128,828     —    

Purchases of mortgage servicing rights

     (14,088     —         —    

Proceeds/payments received on debt securities

     140,787       20,487       —    

Proceeds on sale of mortgage servicing rights

     —         2,497       17,311  

Acquisition of fixed assets

     (9,027     (4,289     (15,368

Purchase of investments

     (3,937     (2,063     (6,133

Payments on deferred purchase price liability

     (3,610     (894     (646

Acquisition of subsidiaries, net of cash acquired

     (197     —         (4,635
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (875,107     (2,025,635     (817,018
  

 

 

   

 

 

   

 

 

 

 

F-9


Finance of America Equity Capital LLC and Subsidiaries

Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Financing activities

      

Proceeds from securitizations of mortgage loans, subject to HMBS related obligations

     2,051,954       1,310,343       1,469,578  

Payments on HMBS related obligations

     (1,943,445     (1,974,683     (2,232,650

Proceeds from issuance of nonrecourse debt

     3,074,047       2,343,707       1,406,708  

Payments on nonrecourse debt

     (1,637,612     (558,808     (217,127

Proceeds from other financing lines of credit

     35,215,086       23,785,157       20,355,608  

Payments on other financing lines of credit

     (34,968,807     (22,825,625     (20,451,201

Debt issuance costs

     (16,981     (8,795     (5,327

Issuance of note payable

     350,000       —         —    

Payments on notes payable

     (46,771     (505     (3,219

Issuance of note receivable

     —         —         (3,500

Payments on note receivable

     —         —         3,500  

Principal payments under capital lease obligation

     —         (297     (270

Proceeds from issuance of nonrecourse MSR financing liability

     15,101       —         —    

Payments on nonrecourse MSR financing liability

     (215     —         —    

Noncontrolling interest distributions

     (1,668     (439     —    

Noncontrolling interest contributions

     104       25       —    

Members distributions

     (380,431     (2,676     —    

Members contributions

     7,500       524       65  
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     1,717,862       2,067,928       322,165  
  

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment

     34       22       (44
  

 

 

   

 

 

   

 

 

 

Net increase in cash and restricted cash

     156,699       143,440       110,984  

Cash and restricted cash, beginning of period

     382,664       239,224       128,240  
  

 

 

   

 

 

   

 

 

 

Cash and restricted cash, end of period

   $ 539,363     $ 382,664     $ 239,224  
  

 

 

   

 

 

   

 

 

 

Supplementary Cash Flows Information

      

Cash paid for interest

   $ 169,362     $ 159,165     $ 124,931  

Cash paid for taxes

     1,447       698       128  

Loans transferred to mortgage loans held for investment, at fair value, from mortgage loans held for investment, subject to nonrecourse debt, at fair value

     568,439       263,645       746,548  

Loans transferred to mortgage loans held for sale, at fair value, from mortgage loans held for investment, at fair value

     183,578       828,845       1,499,263  

Loans transferred to government guaranteed receivables from mortgage loans held for investment, at fair value, and mortgage loans held for sale, at fair value

     28,599       75,080       66,574  

Loans transferred to mortgage loans held for investment, subject to nonrecourse debt, at fair value, from mortgage loans held for investment, at fair value

     2,729,356       2,796,514       1,381,137  

Non-cash members’ contributions

     —         271       1,097  

Non-cash members’ distributions

     —         123       —    

See accompanying notes to consolidated financial statements

 

F-10


Notes to Consolidated Financial Statements

 

 


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

1.

Organization and Description of Business

Finance of America Equity Capital LLC (“FoA” or the “Company”) is a limited liability company that was formed in July 2020. FoA is a wholly-owned subsidiary of UFG Holdings LLC (“UFG”). FoA is a financial services holding company which, through its operating subsidiaries, is a leading originator and servicer of residential mortgage loans and provider of complementary financial services.

FoA owns all of the outstanding equity interests or has a controlling financial interest in Finance of America Holdings LLC (“FAH”) and Incenter LLC (“Incenter”), which are wholly owned subsidiaries of Finance of America Funding LLC (“FOAF”) (collectively known as “operating subsidiaries”).

The Company, through its primary operating subsidiary FAH, originates, purchases, sells and securitizes conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as government sponsored entities (“GSEs”), government-insured (Federal Housing Administration (“FHA”)), government guaranteed (Department of Veteran Affairs), and proprietary non-Agency forward and reverse mortgages. In addition, FAH also serves as a specialty finance company which originates a variety of commercial mortgage loans to owners and investors of single and multi-family residential rental properties. The Company, through its other operating subsidiary, Incenter, also provides lender services, title services, secondary markets advisory, mortgage trade brokerage, appraisal and capital management services to customers in the residential mortgage, student lending, and commercial lending industries. Incenter is a wholly owned subsidiary of the Company, and operates a foreign branch in the Philippines for fulfillment transactional support.

Recent Developments

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.

The COVID-19 outbreak has adversely impacted global financial markets and contributed to significant volatility in market liquidity and yields required by market investors in the type of financial instruments originated by the Company’s primary operating subsidiaries. The pandemic and related government responses are creating disruption in global supply chains and adversely impacting virtually all industries. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak will have on the residential mortgage and commercial lending industries at this time, if the pandemic continues, it may have an adverse effect on the Company’s results of future operations, financial position, intangible assets and liquidity in fiscal year 2020. Management is actively monitoring the global situation and its effect on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine the impact that the CARES Act may have on the business. The CARES Act had no material impact to the Company’s consolidated financial statements. As of December 31, 2020, the COVID-19 pandemic remains in place and impact the economic environment in which the Company conducts business.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation

FoA is a holding company formed under the laws of the State of Delaware in July 2020. Through its Parent, the Company is owned by Libman Family Holdings, LLC, certain investment funds affiliated with The Blackstone Group Inc. (“Blackstone”) and other co-investors (collectively, the “Initial Investors”). There are no historical operating results as, contemporaneous with the formation of FoA, UFG contributed all of its operating subsidiaries into FoA in a common control reorganization. The reorganization was accounted for as a reorganization under common control and, accordingly, the historical basis of accounting was retained as if the entities had always been combined for financial reporting purposes. The Company conducts substantially all of its business operations through its operating subsidiaries. In October 2020, UFG and FoA entered into a transaction agreement with a special purpose acquisition company (“SPAC”), pursuant to which, the SPAC will acquire an equity interest in FoA from its Initial Investors.

 

F-12


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The significant accounting policies described below, together with the other notes that follow, are an integral part of the consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and certain variable interest entities (“VIEs”) where the Company is the primary beneficiary. The Company is deemed to be the primary beneficiary of a VIE when it has both (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (2) exposure to benefits and/or losses that could potentially be significant to the entity. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date that the Company ceases to be the primary beneficiary.

The company consolidates the accounts of Finance of America Commercial Holdings LLC (“FACo Holdings”), the noncontrolling interests of which meet the definition of contingently redeemable financial instruments for which the ability to redeem is outside the control of the consolidating entity. The Contingently Redeemable Noncontrolling Interest (“CRNCI”) in this subsidiary is shown as a separate caption between liabilities and equity. Any income or losses attributable to the CRNCI are shown as an addition to or deduction from CRNCI in the Consolidated Statements of Financial Condition. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions due to factors such as changes in the economy, interest rates, secondary market pricing, prepayment assumptions, home prices or discrete events affecting specific borrowers, and such differences could be material.

Business Combinations

In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), the Company applies the acquisition method to all transactions and other events in which the entity obtains control over one or more other businesses. Assets acquired and liabilities assumed are measured at fair value as of the acquisition date. Liabilities related to contingent consideration are recognized at the acquisition date and re-measured at fair value in each subsequent reporting period. Goodwill is recognized if the consideration transferred exceeds the fair value of the net assets acquired.

VIEs

The Company has been the transferor in connection with securitizations or asset-backed financing arrangements with special purpose entities (“SPE”), in which the Company has continuing involvement with the underlying transferred financial assets. The Company’s continuing involvement includes acting as servicer for the mortgage loans transferred and retaining beneficial interests in the SPE to which the assets were transferred.

The Company evaluates its interests in each SPE for classification as a VIE in accordance with ASC 810-10 Consolidation. When an SPE meets the definition of a VIE and the Company determines that it is the VIE’s primary beneficiary, the Company includes the SPE in its consolidated financial statements.

The beneficial interests held consist of residual securities that were retained at the time of securitization. These beneficial interests may obligate the Company to absorb losses of the VIE that could potentially be significant to the VIE, or affords the Company the right to receive benefits from the VIE that could potentially be significant. In addition, when the Company acts as servicer of the transferred assets, the Company retains the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE. When it is determined that the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, the assets and liabilities of these VIEs are included in the consolidated financial statements of the Company. The Company reassesses its evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

 

F-13


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The Company elected the fair value option provided for by ASC 825-10, Financial Instruments-Overall. This option was applied for the nonrecourse debt issued by the consolidated VIE.

See Note 3 - VIEs for further discussion of VIEs in which the Company is deemed to be the primary beneficiary.

Contingently Redeemable Noncontrolling Interest

Per the Amended and Restated Limited Liability Company Agreement of Finance of America Commercial Holdings LLC (“the FACo Holdings Agreement”), the Class B-1 and Class B-2 Units may only be redeemed upon sale of Finance of America Commercial LLC (“FACo”) by FACo Holdings, sale of FAH, or sale of UFG, which would require FAH to purchase the outstanding Class B Units. As such, the CRNCI has continued to be shown as a separate caption between liabilities and equity. The Company has determined that the legal provisions in the FACo Holdings Agreement in which there is a noncontrolling interest represent a substantive profit-sharing arrangement, where the allocation to the members differs from the stated ownership percentages. The Company utilizes the hypothetical liquidation at book value, or HLBV, method for the allocation of profits and losses each period. Under the HLBV method, the amounts of income and loss attributed to the noncontrolling interests in the Consolidated Statements of Operations and Comprehensive Income reflects changes in the amounts each member would hypothetically receive at each balance sheet date under the liquidation provisions of the FACo Holdings Agreement, assuming the net assets of FACo Holdings were liquidated at their respective recorded amounts.

Noncontrolling Interest

Noncontrolling interest represents the Company’s less than 50% ownership interest in consolidated subsidiaries which are not attributable, directly or indirectly, to the Company. Net income is reduced by the portion of net income that is attributable to noncontrolling interests.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are with high quality financial, governmental or corporate institutions and potentially subject the Company to concentrations of credit risk.

Restricted Cash

Restricted cash includes amounts specifically designated to repay debt and provide over-collateralization within warehouse facilities and securitized nonrecourse debt obligations, custodial accounts related to the Company’s portfolio of mortgage loans serviced for investors, and funds deposited from prospective borrowers to cover out-of- pocket expenses incurred by the Company in connection with due diligence activities performed during the loan approval process. Certain funds deposited with the Company may be returned to the borrower at the time the loan funds or if the loan does not close. The Company records a liability for these amounts until the loan has closed or a cost has been incurred.

Reverse Mortgage Loans Held for Investment, Subject to Home Equity Conversion Mortgage (HECM) Mortgage- Backed Security (HMBS) Related Obligations, at Fair Value

The Company elected the fair value option provided for by ASC 825-10, Financial Instruments-Overall. A reverse home equity conversion mortgage (“HECM”) is a reverse mortgage loan available to homeowners aged 62 or older that allows conversion of a portion of the home’s equity into cash. The HECM loan terms do not have a defined maturity date or a scheduled repayment of principal and interest. Interest rates are tied to an index plus a margin that ranges up to three percentage points. Interest compounds over the life of the loan and is not paid by the borrower until the loan is repaid. HECM loans include a monthly mortgage insurance premium (“MIP”) that is payable to FHA. The MIP amount is typically calculated as 0.5% of the mortgage balance for loans originated prior to October 2, 2017 and 1.25% for loans originated after October 2, 2017 and accretes to the borrower’s loan balance over the life of the loan. As the issuer, the Company is responsible for remitting the MIP to FHA.

A maturity event will cause the loan to become due and payable. Maturity events include: borrower has passed away and the property is not the principal residence of at least one surviving borrower; borrower has sold or conveyed title of the property to a third party; the property is no longer the principal residence of at least one borrower for reasons other than death; the borrower does not maintain the property as principal residence for a period exceeding 12 months; the borrower fails to pay property taxes and/or insurance and all attempts to rectify the situation have been exhausted; and the property is in disrepair and the borrower has refused or is unable to repair the property.

Once a loan has become due and payable, unsecuritized borrower advances cannot be placed into a Ginnie Mae (“GNMA”) Home Equity Conversion Mortgage-Backed Securities (“HMBS”). Generally, the Company recovers such advances (referred to as unpoolable tails) from borrowers, from proceeds of liquidation of collateral or ultimate disposition of the loan, including conveyance of claims to FHA.

 

F-14


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

If the loan is not paid within six months of the maturity event, the Company may proceed with foreclosure on the property. A loan may be satisfied by borrower repayment, sales- or appraisal-based claim submissions to the Department of Housing and Urban Development (“HUD”) and/or foreclosure sale proceeds. If the Company sells the property within six months, it may file a sales-based claim with HUD to recover any shortfall between the sales price of the property and the outstanding loan balance. If the property is not sold within six months, the Company may file an appraisal-based claim with HUD to recover any shortfall between the appraised value and the outstanding loan balance. Once the appraisal based claim is paid by HUD, any subsequent expenses or loss in the property’s value exposes the Company to additional losses that may not be eligible to be recouped through the filing of an additional HUD claim.

The Company has determined that HECM loans transferred under the current GNMA HMBS securitization program do not meet the requirements for sale accounting and are not derecognized upon date of transfer. The GNMA HMBS securitization program includes certain terms that do not meet the participating interest requirements and require or provide an option for the Company to reacquire the loans prior to maturity. Due to these terms, the transfer of the loans does not meet the requirements of sale accounting. As a result, the Company accounts for HECM loans transferred into HMBS securitizations as secured borrowings and continues to recognize the loans as held for investment, subject to HMBS related obligations, along with the corresponding liability for the HMBS related obligations. No gains or losses are recognized on these transfers of HECM loans into HMBS securitizations.

Loans are considered nonperforming upon events such as, but not limited to, the death of the mortgagor, the mortgagor no longer occupying the property as their principal residence, or the property taxes or insurance not being paid. In addition to having to fund these repurchases, the Company also typically earns a lower interest rate and incurs certain non-reimbursable costs during the process of liquidating nonperforming loans. Loans purchased out of GNMA HMBS are recorded in the Consolidated Statements of Financial Condition at their fair value reflective of proceeds of liquidation of collateral or ultimate disposition of the loan.

Reverse mortgage loans held for investment, subject to HMBS related obligations, also include claims receivable that have been submitted to HUD awaiting reimbursement. These amounts are recorded net of amounts the Company does not expect to recover through outstanding claims.

The yield recognized on loans held for investment, subject to HMBS related obligations, and changes in estimated fair value are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The yield recognized includes the recognition of interest income based on the stated interest rates of the loans that is expected to be collected through conveyance of loans to FHA, repayment by borrower or through disposition of real estate upon foreclosure.

Loan origination fees represent an up-front fee charged to a borrower for processing the HECM or jumbo reverse mortgage application and are recorded as they are received when a loan is successfully funded in fee income in the Consolidated Statements of Operations and Comprehensive Income. Costs to originate loans are recognized as incurred and recorded in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.

Certain HECM and jumbo reverse mortgage loans originated or acquired by the Company include broker compensation or correspondent fees. These premiums are remitted to the mortgage broker or correspondent lender who acted as the intermediary for the reverse mortgage. Broker compensation and correspondent fees are recorded on a net basis in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income and therefore not separately presented.

See Note 5 - Fair Value for further discussion of valuation of reverse mortgage loans held for investment, subject to HMBS related obligations.

Mortgage Loans Held for Investment, Subject to Nonrecourse Debt, at Fair Value

Mortgage loans held for investment, subject to nonrecourse debt, are loans that were securitized and serve as collateral for the issued nonrecourse debt, including reverse mortgage loans that were previously repurchased out of a HMBS pool (“HECM Buyouts”), fix & flip securitized loans, and non FHA-insured jumbo reverse mortgages (“non-agency reverse mortgages - Securitized”) that were subsequently securitized into trusts that meet the definition of a VIE and were consolidated. The Company has determined that it has both the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

 

F-15


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The Company has elected the fair value option for all loans held for investment and determines the fair value, on a recurring basis, based on discounted cash flow models. The difference between the cost basis of newly originated or acquired loans and their estimated fair value is recognized in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. No gains or losses are recognized on these transfers of these loans into securitizations. See Note 5 - Fair Value for further discussion of valuation of mortgage loans held for investment, subject to nonrecourse debt.

The yield recognized on loans held for investment, subject to nonrecourse debt, and changes in estimated fair value are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The yield recognized includes the contractual interest income that is expected to be collected based on the stated interest rates of the loans.

Mortgage Loans Held for Investment, at Fair Value

Mortgage loans held for investment, at fair value, consists of certain reverse mortgage and commercial mortgage loans that the Company intends to hold to maturity. The Company has elected the fair value option for all loans held for investment and determines the fair value, on a recurring basis, based on discounted cash flow models. These valuations require the use of judgment by the Company and changes in assumptions can have a significant impact on the determination of the loan’s fair value. The difference between the cost basis of newly originated or acquired loans and their estimated fair value is recognized in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. See Note 5 - Fair Value for further discussion of valuation of mortgage loans held for investment.

The yield recognized on loans held for investment and changes in estimated fair value are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The yield recognized includes the contractual interest income that is expected to be collected based on the stated interest rates of the loans.

Reverse Mortgage Loans

Reverse mortgage loans held for investment consists of originated or purchased HECM and non-agency reverse mortgage loans not yet securitized, unsecuritized tails, and certain HECMs purchased out of GNMA HMBS, which the Company intends to hold to maturity.

HECM loans and tails that have not yet been securitized into HMBS consist primarily of newly-issued HECMs that the Company has either originated or purchased, subsequent borrower draws and amounts paid by the Company on the borrower’s behalf for MIP that have not yet been transferred to a GNMA securitization.

As a jumbo reverse mortgage, non-agency reverse mortgage loans are designated for homeowners aged 62 or older with higher priced homes. The minimum home value is $500 thousand and the maximum loan amount is $4 million. non-agency reverse mortgage loans are not insured by the FHA and will not be placed into a GNMA HMBS. However, the Company may transfer or pledge these assets as collateral for securitized nonrecourse debt obligations.

The Company, as an issuer of HMBS, is required to repurchase reverse loans out of the GNMA securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the Maximum Claim Amount (“MCA”) (referred to as HECM Buyouts). Performing repurchased loans are conveyed to HUD and payment is received from HUD typically within 75 days of repurchase. Nonperforming repurchased loans are generally liquidated through foreclosure, subsequent sale of the real estate owned, and claim submissions to HUD.

Loans are considered nonperforming upon events such as, but not limited to, the death of the mortgagor, the mortgagor no longer occupying the property as their principal residence, or the property taxes or insurance not being paid. In addition to having to fund these repurchases, the Company also typically earns a lower interest rate and incurs certain non-reimbursable costs during the process of liquidating nonperforming loans. Loans purchased out of GNMA HMBS are recorded in the Consolidated Statements of Financial Condition at their fair value reflective of proceeds of liquidation of collateral or ultimate disposition of the loan.

Reverse mortgage loans also include claims receivable that have been submitted to HUD awaiting reimbursement. These amounts are recorded net of amounts the Company does not expect to recover through outstanding claims.

Certain HECM and jumbo reverse mortgage loans originated or acquired by the Company include broker compensation or correspondent fees. These premiums are remitted to the mortgage broker or correspondent lender who acted as the intermediary for the reverse mortgage. Broker compensation and correspondent fees are recorded on a net basis in net fair value gains on mortgage loans and related obligations and therefore are not separately presented in the Consolidated Statements of Operations and Comprehensive Income.

 

F-16


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Commercial Mortgage Loans

Commercial mortgage loans held for investment primarily consist of short-term loans for real estate investors and agricultural loans for farmers.

Mortgage Loans Held for Sale, at Fair Value

Mortgage loans held for sale represent mortgage loans originated by the Company and held until sold to secondary market investors. The Company primarily originates conventional GSEs, government insured (FHA), and government guaranteed (Department of Veteran Affairs) residential mortgage loans (collectively “residential mortgage loans held for sale”), commercial mortgage loans to owners and investors of single and multi-family residential rental properties (“commercial loans held for sale”), and certain HECMs purchased out of GNMA HMBS that the Company intends to sell to third parties (collectively, “reverse mortgage loans held for sale”).

The Company elected the fair value option provided for by ASC 825-10, Financial Instruments-Overall. Mortgage loans held for sale are measured at fair value at the time of origination and on a recurring basis thereafter. Gains and losses on mortgage loans held for sale are recorded in gain on sale of mortgage loans, net, and other income related to the origination of mortgage loans held for sale, net, in the Consolidated Statements of Operations and Comprehensive Income. The yield recognized includes the contractual interest income that is expected to be collected based on the stated interest rates of the loans.

In connection with the Company’s election to measure originated mortgage loans held for sale at fair value, any fees recognized in relation to originated mortgage loans are recognized as they are received and are included in fee income in the Consolidated Statements of Operations and Comprehensive Income. Direct loan origination costs and fees are expensed when incurred and are included in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.

Residential Mortgage Loans Held for Sale

Residential mortgage loans held for sale are typically warehoused for a period after origination or purchase before sale into the secondary market. Servicing rights are either released upon sale of mortgage loans in the secondary market or retained by the Company. The yield on residential mortgage loans held for sale is recorded in interest income and changes in fair value are recorded in gain on sale and other income from mortgage loans held for sale, net, in the Consolidated Statements of Operations and Comprehensive Income.

Commercial Loans Held for Sale

The Company estimates fair value by evaluating a variety of market indicators, including recent sales of similar product types and outstanding commitments, calculated on an aggregate basis. The yield recognized on commercial loans held for sale and changes in estimated fair value are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. In connection with the Company’s election to measure loans held for sale at fair value, the Company is not permitted to defer the loan origination fees, net of direct loan origination costs associated with these loans.

Reverse Mortgage Loans Held for Sale

The Company has determined that the transfer of HECM loans to third party investors after repurchased from HMBS pools qualify as sales as the Company no longer retains effective control over the transferred loans. The yield recognized on reverse loans held for sale and changes in estimated fair value are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income.

Reverse mortgage loans held for sale also includes claims receivable that have been submitted to HUD awaiting reimbursement. These amounts are recorded net of amounts the Company does not expect to recover through outstanding claims and included in gain on sale and other income from mortgage loans held for sale, net, in the Consolidated Statements of Operations and Comprehensive Income.

Mortgage Servicing Rights, at Fair Value

Mortgage servicing rights (“MSRs”) represent contractual rights to perform specific administrative functions for the underlying loans including specified mortgage servicing activities, which consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses such as taxes and insurance, and otherwise administrating the mortgage loan servicing

 

F-17


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

portfolio. MSRs are created through the sale of an originated mortgage loan or purchased from third parties. The unpaid principal balance (UPB) of the loans underlying the MSRs is not included on the Consolidated Statements of Financial Condition. For servicing retained in connection with the securitization of reverse mortgage loans accounted for as secured financings, an MSR is not recognized.

The Company follows the fair value measurement method to record the value of MSRs in accordance with ASC 860, Transfers and Servicing. Under this method, servicing assets are measured at fair value on a recurring basis with changes in fair value recorded through earnings in the period of the change as a component of fee income in the Consolidated Statements of Operations and Comprehensive Income.

The fair value of the MSRs is based upon the present value of the expected future net cash flows related to servicing these loans. For MSRs that the Company has current commitments to sell to third parties, the fair value is based on the outstanding commitment price. The Company receives a base servicing fee based on the remaining outstanding principal balances of the loans, which are collected from borrowers on a monthly basis. The Company determines the fair value of the MSRs by the use of a discounted cash flow model that incorporates prepayment speeds, delinquencies, discount rate, ancillary revenues and other assumptions (including costs to service) that management believes are consistent with the assumptions other similar market participants use in valuing the MSRs.

The primary risk associated with MSRs is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. At times, the Company may utilize derivatives as economic hedges to offset changes in the fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. There is also a risk of valuation decline due to higher than expected increases in default rates, which the Company does not believe can be effectively managed using derivatives.

Debt Securities

Debt securities consists of U.S. government securities, securities backed by collateral pools of proprietary jumbo reverse mortgages that are not insured by the FHA, and other debt securities. The Company accounts for debt securities in accordance with ASC 320, Investments-Debt and Equity Securities (“ASC 320”). The Company determines the classification of securities at purchase. The Company classifies debt securities into held-to-maturity, trading, or available-for-sale categories. Debt securities that management has the ability and intent to hold to maturity as classified as held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method.

The Company has elected to account for certain debt securities at fair value under the fair value option provisions included in ASC 825, Financial Instruments. The election is made on an instrument-by-instrument basis and is irrevocable. Changes in fair value of these securities are included as a component of net fair value gains on mortgage loans and related obligations.

Derivatives and Hedging Activities

The Company’s principal market exposure is to interest rate risk, specifically long-term U.S. Treasury and mortgage interest rates due to their impact on the fair value of mortgage loans and related commitments.

The Company uses derivative instruments as part of its overall strategy to manage its exposure to market and price risks primarily associated with fluctuations in interest rates. As a matter of policy, the Company does not use derivatives for speculative purposes.

Interest Rate Lock Commitments

Interest rate lock commitments (“IRLCs”) represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. The IRLC binds the Company (subject to the loan approval process) to lend funds to a potential borrower at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. The Company uses mandatory and best efforts commitments to substantially mitigate these risks. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs.

 

F-18


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

IRLCs that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance ASC 815, Derivatives and Hedging (“ASC 815”). Loan commitments that are derivatives are recognized at fair value in the Company’s Consolidated Statements of Financial Condition in derivative assets or payables and other liabilities, with changes in their fair values recorded in net fair value gains on mortgage loans and related obligations, in the Consolidated Statements of Operations and Comprehensive Income.

The fair value of the Company’s IRLCs is based upon the estimated fair value of the underlying mortgage loan, adjusted for (i) estimated costs to complete and originate the loan and (ii) the estimated percentage of IRLCs that will result in a closed mortgage loan. The valuation of the Company’s IRLCs are based on prices of mortgage backed securities (“MBS”) in the market place and the value of the related mortgage servicing.

Forward Loan Sale Commitments

The Company is subject to interest rate and price risk on its mortgage loans held for sale and IRLCs from the date the IRLC is made until the date the loan is sold. Mandatory commitments which fix the forward sales price that will be realized in the secondary market are used to substantially mitigate the interest rate and price risk to the Company.

The Company carefully evaluates all loan sale agreements to determine whether they meet the definition of a derivative under the derivatives and hedging accounting guidance under ASC 815. To mitigate the price risk the Company is exposed to on its outstanding loan commitments, the Company uses “mandatory delivery” forward loan sale commitments to manage the risk of potential interest rate movements and their impact on the value of the underlying mortgage loans. Mandatory delivery contracts that meet the definition of a derivative are accounted for as derivative instruments. Accordingly, forward loan sale commitments are recognized at fair value on the Consolidated Statements of Financial Condition in derivative assets or payables and other liabilities with changes in their fair values recorded in gain on sale and other income from mortgage loans held for sale, net, and net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The fair value is determined on a recurring basis based on forward prices with dealers in such securities or internally-developed or third-party models utilizing observable market inputs.

To Be Announced Securities

To Be Announced Securities (“TBAs”) are “forward delivery” securities considered derivative instruments under derivatives and hedging accounting guidance ASC 815. The Company uses TBAs to protect against the price risk inherent in derivative loan commitments. TBAs are valued based on forward dealer marks from the Company’s approved counterparties. The Company utilizes internal and third-party market pricing services which compile current prices for instruments from market sources, and those prices represent the current executable price. TBAs are recorded at fair value in the Consolidated Statements of Financial Condition in derivative assets and payables and other liabilities, with changes in fair value recorded in gain on sale and other income from mortgage loans held for sale, net, in the Consolidated Statements of Operations and Comprehensive Income.

Best Efforts Commitments

The Company uses best efforts commitments with various investors to mitigate the risk associated with mortgage loans held for sale and interest rate lock commitments. The Company is exposed to counterparty risk with its best efforts commitments in the event that the counterparty cannot take delivery of the underlying mortgage loan. Best Efforts Commitments are recorded at fair value in the Consolidated Statements of Financial Condition in derivative assets and payables and other liabilities, with changes in fair value recorded in gain on sale and other income from mortgage loans held for sale, net, in the Consolidated Statements of Operations and Comprehensive Income.

Forward MBS Commitments

Periodically, the Company uses forward MBS commitments to hedge changes in the value of MSRs. MSRs are subject to substantial interest rate risk as the mortgage loans underlying the servicing rights permit the borrowers to prepay the loans. The Company may at times enter into economic hedges, which do not qualify as hedges for accounting purposes, including forward contracts to minimize the effects of loss in value of these MSRs associated with increased prepayment activity that generally results from declining interest rates. Forward commitments are recorded at fair value in the Consolidated Statements of Financial Condition in derivative assets and payables and other liabilities, with changes in fair value recorded in gain on sale and other income from mortgage loans held for sale, net, in the Consolidated Statements of Operations and Comprehensive Income.

 

F-19


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The Company treats forward HMBS purchase and sale commitments that have not settled as derivate instruments. Any changes in fair value are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The fair value is determined on a recurring basis based on forward prices with dealers in such securities or internally-developed or third-party models utilizing observable market inputs. These forward commitments will be fulfilled with loans not yet securitized and new reverse mortgage loan originations and purchases.

Interest Rate Swaps and Futures Contracts

The Company also enters into interest rate swaps and futures contracts to offset changes in the value of its unsecuritized non-agency reverse mortgage loans, commercial loans and mortgage servicing rights. The Company has not designated its interest rate swaps and futures contracts as hedges for accounting purposes. These interest rate swaps and futures contracts are accounted for as derivatives and recorded at fair value as derivative assets or as a component of payables and other liabilities in the Consolidated Statements of Financial Condition. Realized and unrealized changes in fair value of interest rate swaps and futures contracts are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. Certain of the trade counterparties contain margin call provisions that, upon notice from the counterparty require us to transfer cash to eliminate any margin deficit. A margin deficit will generally result from any decline in market value of the assets subject to the related hedging transaction. Margin deposits are presented in other assets, net in the Consolidated Statement of Financial Condition. See Note 12 - Derivatives and Risk Management Activities for further discussion of derivative assets and liabilities. The Company does not account for margin deposits as an offset against the reported derivative assets or liabilities.

Fixed Assets and Leasehold Improvements, Net

Fixed assets are depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the related office lease or the expected useful life of the assets. The Company capitalizes certain costs associated with the acquisition of internal-use software and amortizes the software over its estimated useful life, commencing at the time the software is placed in service. The Company reviews fixed assets and leasehold improvements for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

The Company evaluates all leases at inception to determine if they meet the criteria for a finance lease. A capital lease is recorded as an acquisition of property or equipment at an amount equal to the present value of minimum lease payments at the date of inception. Assets acquired under a capital lease are depreciated on a straight-line basis in accordance with the Company’s normal depreciation policy over the lease term and are included in fixed assets and leasehold improvements, net, in the Consolidated Statements of Financial Condition. A corresponding liability is recorded representing an obligation to make lease payments which is included in payables and other liabilities in the Consolidated Statements of Financial Condition. Lease payments are allocated between interest expense and reduction of obligation.

Goodwill

Goodwill is the excess of the purchase price over the fair value of the net assets acquired. Goodwill is not amortized, but is reviewed for impairment annually as of October 1 and monitored for interim triggering events on an ongoing basis. If certain events occur, which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur. In making this assessment, the Company considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, etc. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill impairment in future periods. In testing goodwill for impairment, the Company follows ASC 350, Intangibles-Goodwill and Other (“ASC 350”), which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, the Company will compare the fair value of that reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss equal to the amount by which the carrying value of the goodwill exceeds the implied fair value of that goodwill.

 

F-20


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Intangible Assets, Net

Intangible assets, net primarily consist of customer list, domain name and broker relationships acquired through various acquisitions. Intangible assets are amortized on a straight line basis over their estimated useful lives. Amortization expense of intangibles is included in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. No impairment was recorded on intangible assets for the years ended December 31, 2020, 2019 and 2018.

Other Assets, Net

Other assets, net, consist of receivables, net of allowance, government guaranteed receivables, net, ROU assets, loans subject to repurchase from GNMA, other, investments, at fair value, prepaid expenses, deposits, servicer advances, net of allowance, and receivable from clearing organization. The components of other assets, net, are detailed in Note 16 - Other Assets, Net.

Receivables, Net of Allowance

Receivables, net of allowance are represented by amounts due from investors and other parties and are stated at the amounts management expects to collect. If the Company expects to collect less than 100% of the recorded receivable balances, an allowance for doubtful accounts is recorded based on the expected credit loss (“CECL”) methodology which includes a combination of historical experience, aging analysis, information on specific balances and reasonable and supportable forecasts.

Government Guaranteed Receivables, Net

The Company accounts for foreclosed mortgage loans guaranteed by the government as a separate receivable. These amounts are carried at the net amounts the Company expects to receive from the liquidation of the underlying property and any expected claim proceeds from HUD for shortfall on liquidation proceeds in other assets, net, in the Consolidated Statements of Financial Condition.

Outstanding HUD claims associated with HECM loans that are collateral for issued and outstanding HMBS may be retained inside the HMBS while the associated HECM loan remains insured by HUD or a HUD claim is outstanding and the HECM loan has not yet reached 98% of the loan’s MCA. Subsequent to reaching 98% of the MCA, the Company must purchase the loan out of the HMBS.

Loans Subject to Repurchase from GNMA

For certain loans that the Company has pooled and securitized with GNMA, the Company as the issuer has the unilateral right to repurchase, with GNMA’s prior authorization, any individual loan in a GNMA securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, the Company has effectively regained control over the loan and under GAAP, must re-recognize the loan in its Consolidated Statements of Financial Conditions and establish a corresponding liability regardless of the Company’s intention to repurchase the loan.

Investments, at Fair Value

The Company invests in the equity of other companies in the form of common stock, preferred stock or other in- substance equity interests or an investment in a limited liability company. The Company evaluates its outstanding equity investments in other companies to determine whether the Company is able to demonstrate a controlling financial interest or significant influence. For investments for which the Company is able to exercise significant influence, the Company applies the equity method of accounting. If the investment does not meet the criteria for the use of the equity method of accounting, the investment is accounted for at cost unless an election is made to account for it at fair value. For investments in which the Company is unable to exercise significant influence, the Company does not account for these equity investments under ASC 323, Investments - Equity Method and Joint Ventures.

The Company has elected to account for certain of its investments at fair value under the fair value option provisions included in FASB ASC 825, Financial Instruments. This standard provides companies the option of reporting certain instruments at fair value (with changes in fair value recognized in the statement of operations) that were previously either carried at cost, not recognized on the financial statements, or carried at fair value with changes in fair value recognized as a component of equity rather than in the statement of operations. The election is made on an instrument-by-instrument basis and is irrevocable. See Note 5 - Fair Value for the information regarding the effects of applying the fair value option to the Company’s financial instruments in the consolidated financial statements.

 

F-21


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Equity securities with a readily determinable fair value are required to be measured at fair value, with changes in fair value recognized through net income. Equity securities without readily determinable fair value are carried at cost, less any impairment plus or minus changes resulting from observable price changes for identical or similar investments.

Servicer Advances, Net of Allowance

The Company is required under certain servicing contracts to ensure that property taxes, insurance premiums, foreclosure costs and various other items are paid in order to preserve the assets being serviced. Generally, the Company recovers such advances from borrowers for reinstated or performing loans, from proceeds of liquidation of collateral or ultimate disposition of the loan, from credit owners or from loan insurers.

Receivable from Clearing Organization

The Company clears all of its proprietary and all of its customer transactions through another broker-dealer on a fully disclosed basis. Securities transactions are recorded on the trade date as if they had settled. The related amounts receivable and payable for unsettled securities transactions along with contractual deposits, are recorded in receivable from or payable to clearing organization in the Consolidated Statements of Financial Condition.

Operating Leases

The Company records the operating lease expense on a straight-line basis over the lease term by adding interest expense determined using the effective interest method to the amortization of the right-of-use (“ROU”) assets. Amortization of the ROU assets is calculated as the difference between the straight-line expense and the interest expense on the lease liability for a given period. See Note 21 - Leases for further discussion of operating leases.

HMBS Related Obligations, at Fair Value

HMBS related obligations represent the secured borrowing associated with the Company’s securitization of HECM loans where the securitization does not meet the criteria for sale accounting treatment. This liability includes the Company’s obligation to repay the secured borrowing from the FHA insured HECM cash flows and the obligations as issuer and servicer of the HECM loans and HMBS.

As an issuer of HMBS, the Company is obligated to service the HECM loan and associated HMBS, which includes funding the repurchase of the HECM loans or pass through of cash due to the holder of the beneficial interests in the GNMA HMBS upon maturity events and certain funding obligations related to monthly guarantee fees, mortgage insurance proceeds and partial month interest.

As an issuer, the Company is required to repurchase reverse loans out of the GNMA securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the MCA. The Company is also required to pay off the outstanding remaining principal balance of secured borrowings if certain triggering events are reached prior to the 98% of MCA limit, such as death of borrower and completion of foreclosure. Performing repurchased loans are conveyed to HUD and payment is received from HUD typically within 75 days of repurchase. Nonperforming repurchased loans are generally liquidated through foreclosure, subsequent sale of real estate owned and claim submissions to HUD. Loans are considered nonperforming upon events such as, but not limited to, the death of the mortgagor, the mortgagor no longer occupying the property as their principal residence, or the property taxes or insurance not being paid. The Company relies upon its secured financing facilities (see Note 19 - Other Financing Lines of Credit) and operating cash flows, to the extent necessary, to repurchase loans. The timing and amount of the Company’s obligation to repurchase HECMs is uncertain as repurchase is predicated on certain factors such as whether or not a borrower event of default occurs prior to the HECM reaching the mandatory repurchase threshold under which the Company is obligated to repurchase the loan.

Performing repurchased loans are conveyed to HUD and nonperforming repurchased loans are generally liquidated in accordance with program requirements. In addition to having to fund repurchases, the Company may sustain losses during the process of liquidating the loans. The issuer is also required to fund guarantee fees to GNMA, MIP to the FHA and is obligated to fund partial month interest resulting from shortfalls in interest received from borrower payoffs to the holders of the HMBS beneficial interests. Estimated cash flows associated with these obligations are included in the HMBS related obligations, at fair value in the Consolidated Statements of Financial Condition.

The Company has elected to record the HMBS related obligations at fair value. The estimated fair value is generally determined by discounting expected principal, interest and other servicing or issuer obligation cash flows using an estimated market discount rate that management believes a market participant would consider in determining fair value.

 

F-22


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

See Note 5 - Fair Value for further discussion of valuation of HMBS related obligations.

The yield on HMBS related obligations along with any changes in fair value are recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The yield on the HMBS related obligations includes recognitions of contractual interest expense based on the stated interest rates of the HMBS beneficial interests.

Nonrecourse Debt, at Fair Value

Nonrecourse debt is debt of securitization trusts that are VIEs that have been consolidated, as the Company is the primary beneficiary. The loans initially transferred to the securitization trust serve as collateral for the nonrecourse debt, and the principal and interest cash flows from these loans serve as the sole source of repayment.

The Company has elected to measure the outstanding nonrecourse debt at fair value in the Consolidated Statements of Financial Condition with all changes in fair value recorded to net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The yield on nonrecourse debt and any change in fair value are also recorded in net fair value gains on mortgage loans and related obligations in the Consolidated Statements of Operations and Comprehensive Income. The yield recognized includes the contractual interest expense based on the stated interest rates of the debt and amortization of any discount at which the related bonds were issued.

Reverse Mortgage Loans

The Company securitizes certain of its interests in HECM Buyouts and non-agency reverse mortgage loans. The transactions provide investors with the ability to invest in a pool of reverse mortgage loans secured by one-to-four-family residential properties. The transactions provide the Company with access to liquidity for these assets, ongoing servicing fees, and potential residual returns. The securitizations are callable at or following the optional redemption date as defined in the respective indenture agreements.

Commercial Mortgage Loans

The Company issued nonrecourse debt securities secured by mortgage loans made to real estate investors. The transactions provide debt security holders the ability to invest in a pool of performing loans secured by investment real estate. The transactions provide the Company with access to liquidity for the mortgage loans and ongoing management fees.

Nonrecourse MSR Financing Liability, at Fair Value

The Company has agreements with third parties to sell beneficial interests in the servicing fees generated from its originated or acquired mortgage servicing rights. Under these agreements, the Company has agreed to sell to the third parties the right to receive all excess servicing and ancillary fees related to the identified MSRs in exchange for an upfront payment equal to the entire purchase price of the acquired or originated mortgage servicing rights. These transactions are accounted for as financings under ASC 470, Debt and included in payables and other liabilities in the Consolidated Statements of Financial Condition.

The Company elected to measure the outstanding financings related to the nonrecourse MSR financing liability, at fair value, as permitted under ASC 825, Financial Instruments, with all changes in fair value recorded as a charge or credit to fee income in the Consolidated Statements of Operations and Comprehensive Income. The fair value on the nonrecourse MSR financing liability is based on the present value of the future expected discounted cash flows paid to the third parties with the discount rate approximating current market value for similar financial instruments. See Note 37 - Related Parties for additional information regarding the nonrecourse MSR financing liability.

Other Financing Lines of Credit

Other financing lines of credit principally consists of variable-rate, asset-backed facilities, primarily warehouse lines of credit, to support the origination of mortgage loans and operations of the Company, which provide creditors a collateralized interest in specific mortgage loans and other Company assets that meet the eligibility requirements under the terms of the facility. The source of repayment of the facilities is typically from the sale or securitization of the underlying loans into the secondary mortgage market. The Company evaluates its capacity needs for warehouse facilities and adjusts the amount of available capacity under these facilities in response to the current mortgage environment and origination needs. Interest expense from these financings is recorded in net interest expense in the Consolidated Statements of Operations and Comprehensive Income.

 

F-23


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Costs incurred in connection with obtaining financing lines of credit are capitalized to other assets, net, within the Consolidated Statements of Financial Position and amortized over the term of the related financing as interest expense within the Consolidated Statements of Operations and Comprehensive Income.

Payables and Other Liabilities

Payables and other liabilities consist of accrued compensation expense, accrued liabilities, lease liabilities, liability for loans eligible for repurchase from GNMA, GNMA reverse mortgage buy-out payable, derivative liabilities, nonrecourse MSR financing liability, at fair value, repurchase reserves, estimate of claim losses, deferred purchase price liabilities, at fair value, finance lease obligations, and due to investors. The components of payables and other liabilities are detailed in Note 20 - Payables and Other Liabilities.

IBNR and Estimate of Claim Losses

The Company offers medical, dental, and other benefits to its employees. In 2016, certain of these medical benefit plans became self-funded by the Company, whereby the Company pays actual claims made by its employees. Any employee-paid portion of these benefits are withheld by the individual operating entities and remitted back to the Company on a monthly basis. In addition, the Company has a stop-loss insurance policy in place which reimburses the company for extraordinary claims. The Company estimates incurred but not reported obligations, including any existing and future claims (“IBNR”), related to these self-funded benefits on a quarterly basis. The estimated claims are recorded based upon current and future claims expected to be received. In addition, the Company has engaged a third party actuary to validate the reasonableness of the existing estimated claims.

The Company is occasionally named as a defendant in claims concerning alleged errors or omissions pertaining to the issuance of title policies or the performance of escrow services. The Company assesses pending and threatened claims to determine whether losses are probable and reasonably estimable in accordance with ASC 450, Contingencies. To the extent losses are deemed probable and reasonably estimable, the Company will establish an accrual for those losses based on historical experience and analysis of specific claim attributes.

The Company maintains an estimate of claim losses for potential losses related to title research and the related title policies sold by the Company as agent. This reserve is subjective and is based on known claims and claims incurred but not yet reported to the Company. The Company monitors the estimate of claim losses for adequacy on an annual basis.

This liability also includes amounts determined on the basis of claim evaluation, estimates for reported losses and estimates for losses incurred but not reported related to the Company’s title and settlement services subsidiary. These estimates are continually reviewed and updated. Any adjustments are reflected currently. Accordingly, loss and loss adjustment expenses are charged to income as incurred. Management believes the liability for loss and loss adjustment expenses is adequate; however, the ultimate liability may be in excess of or less than the amounts provided.

Repurchase Reserve

The Company has exposure to potential mortgage loan repurchases and indemnifications in its capacity as a seller of mortgage loans. The estimation of the liability for probable loss related to repurchase and indemnification obligations considers: (i) specific, non-performing loans where the Company has received a repurchase or indemnification request and believes it will be required to repurchase the loan or indemnify the investor for any losses; and (ii) an estimate of probable future repurchase or indemnification obligations for standard representation and warranty provisions, early payment defaults or other recourse obligations. The Company establishes an initial reserve at fair value for expected losses relating to loan sales at the date the loans are de-recognized from the Consolidated Statements of Financial Condition, which is recorded as a component of gain on sale and other income from mortgage loans held for sale, net in the Consolidated Statements of Operations and Comprehensive Income.

Deferred Purchase Price Liabilities, at fair value

As a result of business acquisitions, the Company has recorded contingent liabilities based upon expected future payouts. These payouts are partially based on future loan production and profits of the Company. In accordance with ASC 805, the Company measures any contingent consideration related to business combinations at fair value, and adjusts the reported amount each period with the change in fair value recorded in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.

 

F-24


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Notes Payable

The Company accounts for outstanding notes payable in accordance with ASC 470 - Debt. Notes payable are carried at amortized cost. Issuance costs, premiums and discounts are capitalized as part of the notes payable balance and amortized to interest expense on the Consolidated Statements of Operations and Comprehensive Income over the outstanding life of the note using the effective interest method.

Offsetting of Amounts Related to Certain Contracts

When the requirements of FASB ASC 815-10-45-5, Derivatives and Hedging, are met, the Company offsets certain fair value amounts recognized for cash collateral receivables or payables against fair value amounts recognized for net derivative positions executed with the same counterparty under the same master netting arrangement.

Reinsurance

The Company assumes and cedes reinsurance with other insurance companies in the normal course of business. Ceded insurance is comprised of excess of loss treaties, which protect against losses over defined amounts. The Company remains liable to the insured for claims under ceded insurance policies in the event the assuming insurance companies are unable to meet their obligations under these contracts. Reinsurance is recorded as a contra revenue within fee income on the Consolidated Statements of Operations and Comprehensive Income.

Comprehensive Income

Recognized revenue, expenses, gains and losses are included in operations. Certain changes in assets and liabilities, such as foreign currency translation adjustments, are reported as a separate component in the Consolidated Statements of Changes in Members’ Equity. Such items, along with net income and losses, are components of comprehensive income (loss).

The components of other comprehensive income (loss) are reported in the Consolidated Statements of Operations and Comprehensive Income. For the years ended December 31, 2020, 2019 and 2018, the only component of other comprehensive income (loss) was foreign currency translation adjustments, arising from translation of the foreign branch accounts in Manila, Philippines.

Foreign Currency

The functional currency of the Company’s international branch is the Philippine peso. Foreign currency denominated assets and liabilities are translated into United States dollars using the exchange rates in effect at the dates of the Consolidated Statements of Financial Condition. Results of operations and cash flows are translated using the average exchange rates throughout the period. The resulting exchange rate translation adjustments are included as a component of members’ equity in accumulated other comprehensive income (loss).

Revenue Recognition

The Company derives its revenues principally from gains on origination and sale of loans, including revenue fees collected from the borrower at closing, loan servicing fees, fair value gains on originated mortgage loans, net of changes in fair value associated with outstanding HMBS and other nonrecourse obligations, other fee income, and net interest income on loans.

Net gains on mortgage loans held for sale include realized and unrealized gains and losses on loans held for sale, interest rate lock commitments, hedging derivatives and retained mortgage servicing rights. The Company sells mortgage loans into the secondary market, including sales to the GSEs on a servicing-released basis, where the loans are sold to an investor with the associated mortgage servicing rights transferred to the investor or to a separate third-party investor. In addition, the Company may opportunistically sell loans on a servicing-retained basis, where the loan is sold and the rights to service that loan are retained. Unrealized gains and losses include fair value gains and losses resulting from changes in fair value in the underlying mortgages, interest rate lock commitments, hedging derivatives and retained mortgage servicing rights, from the time of origination to the ultimate sale of the loan or other settlement of those financial instruments.

Monthly servicing revenue represents income derived by the Company in relation to the servicing of loans. Interest income reflects interest collected at the closings of loans, as well as on loans held for sale by the Company prior to sale on the secondary market. The interest income collected on such loans is reported net of the interest expense incurred while the loans are carried on the Company’s warehouse lines.

Interest income is recognized using the interest method. Loans are placed on non-accrual status when any portion of the principal or interest is 90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable. Interest received from loans on non-accrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible.

 

F-25


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Agents National Title Insurance Company (“ANTIC”), a subsidiary of the Company, issues title insurance products through a network of title insurance agents throughout the country. Title insurance is a product providing coverage to parties within a real estate transaction according to the respective state regulatory bodies in the United States of America. Insurance premium revenue is recognized from title insurance contracts when the title agents report the issuance of a title insurance policy. The revenue stream falls under ASU 2016-20, Issue 5: Scope of Topic 606 11, which is excluded from ASC 606, Revenue from Contracts with Customers (“ASC 606”). The scope exceptions to ASC 606 clarify that all contracts within the scope of Topic 944, Financial Services-Insurance, are excluded from the scope of Topic 606. Therefore ANTIC is considered under Insurance Contracts within the scope of ASC 944-605 which reflects premiums from title insurance contracts shall be considered due from policyholders and, accordingly, recognized as revenue on the effective date of the insurance contract because most of the services associated with the contract have been rendered by that time. However, the binder date is appropriate if the insurance entity is legally or contractually entitled to the premium on the binder date.

The majority of revenue generated by the Company in connection with originations and servicing are not within the scope of ASC 606.

The Company recognizes revenues from services provided in accordance with the five-step process outlined in ASC 606. Revenue was recognized when the performance obligations have been satisfied by transferring control of a product or service to a customer in an amount that reflects the consideration that the Company expects to receive. This revenue can be recognized at a point in time or over time. Based on its evaluation of loan origination fees, the Company has determined that loan origination fees are recorded in fee income in the Consolidated Statements of Operations and Comprehensive Income when a loan is successfully funded, with the related costs recognized in general and administrative expenses when incurred.

The primary components of fee income consist of the following:

Loan Servicing Fees

Loan servicing income represents recurring servicing and other ancillary fees earned for servicing mortgage loans owned by investors. Servicing fees received for servicing mortgage loans owned by investors are based on a stipulated percentage of the outstanding monthly principal balance on such loans, or the difference between the weighted-average yield received on the mortgage loans and the amount paid to the investor, less guaranty fees and interest on curtailments. Loan servicing income is receivable only out of interest collected from mortgagors and is recorded as income when collected. Late charges and other miscellaneous fees collected from mortgagors are also recorded as income when collected, and are included as a component of fee income in the Consolidated Statements of Operations and Comprehensive Income.

Loan Origination Fees

Loan origination fees are recorded in fee income in the Consolidated Statements of Operations and Comprehensive Income when earned, with the related costs recognized in general and administrative expenses when incurred at the date of origination.

The Company collects from the borrower certain amounts, including underwriting fees, credit reporting fees, loan administration and appraisal fees. The Company has determined that it is primarily responsible for fulfillment and acceptability for these services, and has discretion in setting the price to the borrower, and therefore these fees should be recognized gross as the Company is the principal for the specified goods and services performed.

In addition to the fees above, the Company also acts as agent for certain services for its customers. These services include obtaining flood certification, credit reporting, and inspection fees. In these transactions, the Company will facilitate the providing of the goods or services to prospective borrowers, and collects these amounts from the borrower prior to the services being provided. These amounts are recorded net in the Company’s consolidated financial statements.

Other Fee Income

Title and Closing Services: The Company generates revenue by providing title agent and closing services for lenders in connection with loan closings. Specific fees are specified within each lenders/financial institutions’ agreements. While the services are generally performed over a 90-day time frame leading up to and finalized before the date of loan closing, no fees are earned and recorded unless the loan closing occurs. Net fees are issued to the

 

F-26


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Company at the time of the respective loan closing. The specific good and/or service provided to the customer is the issuance of title insurance policy. The risk in the title issuance lies mostly with the title underwriter of the insurance policy and less on the Company, as the agent, thus the Company determined within step 5 of ASC 606 that the Company does not control the goods or service before it is transferred to the customer. The Company is recognizing net revenue at a point in time using the output method, specifically as services are completed in connection with the performance of said obligations. There are two performance obligations, the first is the search and examination of the title of a property, which is performed by the Company on behalf of the underwriter. The second will be the issuance of a title insurance policy, which is performed by an independent underwriter. The transaction price is allocated between the performance obligations based on the terms of the transaction agreement.

Settlement, Appraisal and Other Services: Settlement, appraisal and other services include specific real estate transaction services provided to customers to facilitate the origination of mortgage loans. Revenue is recognized when the performance obligations have been satisfied by transferring control of a product or service to a customer in an amount that reflects the consideration that the Company expects to receive. The Company recognizes gross revenue at a point in time using the output method, specifically as services are completed in connection with the performance of said obligations.

The Company earns appraisal revenue through the one performance obligation of managing the appraisal process for a consumer to obtain an independent valuation of a property to be mortgaged. The appraisal management company maintains a pool of qualified appraisers, who on behalf of the lender provide an appraisal report for a property. Gross revenue is earned and recognized at a point in time using the output method when each appraisal is performed and completed.

There are no variable consideration or significant judgments or estimates when revenue is recognized for this stream in accordance with ASC 606.

Transactional Revenue: The Company generates revenue through loan processing activities for in-school students and refinancing existing student loans. Transaction fees are considered revenue from contracts with customers. The Company receives transaction fees for the performance obligation of providing loan application processing and loan facilitation services for the issuing banks. The Company records revenue over time using the output method, specifically when certain milestones are reached in connection with the performance of said obligations.

Hedge Advisory Services: The Company provides certain valuation and advisory services, which includes the development and implementation of a mortgage servicing rights hedging framework, for various independent mortgage banks. Pursuant to these agreements or other governing documents, the Company’s maintenance fee (the “maintenance fee”) will generally vary between 0.05% and 0.25% of the assets under management per month. The maintenance fee is typically calculated and paid monthly and is recognized in the Consolidated Statements of Operations and Comprehensive Income in the month services are provided. In addition to the Company’s maintenance fee, the Company may also be entitled to receive incentive compensation (the “at-risk fee”) tied to the performance of the MSR portfolio, which will generally vary between 5% and 15% of net gains. The at-risk fee is typically calculated and paid monthly. The Company recognizes gross revenues over time utilizing the output method.

Other advisory fees: In addition to the management fee and incentive fee, the Company may also receive expense reimbursements from its clients in accordance with applicable advisory or sub-advisory agreements and other governing documents. These may include but are not limited to, reimbursement for expenses associated with legal entity formation and capital raising activities, initial public offering costs and expenses, fund administration costs, professional fees, securitization costs, custodian and transfer agent costs and certain other out-of-pocket expenses. To the extent such reimbursements are provided, the Company recognizes these amounts in revenues in the Consolidated Statements of Operations and Comprehensive Income. The Company recognizes gross revenues over time utilizing the output method.

MSR Trade Broker: The Company’s one performance obligation for these services is providing brokerage services to its clients. Services include analysis, structuring, marketing and negotiation of transactions for servicing portfolios in the secondary market. The Company earns revenue based on fees resulting from the trade of MSR assets. Trading of MSR assets is done in two ways: 1) co-issue, flow arrangement for the exit of a pipeline on a per loan basis, and 2) bulk, sale of an entire MSR portfolio. Fees on these brokered trades are based upon a dollar per loan or basis points on unpaid principal balance (“UPB”) of underlying loans. Fees are defined in agreements with clients. Service is completed at the settlement date. The Company recognizes gross revenue at a point in time when the services are performed utilizing the output method.

 

F-27


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

OAS & MSR Valuation Services: The Company has one performance obligation for these services which is providing the analytic valuation services specified in the client-specific statement of work. Services are rendered when valuation results are complete and delivered to the client. The Company recognizes gross revenue at a point in time in which the services are performed using the output method.

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. The Company did not have any significant contract balances at December 31, 2020 and 2019.

The Company has other revenue streams that are considered insignificant to the overall business. These services are negotiated with customers based on separate contracts for each of the respective services. These revenue streams are also recognized over time using the output method and contain only one performance obligation. There is no significant variable consideration or significant judgments or estimates when revenue is recognized for the Company’s revenue streams in accordance with ASC 606.

Revenue streams were reflected as $272.6 million, $48.3 million and $32.1 million point in time revenue, $69.6 million, $34.2 million and $28.8 million over time revenue, and $44.5 million, $119.1 million and $90.7 million non ASC 606 revenue recognition revenue for the years ended December 31, 2020, 2019 and 2018, respectively. See Note 30 - Fee Income for disclosures of fee income by type of revenue.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, put presumptively beyond the reach of the entity, even in bankruptcy, (ii) the transferee (or if the transferee is an entity whose sole purpose is to engage in securitization and that entity is constrained from pledging or exchanging the assets it receives, each third-party holder of its beneficial interests) has the right to pledge or exchange the transferred financial assets, and (iii) the Company or its agents does not maintain effective control over the transferred financial assets or third-party beneficial interest related to those transferred assets through an agreement to repurchase them before their maturity.

When the Company determines that control over the transfer of financial assets has been surrendered, the transaction will be accounted for as a sale in which the underlying mortgage loans are derecognized, and a corresponding gain recorded equal to the proceeds of the cash and any other beneficial interest retained by the Company, less the carrying balance of the transferred mortgage loans. Upon completion of the sale, the recorded gains and losses are reflected in gain on mortgage loans in the Consolidated Statements of Operations and Comprehensive Income.

Whenever the requirements for sale treatment have not been met due to control over the transferred financial assets not being surrendered, the transferred loans will continue to be held as mortgage loans held for investment, subject to nonrecourse debt, and an associated liability is recorded in nonrecourse debt on the Consolidated Statements of Financial Position.

Share Based Compensation

The Company has entered into transactions with certain of its executive officers whereby the executive officer purchased equity units in UFG Management Holdings LLC in exchange for a combination of cash and a partial-recourse promissory note. The Company accounts for compensation cost related to the grant of parent company awards to its employees with a corresponding credit to member’s equity in the Consolidated Statements of Financial Condition. These equity units are legally issued to the officers; however, because the promissory note is only partial-recourse, the Company accounts for the transaction as a grant of an option award, in accordance with FASB ASC 718, Compensation-Stock Compensation. The Company records a charge to salaries, benefits, and related expenses in the Consolidated Statements of Operations and Comprehensive Income on the transaction date for the value of the “option” as determined using an option pricing model. These “options” are considered vested upon the initial grant date, as no requisite service period is required of these officers. See Note 28 - Shareholders’ Notes Receivable for additional discussion.

 

F-28


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Advertising Costs

Advertising costs are expensed as incurred. For the years ended December 31, 2020, 2019 and 2018, the Company recorded $37.5 million, $27.2 million and $30.1 million, respectively, in advertising and related expenses which are included in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.

Income Taxes

As a limited liability company, the Company has elected to report as a partnership for federal and state income tax purposes at a consolidated level. However, certain of the Company’s consolidated subsidiaries are structured as C-Corporations and subject the Company to income taxes at the subsidiary level. The Company is also subject to foreign taxes at its international branch, which are not material.

The Company records income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). The Company accounts for income taxes under the asset and liability approach that requires recognition of accounts for certain income and expense items differently for financial reporting purposes and income tax purposes. Further, the Company recognizes deferred income tax assets and liabilities for the differences between the financial reporting basis and the tax basis of assets and liabilities, as well as expected benefits of utilizing net operating loss and credit carryforwards, when applicable.

Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All evidence, both positive and negative, is evaluated when making this determination. Items considered in this analysis include the ability to carry back losses to recoup taxes previously paid, the reversal of temporary differences, tax planning strategies, historical financial performance, expectations of future earnings, and the length of statutory carryforward periods. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences.

ASC 740 establishes rules for recognizing and measuring tax positions taken in an income tax return, including disclosures of uncertain tax positions (“UTPs”).

The Company evaluates all material income tax positions for periods that remain open under applicable statutes of limitation, as well as positions expected to be taken in future returns. The Company recognizes an income tax benefit only if the position has a “more likely than not” chance of being sustained on its technical merits.

Contingencies

The Company evaluates contingencies based on information currently available and will establish accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. For matters where a loss is believed to be reasonably possible but not probable, no accrual is established but the nature of the loss contingency and an estimate of the reasonably possible range of loss in excess of amounts accrued, when such estimate can be made, is disclosed. In deriving an estimate, the Company is required to make assumptions about matters that are, by their nature, highly uncertain. The assessment of loss contingencies, including legal contingencies, involves the use of critical estimates, assumptions and judgments. Whenever practicable, the Company consults with outside experts, including legal counsel and consultants, to assist with the gathering and evaluation of information related to contingent liabilities. It is not possible to predict or determine the outcome of all loss contingencies. Accruals are periodically reviewed and may be adjusted as circumstances change. See Note 26 - Commitments and Contingencies for further discussion.

Reclassifications

Certain amounts from the prior year consolidated financial statements have been reclassified to conform to the current year financial presentation.

 

F-29


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Recently Adopted Accounting Guidance

 

Standard    Description    Effective Date   

Effect on Consolidated

Financial Statements

ASU 2016-02, Leases (Topic 842), ASU 2018-10, Codification Improvements to Topic 842, Leases , ASU 2018-11, Leases (Topic 842), Targeted Improvements, (collectively, ‘Topic 842 Updates’), ASU 2018-20, Leases (Topic 842), Narrow Scope Improvements for Lessors, ASU 2019-01, Leases (Topic 842): Codification Improvements, ASU 2019-10, Leases (Topic 842): Effective Dates, ASU 2020-03, Codification Improvements to Financial Instruments, ASU 2020-05, (Topic 842), Effective Dates for Certain Entities   

This guidance and subsequent clarifications and improvements sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors) and supersedes previous leasing standards.

 

•   Requires lessees to recognize all leases longer than twelve months on the Consolidated balance sheets as a lease liability with a corresponding right-of-use (“ROU”) asset

 

•   Requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests

 

•   Expands qualitative and quantitative leasing disclosures

   January 2019   

The Company early adopted the guidance in the first quarter of 2019, using the modified retrospective method of adoption without restating prior periods.

 

The Company elected the package of practical expedients, which, among other items, permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the short-term lease recognition exemption for all leases that qualify. Under this election, the Company does not recognize right-of-use assets or lease liabilities, which includes not recognizing ROU assets or lease liabilities for leases with a term of 12 months or less of those assets in transition. The Company also elected to not separate lease and non-lease components for all leases. The Company did not elect the use-of hindsight practical expedient.

 

Upon adoption, a lease liability was recorded of $74,126 and right of use asset of $74,126 on January 1, 2019, with no impact on its consolidated statement of operations. The ROU assets and operating lease liabilities are recorded in other assets, net, and payables and other liabilities, respectively, in the consolidated balance sheets.

 

See Note 21, for additional information.

 

F-30


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Standard    Description    Effective Date   

Effect on Consolidated

Financial Statements

ASU 2016-13 , Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, ASU 2019-10, Financial Instruments —Credit Losses (Topic 326), ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, ASU 2020-03, Codification Improvements to Financial Instruments

 

Issued June 2016

  

Requires use of the current expected credit loss model that is based on expected losses (net of expected recoveries), rather than incurred losses, to determine the allowance for credit losses on financial assets measured at amortized cost, certain net investments in leases and certain off-balance sheet arrangements.

 

Replaces current accounting for purchased credit impaired (“PCI”) and impaired loans.

 

Amends the other-than-temporary impairment model for available for sale debt securities. The new guidance requires that credit losses be recorded through an allowance approach, rather than through permanent write-downs for credit losses and subsequent accretion of positive changes through interest income over time.

   January 2020    The Company determined that certain servicer advances and other receivables, net of reserves including in other assets are with the scope of ASU 2016-13. The Company determined that these receivables have limited expected credit-related losses due to the contractual servicing agreements with agencies and loan product guarantees. Furthermore, the Company determined that for outstanding servicer and other advances, that the majority of estimated losses are attributable to losses due to servicing operational errors and credit-related losses are not significant because of the contractual relationship with the agencies. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements.
ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment   

Historical guidance for goodwill impairment testing prescribed that the Company must compare each reporting unit’s carrying value to its fair value. If the carrying value exceeds fair value, an entity performs the second step, which assigns the reporting unit’s fair value to its assets and liabilities, including unrecognized assets and liabilities, in the same manner as required in purchase accounting and then records an impairment. This ASU eliminates the second step.

 

Under the new guidance, an impairment of a reporting unit’s goodwill is determined based on the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to the reporting unit.

   January 2020   

The Company adopted this guidance using the prospective method of adoption.

 

Adoption of this standard did not have a material impact on the consolidated financial statements.

 

F-31


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Standard    Description    Effective Date   

Effect on Consolidated

Financial Statements

ASU 2018-13 , Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement   

The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurements, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. Certain disclosure requirements were either removed, modified, or added.

 

This guidance removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

 

   January 2020    The adoption of this standard did not have a material impact on the consolidated financial statements.
ASU 2018-15 , Intangibles - Goodwill and Other - Internal- Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract    The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).    January 2020   

The Company adopted this guidance using the prospective method of adoption.

 

Adoption of this standard did not have a material impact on the consolidated financial statements.

 

F-32


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Recently Issued Accounting Guidance, Not Yet Adopted

 

Standard    Description    Date of Planned
Adoption
  

Effect on Consolidated

Financial Statements

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

 

ASU 2021-01, Reference Rate Reform (Topic 848): Codification Clarification

  

The amendments in this Update provide temporary optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-Bank Offered Rate (“LIBOR”) or other interbank offered rates expected to be discontinued.

 

In January 2021, FASB issued an Update which refines the scope of ASU Topic 848 and clarifies the guidance issued to facilitate the effects of reference rate reform on financial reporting. The amendment permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements and calculating price alignment interest in connection with reference rate reform activities.

   TBD   

This ASU is effective from March 12, 2020 through December 31, 2022.

 

If LIBOR ceases to exist or if the methods of calculating LIBOR change from the current methods for any reasons, interest rates on our floating rate loans, obligation derivatives, and other financial instruments tied to LIBOR rates, may be affected and need renegotiation with its lenders.

 

The Company is in the process of reviewing the potential impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.

 

3.

Variable Interest Entities and Securitizations

The Company determined that the SPEs created in connection with its securitizations are VIEs. A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is the entity that, through its variable interests has both the power to direct the activities that significantly impact the VIE’s economic performance and the obligations to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Finance of America Commercial

FACo securitizes certain of its interests in fix & flip mortgages. The transactions provide debt security holders the ability to invest in a pool of performing loans secured by investment real estate. The transactions provide the Company with access to liquidity for the loans and ongoing management fees. The principal and interest on the outstanding debt securities are paid using the cash flows from the underlying loans, which serve as collateral for the debt. The Company has determined that the securitization structure meets the definition of a VIE. In its capacity as servicer of the securitized loans, the Company retains the power to direct the VIE’s activities that most significantly impact the VIEs economic performance. The Company has also retained certain beneficial interests in these trusts which provide exposure to potential gains and losses on the performance of the trust. As the Company has both the power to direct the activities that significantly impact the VIE’s economic performance and the obligations to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company has determined it meets the definition of the primary beneficiary and consolidates the trusts.

Certain obligations may arise from the agreements associated with transfers of loans. Under these agreements, the Company may be obligated to repurchase the loans, or otherwise indemnify or reimburse the investor for losses incurred due to material breach of contractual representations and warranties.

The Company incurred $2.5 million of realized losses during the year ended December 31, 2020 associated with transferred loans related to the standard securitization representations and warranties obligations. No realized losses were incurred for the years ended December 31, 2019 and 2018.

 

F-33


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Finance of America Reverse

Finance of America Reverse LLC (“FAR”) securitizes certain of its interests in non-performing reverse mortgages and non-agency reverse mortgage loans. The transactions provide investors with the ability to invest in a pool of reverse mortgage loans secured by one-to-four-family residential properties. The transactions provide FAR with access to liquidity for these assets, ongoing servicing fees, and potential residual returns. The principal and interest on the outstanding certificates are paid using the cash flows from the underlying reverse mortgage loans, which serve as collateral for the debt. The securitizations are callable at or following the optional redemption date as defined in the respective indenture agreements. FAR has determined that these securitization structures meet the definition of VIEs. In its capacity as servicer of the securitized loans, the Company retains the power to direct the VIE’s activities that most significantly impact the VIEs economic performance. The Company has also retained certain beneficial interests in these trusts which provide exposure to potential gains and losses on the performance of the trust. As the Company has both the power to direct the activities that significantly impact the VIE’s economic performance and the obligations to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company has determined it meets the definition of the primary beneficiary and consolidates the trusts.

In February 2020, the Company executed its optional redemption of outstanding securitized notes related to outstanding nonperforming HECM securitizations. As part of the optional redemption, the Company paid off notes with an outstanding principal balance of $218.0 million. The notes were paid off at par.

In July 2020, the Company executed its optional redemption of outstanding securitized notes related to outstanding nonperforming HECM securitizations. As part of the optional redemption, the Company paid off notes with an outstanding principal balance of $223.9 million. The notes were paid off at par.

In September 2020, the Company purchased the remaining outstanding securitized notes of $15.9 million and residual interest of $5.7 million from Blackstone Toro Operating Partnership (“TORO”) related to the Toro Mortgage Funding Transaction (“TMFT”) securitization. As part of the optional redemption, the Company paid off notes with an outstanding principal balance of $122.7 million. The notes were paid off at par and the outstanding loans with UPB in the amount of $116.0 million are reflected as assets in the Consolidated Statements of Financial Condition.

In December 2020, the Company executed its optional redemption of outstanding securitized notes related to outstanding performing HECM securitizations. As part of the optional redemption, the Company paid off notes with an outstanding principal balance of $136.7 million. The notes were paid off at par.

The following table presents the assets and liabilities of the Company’s consolidated VIEs, which are included in the Consolidated Statements of Financial Condition above and excludes intercompany balances, except for retained bonds (in thousands):

 

     December 31,  
     2020      2019  

ASSETS

     

Restricted cash

   $ 293,580      $ 226,408  

Mortgage loans held for investment, subject to nonrecourse debt, at fair value

 

2019 FASST JR2

     488,760        505,009  

2019 FASST JR3

     450,703        460,344  

2018 FASST JR1

     449,069        506,786  

2020 FASST HB2

     398,480        —    

2019 FASST JR4

     377,265        367,380  

2020 FASST JR3

     372,015        —    

2020 FASST JR2

     341,439        —    

2019 FASST JR1

     331,244           348,919  

2020 FASST S3

     316,774        —    

2020 FASST S2

     311,721        —    

2020 FASST HB1

        265,923        —    

 

F-34


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

2018 FASST JR2

     264,622        276,125  

2020 FASST JR1

     263,266        —    

2020 FASST-JR4

     237,100        —    

2020 FASST S1

     189,243        —    

2020 RTL1 ANTLR

     137,989        —    

2019 RTL1 ANTLR

     118,161        221,143  

2018 RTL1 ANTLR

     82,393        222,099  

2018 FASST HB1

     —          206,586  

2019 FASST HB1

     —          201,382  

2019 FAHB 19-1

     —          195,439  

Other assets

     79,528        75,115  
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 5,769,275      $ 3,812,735  
  

 

 

    

 

 

 
  

 

 

    

 

 

 

LIABILITIES

     

Nonrecourse debt, at fair value

     

2019 FASST JR2

   $ 487,966      $ 474,134  

2020 FASST HB2

     474,599        —    

2018 FASST JR1

     458,279        507,516  

2019 FASST JR3

     445,691        427,264  

2019 FASST JR4

     368,963        343,172  

2020 FASST JR3

     354,762        —    

2019 FASST JR1

     343,544        332,829  

2020 FASST S2

     314,144        —    

2020 FASST JR2

     313,057        —    

2020 FASST S3

     309,713        —    

2020 FASST HB1

     298,914        —    

2018 FASST JR2

     269,741        274,139  

2020 FASST JR1

     250,988        —    

2020 FASST JR4

     228,804        —    

2020 FASST S1

     191,189        —    

2020 RTL1 ANTLR

     140,839        —    

2019 RTL1 ANTLR

     127,981        206,176  

2018 RTL1 ANTLR

     80,767        210,738  

2018 FASST HB1

     —          224,053  

2019 FAHB 19-1

     —          253,449  

2019 FASST HB1

     —          236,726  

Payables and other liabilities

     291        13  
  

 

 

    

 

 

 

TOTAL LIABILITIES

   $ 5,460,232      $ 3,490,209  
  

 

 

    

 

 

 
  

 

 

    

 

 

 

 

F-35


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The following table presents the carrying amounts of the Company’s assets and liabilities that relate to its variable interest in the VIEs that are not consolidated (in thousands):

 

Period

   Classification      Carrying Amount      Maximum Exposure to
Loss (1)
 

December 31, 2020

     Debt securities      $ —        $ —    

December 31, 2019

     Debt securities      $ 103,446      $ 103,446  

 

(1)

The Company’s maximum exposure to losses for VIEs equals the carrying value of assets recognized on the Consolidated Statements of Financial Condition.

 

4.

Acquisitions

Incenter Appraisal Management LLC

On April 1, 2019, Incenter, through one of its wholly-owned subsidiaries, acquired 100% of the outstanding LLC interests of Management Appraisal Services (“MAS”) pursuant to the Amended and Restated Stock Purchase Agreement (“SPA”) between the Company and the seller dated February 26, 2019. The name of MAS was subsequently changed to Incenter Appraisal Management, LLC (“IAM”). The Company acquired MAS to further diversify the services of the Company, adding the new revenue stream for appraisal management services.

In accordance with the SPA, the purchase price for IAM is paid out to the seller through a deferred purchase price liability. The liability is comprised of two parts: 1) The Company pays the seller 40 percent of net income of IAM before taxes, depreciation, and amortization not to exceed the Purchase Price Cap of $2.1 million. Net income before taxes is calculated on a monthly basis, and 2) Seller receives a marketing fee per appraisal during the period of the earn-out. The amount of the monthly earn-out payment is reduced by fifty percent until the cumulative amount withheld equals the liabilities assumed by the Company at the date of acquisition. The estimated fair value of purchase consideration was $1.7 million as of the acquisition date, which consists of a $0.6 million marketing fee and a $1.1 million deferred purchase price liability. Acquired goodwill of $2.3 million was allocated to the Lender Services segment.

The table below presents the purchase price allocation of the acquisition date fair values of the assets acquired and the liabilities assumed (in thousands):

 

     2019  

Tangible assets acquired

  

Other assets, net

   $ 123  
  

 

 

 

Total tangible assets acquired

     123  
  

 

 

 

Tangible liabilities assumed

  

Payables and other liabilities

   $ 734  
  

 

 

 

Total tangible liabilities assumed

     734  
  

 

 

 

Tangible net liabilities acquired

   $ (611
  

 

 

 

Purchase price allocation

  

Deferred purchase price liability

     1,673  

Tangible net liabilities acquired

     611  
  

 

 

 

Goodwill

   $ 2,284  
  

 

 

 
  

 

 

 

On March 16, 2020, the Company signed an agreement with Silvernest, Inc. to acquire all issued and outstanding capital stock. The Company gave upfront consideration of $0.3 million dollars and an earnout which is not to exceed $2.0 million dollars over a three-year period. The Company acquired tangible assets of $0.4 million and assumed tangible liabilities of $0.2 million. For the year ended December 31, 2020, acquired goodwill of $0.6 million was allocated to the Lender Services segment.

 

5.

Fair Value

ASC 820, Fair Value Measurement (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

F-36


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Fair value is based on the assumptions market participants would use when pricing an asset or liability and follows a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation.

All aspects of nonperformance risk, including the Company’s own credit standing, are considered when measuring the fair value of a liability.

Following is a description of the three levels:

Level 1 Inputs: Quoted prices for identical instruments in active markets.

Level 2 Inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs: Instruments with unobservable inputs that are significant to the fair value measurement.

The Company classifies assets in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy for the years ended December 31, 2020, 2019 and 2018.

Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and the details of the valuation models, key inputs to those models and significant assumptions utilized.

Reverse Mortgage Loans Held for Investment, Subject to HMBS Related Obligations, at Fair Value

HECM loans securitized into GNMA HMBS are not actively traded in open markets with readily observable market prices.

The Company values HECM loans securitized into GNMA HMBS utilizing a present value methodology that discounts estimated projected cash flows over the life of the loan portfolio using prepayment, borrower mortality, borrower draw and discounts rate assumptions management believes a market participant would use in estimating fair value. The significant unobservable inputs used in the measurement include:

Conditional Repayment Rate - the Company projects borrower prepayment rates which considers borrower age and gender and is based on historical termination rates. The outputs of borrower prepayment rates, which include both voluntary and involuntary prepayments, are utilized to anticipate future terminations.

Loss Frequency/Severity - termination proceeds are adjusted for expected loss frequencies and severities to arrive at net proceeds that will be provided upon final resolution. Historical experience is utilized to estimate the loss rates resulting from scenarios where FHA insurance proceeds are not expected to cover all principal and interest outstanding and, as servicer, the Company is exposed to losses upon resolution of the loan. Loss frequency and severities are based upon the historical experience with specific loan resolution waterfalls.

Due and Payable Triggers - the input for terminations not attributable to an FHA assignment is based on historical foreclosure and liquidation experience.

Discount Rate - derived based upon reference to yields required by market participants for recent transactions in the HECM loan bulk market adjusted based upon weighted average life of the loan portfolio. This rate reflects what the Company believes to be a market participant’s required yield on HECM loans of similar weighted average lives. The yield spread is applied over interpolated benchmark curve or as a spread over collateral forward curve.

Borrower Draw Rates - the draw curve is estimated based upon the historical experience with the specific product type contemplating the borrower’s age and loan age.

Changes to any of these assumptions could result in significantly different valuation results. The Company classifies reverse mortgage loans held for investment as Level 3 assets within the GAAP hierarchy, as they are dependent on unobservable inputs.

 

 

F-37


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The following table presents the weighted average significant unobservable inputs used in the fair value measurement of reverse mortgage loans held for investment, subject to HMBS related obligations, for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Conditional repayment rate

     NM       20.0     NM       21.5

Loss frequency(1)

     NM       4.4     NM       4.6

Loss severity(1)

     5.1% - 13.3     5.4     4.2% - 14.0     4.8

Discount rate

     NM       1.6     NM       2.5

Average draw rate

     NM       1.1     NM       1.1

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss frequency and severity represents the frequency of losses and the losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided above are based upon the range of inputs utilized for each securitization trust.

Mortgage Loans Held for Investment, Subject to Nonrecourse Debt, at Fair Value

Reverse Mortgage Loans

Reverse mortgage loans held for investment, subject to nonrecourse debt, include HECM loans previously purchased out of GNMA HMBS pools and non FHA-insured jumbo reverse mortgages, which have been subsequently securitized and serve as collateral for the issued debt. These loans are not traded in active and open markets with readily observable market prices. The Company classifies reverse mortgage loans held for investment, subject to nonrecourse debt as Level 3 assets within the GAAP hierarchy.

HECM Buyouts - Securitized (Nonperforming)

The Company values HECM buyouts utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio using conditional repayment, loss frequency and severity, borrower mortality, and discount rate assumptions management believes a market participant would use in estimating fair value.

The following table presents the weighted average significant unobservable inputs used in the fair value measurement of these assets and liabilities for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted
Average of Input
    Range of Input     Weighted
Average of Input
 

Conditional repayment rate

     NM       42.9     NM       56.9

Loss frequency(1)

     25.0% - 100.0     54.8     25.0% - 100.0     56.7

Loss severity(1)

     5.1% - 13.3     7.5     4.2% - 14.0     6.3

Discount rate

     NM       4.1     NM       5.0

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss frequency and severity represents the frequency of losses and the losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided above are based upon the range of inputs utilized for each securitization trust.

HECM Buyouts - Securitized (Performing)

The Company values securitized HECM buyouts utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio using conditional repayment, loss frequency and severity, borrower mortality, and discount rate assumptions management believes a market participant would use in estimating fair value.

 

 

F-38


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The following table presents the weighted average significant unobservable inputs used in the fair value measurement of these assets and liabilities for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Weighted-average remaining life in years

     NM       8.5       NM       9.2  

Conditional repayment rate

     NM       14.7     NM       13.7

Loss severity(1)

     5.1% - 13.3     7.7     4.2% - 14.0     5.9

Discount rate

     NM       3.5     NM       4.1

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss severity represents the losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided above are based upon the range of inputs utilized for each securitization trust.

Non-agency reverse mortgages - Securitized

The Company values securitized non-agency reverse mortgage loans utilizing a present value methodology that discounts estimated projected cash flows over the life of the loan portfolio using repayment, home price appreciation, pool-level losses, and discount rate assumptions. The following table presents the weighted average significant unobservable inputs used in the fair value measurements of non-agency reverse mortgage loans for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Weighted-average remaining life in years

     NM       6.9       NM       10.1  

Loan to value

     9.0% - 73.1     48.2     NM       46.7

Conditional repayment rate

     NM       18.7     NM       12.1

Loss severity(1)

     NM       10.0     NM       10.0

Home price appreciation

     1.1% - 8.9     5.6     3.4% - 7.4     5.4

Discount rate

     NM       3.6     NM       4.5

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss severity represents the losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

 

 

F-39


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided above are based upon the range of inputs utilized for each securitization trust.

Commercial Mortgage Loans

Fix & Flip

The Fix & Flip loans are short-term loans for individual real estate investors, with terms ranging from 9-18 months. This product is valued using a discounted cash flow model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.

The Company utilized the following weighted average assumptions in estimating the fair value of fix & flip mortgage loans for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Prepayment rate (SMM)

     NM       17.1     NM       14.4

Discount rate

     6.7% - 10.0     6.7     5.3% - 6.8     5.3

Default rate (MDR)(1)

     N/A       N/A (1)      0% - 0.5     0.5

Loss frequency(2)

     0.2% - 44.0     0.6     0.1% - 1.8     0.1

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

The Company determined that loss frequency is a significant input in the model. As such, the default rate is no longer considered a significant input for 2020.

(2) 

Loss frequency represents the frequency of losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided above are based upon the range of inputs utilized for each securitization trust.

Mortgage Loans Held for Investment, at Fair Value

Reverse Mortgage Loans

Reverse mortgage loans held for investment, at fair value, consists of originated or purchased HECM and non-agency reverse mortgage loans not yet securitized, unsecuritized tails, and certain HECMs purchased out of GNMA HMBS (“Inventory Buyouts”) that the Company intends to securitize for purposes of serving as collateral for future securitization transfers.

Originated or purchased HECM loans held for investment are valued predominantly by utilizing forward HMBS prices for similar pool characteristics and based on observable market data. These amounts are further adjusted to include future cash flows that would be earned for servicing the HECM loan over the life of the asset.

Unsecuritized tails consists of performing and nonperforming repurchased loans. The fair value of performing unsecuritized tails are valued at current pricing levels for similar GNMA HMBS. The fair value of nonperforming unsecuritized tails is based on expected claim proceeds from HUD upon assignment of the loans.

The fair value of repurchased loans is based on expected cash proceeds of the liquidation of the underlying properties and expected claim proceeds from HUD. The primary assumptions utilized in valuing nonperforming repurchased loans include loss frequency and loss severity. Termination proceeds are adjusted for expected loss frequencies and severities to arrive at net proceeds that will be provided upon final resolution, including assignments to FHA. Historical experience is utilized to estimate the loss rates resulting from scenarios where FHA insurance proceeds are not expected to cover all principal and interest outstanding and as servicer, the Company is exposed to losses upon resolution of the loan.

The Company classifies reverse mortgage loans held for investment, at fair value as Level 3 assets within the GAAP hierarchy.

 

 

F-40


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Inventory Buyouts

The fair value of Inventory Buyouts is based on the expected cash proceeds of the liquidation of the underlying properties and expected claim proceeds from HUD. The primary assumptions utilized in valuing Inventory Buyouts include loss frequency and loss severity. Termination proceeds are adjusted for expected loss frequencies and severities to arrive at net proceeds that will be provided upon final resolution, including assignments to FHA. Historical experience is utilized to estimate the loss rates resulting from scenarios where FHA insurance proceeds are not expected to cover all principal and interest outstanding and as servicer, the Company is exposed to losses upon resolution of the loan.

The Company values Inventory Buyouts utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio using conditional repayment, loss frequency and severity, borrower mortality, and discount rate assumptions management believes a market participant would use in estimating fair value.

The following table presents the weighted average significant unobservable inputs used in the fair value measurement of HECM buyouts - inventory classified as reverse mortgage loans held for investment for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input      Weighted Average
of Input
    Range of Input      Weighted Average
of Input
 

Conditional repayment rate

     NM        44.0     NM        52.5

Loss frequency(1)

     NM        46.9     NM        56.7

Loss severity(1)

     NM        10.5     NM        6.3

Discount rate

     NM        4.1     NM        5.0

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss frequency and severity represents the frequency of losses and the losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

Non-Agency Reverse Mortgage Loans

The fair value of non-agency reverse mortgage loans is based on values for investments with similar investment grade ratings and the value the Company would expect to receive if the whole loans were sold to an investor.

The Company values non-agency reverse mortgage loans utilizing a present value methodology that discounts estimated projected cash flows over the life of the loan portfolio using prepayment, home price appreciation, pool-level losses, cost to service, and discount rates.

The following table presents the weighted average significant unobservable inputs used in the fair value measurement of non-agency reverse mortgage loans classified as reverse mortgage loans held for investment for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Weighted-average remaining life in years

     NM       8.0       NM       10.9  

Loan to value

     0.1% - 62.1     44.0     8.4% - 120.7     40.5

Conditional repayment rate

     NM       16.8     NM       11.7

Loss severity(1)

     NM       10.0     NM       10.0

Home price appreciation

     1.1% - 8.9     5.5     3.4% - 7.4     5.4

Discount rate

     NM       3.6     NM       4.4

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss severity represents the losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

 

 

F-41


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Commercial Mortgage Loans

Agricultural Loans

The agricultural loans are government-insured loans made to farmers to fund their inputs and operating expenses for the upcoming growing season with terms ranging from 7 - 17 months. The product is valued using a discounted cash flow model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.

The Company utilized the following weighted average assumptions in estimating the fair value of loans for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Discount rate

     NM       6.4     NM       8.0

Prepayment rate (CPR)

     0% - 1.0     0.7     0% - 1.0     0.3 %

Default rate (CDR)

     0% - 2.0     0.4     0% - 2.0     1.4

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

Fix & Flip

The Fix & Flip loans are short-term loans for individual real estate investors, with terms ranging from 9-18 months. This product is valued using a discounted cash flow model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.

The Company utilized the following weighted average assumptions in estimating the fair value of fix & flip mortgage loans for the periods indicated:

 

     December 31, 2019  
     Range of Input     Weighted Average
of Input
 

Prepayment rate (SMM)

     NM       11.4

Discount rate

     NM       5.5

Default rate (MDR)

     0% - 0.4     0.4

Loss frequency(1)

     0.1% - 0.4     0.1

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss frequency represents the frequency of losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

As of December 2020, management made the decision to change the classification of fix & flip loans from mortgage loans held for investment, at fair value to mortgage loans held for sale, at fair value.

Mortgage Loans Held for Sale, at Fair Value

Reverse Mortgage Loans

Reverse mortgage loans held for sale, at fair value, consists of unpoolable loans that the Company intends to sell to third party investors. Reverse mortgage loans held for sale consists primarily of performing repurchased loans. The fair value of performing unpoolable loans is based on expected claim proceeds from HUD upon assignment of the loans. In certain instances the loan balance may exceed the MCA. In these instances, the fair value is based on expected proceeds from sale of the underlying property and any additional HUD claim proceeds. The Company classifies reverse mortgage loans held for sale as Level 3 assets within the GAAP hierarchy.

Residential and Commercial Mortgage Loans

Mortgage loans held for sale include residential and commercial mortgage loans originated by the Company and held until sold to secondary market investors. The Company primarily originates conventional GSEs and government (FHA and Department of Veteran Affairs) residential mortgage loans (collectively “residential mortgage loans held for sale”) and recourse and nonrecourse commercial mortgage loans to owners and investors of single and multi-family residential rental properties (“commercial loans held for sale”).

 

 

F-42


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Residential Mortgage Loans

The Company originates or purchases mortgage loans in the U.S. that it intends to sell to FNMA, FHLMC, and GNMA (collectively “the Agencies”). Additionally, the Company originates or purchases mortgage loans in the U.S. that it intends to sell into the secondary markets via whole loan sales. Mortgage loans held for sale are typically pooled and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. In addition, the Company may originate loans that do not meet specific underwriting criteria and are not eligible to be sold to the Agencies. Two valuation methodologies are used to determine the fair value of mortgage loans held for sale. The methodology used depends on the exit market as described below:

Loans valued using observable market prices for identical or similar assets - This includes all mortgage loans that can be sold to the Agencies, which are valued predominantly by published forward agency prices. This will also include all non-agency loans where recently negotiated market prices for the loan pool exist with a counterparty (which approximates fair value), or quoted market prices for similar loans are available. As these valuations are derived from quoted market prices, the Company classified these valuations as Level 2 in the fair value disclosures. During periods of illiquidity of the mortgage marketplace, it may be necessary to look for alternative sources of value, including the whole loan purchase market for similar loans, and place more reliance on the valuations using internal models.

Loans valued using internal models – To the extent observable market prices are not available, the Company will determine the fair value of mortgage loans held for sale using a collateral based valuation model, which approximates expected cash proceeds on liquidation. For loans where bid prices or commitment prices are unavailable, these valuation models estimate the exit price the Company expects to receive in the loan’s principal market and are based on a combination of recent appraisal values, adjusted for certain loss factors. The Company classifies these valuations as Level 3 in the fair value disclosures.

Commercial Mortgage Loans

The Company primarily originates two separate commercial loan products that it classifies as held for sale: Single Rental Loan (“SRL”) and Portfolio Lending.

SRL

The SRL product is designed for small/individual real estate investors looking to purchase and then rent-out a single property. These are 30-year loans with fixed interest rates typically between 5.0% - 8.0%. This product is valued using a discounted cash flow model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.

The Company utilized the following weighted average assumptions in estimating the fair value of SRL mortgage loans held for sale for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Prepayment rate (CPR)

     1.0% - 17.1     15.4     1.0% - 29.4     21.5

Discount rate

     NM       5.0     NM       4.7

Default rate (CDR)

     1.0% - 64.9     3.6     1.0% - 51.0     1.6

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

Portfolio Lending

The Portfolio product is designed for larger investors with multiple properties. Specifically, these loans are useful for consolidating multiple rental property mortgages into a single loan. These loans have fixed coupons that typically range from 5.0% - 6.2%, with 5 and 10-year balloon structures, as well as a 30 year structure. This product is valued using a discounted cash flow model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.

 

 

F-43


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The Company utilized the following weighted average assumptions in estimating the fair value of Portfolio mortgage loans held for sale for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Prepayment rate (CPR)

     0% - 15.0     9.3     0% - 1.0     0.0

Discount rate

     NM       4.9     NM       5.0

Default rate (CDR)

     1.0% - 42.7     2.0     1.0% - 43.4%       1.0

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

Due to limited sales activity and periodically unobservable prices in certain of the Company’s markets, certain mortgage loans held for sale portfolios may transfer from Level 2 to Level 3 in future periods.

Fix & Flip

The Fix & Flip loans are short-term loans for individual real estate investors, with terms ranging from 9-18 months. This product is valued using a discounted cash flow model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.

The Company utilized the following weighted average assumptions in estimating the fair value of fix & flip mortgage loans for the periods indicated:

 

     December 31, 2020  
     Range of Input     Weighted Average
of Input
 

Prepayment rate (SMM)

     NM       12.4

Discount rate

     6.7% - 10.0     7.2

Default rate (MDR)(1)

     NM       N/A (1) 

Loss frequency(1)(2)

     NM       0.8

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

The Company determined that loss frequency is a significant input in the model. As such, the default rate is no longer considered a significant input for 2020.

(2) 

Loss frequency represents the frequency of losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

As of December 2020, management made the decision to change the classification of fix & flip loans from mortgage loans held for investment, at fair value to mortgage loans held for sale, at fair value.

Mortgage Servicing Rights

As of December 31, 2020, the Company valued mortgage servicing rights internally. The Company used a third party to provide valuations of the mortgage servicing rights as of December 31, 2019. The significant assumptions utilized to determine fair value are projected prepayments using the Public Securities Association Standard Prepayment Model, discount rates, and projected servicing costs that vary based on the loan type and delinquency. The Company classifies these valuations as Level 3 since they are dependent on unobservable inputs.

Fair value is derived through a discounted cash flow analysis and calculated using a computer pricing model. This computer valuation is based on the objective characteristics of the portfolio (loan amount, note rate, etc.) and commonly used industry assumptions (PSAs, etc.). The assumptions taken into account by the pricing model are those which many active purchasers of servicing employ in their evaluations of portfolios for sale in the secondary market. The unique characteristics of the secondary servicing market often dictate adjustments to parameters over short periods of time.

Subjective factors are also considered in the derivation of fair values, including levels of supply and demand for servicing, interest rate trends, and perception of risk not incorporated into prepayment assumptions.

Fair value is defined as the estimated price at which the servicing would change hands in the marketplace between a willing buyer and seller. The valuation assumes that neither party would be under any compulsion to buy or sell and that each has reasonably complete and accurate knowledge of all

 

F-44


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

relevant aspects of the offered servicing. The fair values represented in this analysis have been derived under the assumptions that sufficient time would be available to market the portfolio.

The following tables summarize certain information regarding the servicing portfolio of retained MSRs for the periods indicated:

 

     December 31, 2020     December 31, 2019  

Capitalization servicing rate

     0.8     0.9

Capitalization servicing multiple

     3.2       2.6  

Weighted-average servicing fee (in basis points)

     25       35  

The significant assumptions used in estimating the fair value of MSRs were as follows (in annual rates):

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted Average
of Input
    Range of Input     Weighted Average
of Input
 

Weighted-average prepayment speed (CPR)

     6.6% - 24.9     12.1     11.3% - 18.4     13.8

Discount rate

     NM       12.1     NM       10.3

Weighted-average delinquency rate

     1.2% - 9.2     1.3     1.9% - 37.5     6.3

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

The following table summarizes the estimated change in the fair value of MSRs from adverse changes in the significant assumptions (in thousands):

 

     December 31, 2020     

 

 
     Weighted
Average
Prepayment
Speed
     Discount
Rate
     Weighted
Average
Delinquency
Rate
 

Impact on fair value of 10% adverse change

   $ (7,355    $ (6,735    $ (119

Impact on fair value of 20% adverse change

     (14,139      (12,925      (237

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

Debt Securities, at Fair Value

Mortgage Backed Securities

The Company values mortgage backed securities utilizing a present value methodology that discounts estimated projected cash flows over the life of the investment using conditional prepayment rates, home price appreciation, expected loss severities and discount rates. The Company classifies mortgage backed securities as Level 3 assets within the GAAP hierarchy.

 

 

F-45


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The following table presents the weighted average significant unobservable inputs used in the fair value measurement of these assets for the periods indicated:

 

     December 31, 2019  
     Range of Input      Weighted Average
of Input
 

Weighted-average remaining life in years

     NM        1.8  

Conditional repayment rate

     NM        45.0

Loss severity(1)

     NM        10.0

Discount rate

     NM        3.0

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

 

(1) 

Loss severity represents the losses associated with loans that are liquidated through a foreclosure sale, net of claim proceeds.

Investments, at Fair Value

The Company invests in the equity of other companies in the form of common stock, preferred stock, or other in-substance equity interests. To the extent market prices are not observable, the Company engages third-party valuation experts to assist in determining the fair value of these investments. The values are determined utilizing a market approach which estimates fair value based on what other participants in the market have paid for reasonably similar assets that have been sold within a reasonable period from the valuation date. The Company classifies these valuations as Level 3 in the fair value disclosures.

Derivative Assets and Liabilities

Some of the derivatives held by the Company are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 1. In addition, the Company enters into IRLCs with prospective borrowers. Commitments to fund residential mortgage loans with potential borrowers are a binding agreement to lend funds to these potential borrowers at a specified interest rate within a specified period of time. The fair value of IRLCs is derived from the fair value of similar mortgage loans or bonds, which is based on observable market data. Changes to the fair value of IRLCs are recognized based on changes in interest rates, changes in the probability that the commitment will be exercised (pull through factor), and the passage of time. The expected net future cash flows related to the associated servicing of the loan are included in the fair value measurement of IRLCs. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. Given the unobservable nature of the pull through factor, IRLCs are classified as Level 3.

In addition, the Company executes derivative contracts, including forward commitments, TBAs, interest rate swaps, and interest rate swap futures, as part of its overall risk management strategy related to its reverse mortgage and commercial loan portfolios. The value of the forward commitments is estimated using current market prices for HMBS and are considered Level 3 in the fair value hierarchy. TBAs are valued based on forward dealer marks from the Company’s approved counterparties and are considered Level 2 in the fair value hierarchy. The value of interest rate swaps and interest rate swap futures is based on the exchange price or dealer market prices. The Company classifies interest rate swaps as Level 2 in the fair value hierarchy. The Company classifies interest rate swap futures as Level 1 in the fair value hierarchy. The value of the forward MBS is based on forward prices with dealers in such securities or internally-developed third party models utilizing observable market inputs. The Company classifies forward MBS as Level 2 in the fair value hierarchy.

HMBS Related Obligations, at Fair Value

The HMBS related obligation valuation considers the obligation to pass FHA insured cash flows through to the beneficial interest holders (repayment of secured borrowing) of the HMBS securities and the servicer and issuer obligations of the Company.

The valuation of the obligation to repay the secured borrowing is estimated using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The estimated fair value of the HMBS related obligations also includes the consideration required by a market participant to transfer the HECM and HMBS servicing obligations including exposure resulting from shortfalls in FHA insurance proceeds.

 

F-46


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The Company’s valuation considers assumptions that it believes a market participant would consider in valuing the liability, including, but not limited to, assumptions for repayment, costs to transfer servicing obligations, shortfalls in FHA insurance proceeds, and discount rates. The significant unobservable inputs used in the measurement include:

Borrower Repayment Rates - the conditional repayment rate curve considers borrower age and gender is based on historical termination rates.

Discount Rate - derived based on an assessment of current market yields and spreads that a market participant would consider for entering into an obligation to pass FHA insured cash flows through to holders of the HMBS beneficial interests. Yield spread applied over interpolated benchmark curve or as a spread over collateral forward curve.

The following table presents the weighted average significant unobservable inputs used in the fair value measurement of HMBS related obligations:

 

     December 31, 2020     December 31, 2019  
     Range of Input      Weighted Average
of Input
    Range of Input      Weighted Average
of Input
 

Conditional repayment rate

     NM        19.9     NM        21.4

Discount rate

     NM        1.4     NM        2.5

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

Nonrecourse Debt

Reverse Mortgage Loans

Outstanding notes issued that are securitized by nonrecourse debt are paid using the cash flows from the underlying reverse mortgage loans, which serve as collateral for the debt. Nonrecourse debt is estimated using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The significant unobservable inputs used in the measurement include:

Weighted Average Remaining Life - the projected remaining life is based on the expected conditional prepayment rate, which is utilized to determine future terminations.

Borrower Repayment Rates - the conditional repayment rate curve considers borrower age and gender is based on historical termination rates.

Discount Rate - derived based on an assessment of current market yields and spreads that a market participant would consider for entering into an obligation to pass FHA insured cash flows through to holders of the HMBS beneficial interests. Yield spread applied over interpolated benchmark curve or as a spread over collateral forward curve.

 

F-47


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The Company’s valuation considers assumptions that it believes a market participant would consider in valuing the liability, including, but not limited to, assumptions for prepayment and discount rates. The following table presents the weighted average significant unobservable inputs used in the fair value measurements of nonrecourse debt for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted
Average of
Input
    Range of Input     Weighted
Average of
Input
 

Nonperforming HECM securitizations

        

Weighted-average remaining life (in years)

     0.2 -1.5       1.0       0.1 -0.4       0.2  

Conditional repayment rate

     34.3% - 56.3     42.8     48% - 100     73.1

Discount rate

     NM       3.1     NM       3.8

Performing HECM securitizations

        

Weighted-average remaining life (in years)

     NM       —         NM       2.8  

Conditional repayment rate

     NM       —       NM       11.3

Discount rate

     NM       —       NM       3.3

Securitized Non-Agency Reverse

        

Weighted-average remaining life (in years)

     0.3 -  2.7       2.1       3.5 - 4.3       3.9  

Conditional repayment rate

     19.6% - 35.8     23.9     7.4% - 8.5     7.9

Discount rate

     NM       2.2     NM       4.1

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

Commercial Mortgage Loans

Outstanding nonrecourse notes issued that are securitized by loans held for investment, subject to nonrecourse debt, are paid using the cash flows from the underlying mortgage loans. The fair value of nonrecourse debt is estimated using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability.

The Company’s valuation considers assumptions that it believes a market participant would consider in valuing the liability, including, but not limited to, assumptions for prepayment and discount rates. The Company estimates prepayment speeds giving consideration that the Company may in the future transfer additional loans to the trust, subject to the availability of funds provided for within the trust. The following table presents the significant unobservable inputs used in the fair value measurements of nonrecourse debt for the periods indicated:

 

     December 31, 2020     December 31, 2019  
     Range of Input     Weighted
Average of
Input
    Range of Input     Weighted
Average of
Input
 

Nonrecourse Debt

        

Weighted-average remaining life (in months)

     1.9 - 4.1       3.4       4.4 - 4.8       4.6  

Weighted-average prepayment speed (SMM)

     17.7% - 32.0     21.4     12.7% - 16.5     14.6

Discount rate

     NM       5.8     NM       4.3

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

Deferred Purchase Price Liabilities

Deferred purchase price liabilities are measured using a present value of future payments which considers various assumptions, including future loan origination volumes, projected earnings and discount rates. As of December 31, 2020 and 2019, the Company utilized discount rates ranging from

 

F-48


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

12% to 21% to value the deferred purchase price liabilities. As this value is largely based on unobservable inputs, the Company classifies this liability as Level 3 in the fair value hierarchy.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given asset or liability is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Nonrecourse MSR Financing Liability, at Fair Value

In December 2020, the Company entered into agreements with third parties to sell beneficial interests in the servicing fees generated from its originated or acquired mortgage servicing rights. Under these agreements, the Company has agreed to sell to the third parties the right to receive all excess servicing and ancillary fees related to the identified mortgage servicing rights in exchange for an upfront payment equal to the entire purchase price of the acquired or originated mortgage servicing rights. For the year ended December 31, 2020, the Company had outstanding MSRs of $14.9 million pledged against this agreement.

Consistent with the underlying mortgage servicing rights, fair value is derived through a discounted cash flow analysis and calculated using a computer pricing model. This computer valuation is based on the objective characteristics of the portfolio (loan amount, note rate, etc.) and commonly used industry assumptions (PSAs, etc.). The assumptions taken into account by the pricing model are those which many active purchasers of servicing employ in their evaluations of portfolios for sale in the secondary market. The unique characteristics of the secondary servicing market often dictate adjustments to parameters over short periods of time.

Subjective factors are also considered in the derivation of fair values, including levels of supply and demand for servicing, interest rate trends, and perception of risk not incorporated into prepayment assumptions.

The Company classifies the valuations of the Nonrecourse MSR Financing Liability as Level 3 in the fair value disclosures.

The significant assumptions used in estimating the fair value of the outstanding nonrecourse MSR financing liability were as follows (in annual rates):

 

     December 31, 2020  
     Range of Input     Weighted Average
of Input
 

Weighted average prepayment speed (CPR)

     6.9% - 12.7     11.6

Discount rate

     11.7% - 12     12.0

Weighted average delinquency rate

     NM       1.8

“NM” - these “Not Meaningful” inputs do not have an applicable range, as they are a single derived input.

The following table summarizes the estimated change in the fair value of the nonrecourse MSR financing liability, at fair value from adverse changes in the significant assumptions (in thousands):

 

     December 31, 2020  
     Weighted
Average
Prepayment
Speed
     Discount
Rate
     Weighted
Average
Delinquency
Rate
 

Impact on fair value of 10% adverse change

   $ (701    $ (696    $ (8

Impact on fair value of 20% adverse change

     (1,348      (1,334      (15

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

 

F-49


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis (in thousands):

 

     December 31, 2020  
     Total Fair
Value
     Level 1      Level 2      Level 3  

Assets

           

Reverse mortgage loans held for investment, subject to HMBS related obligations

   $ 9,929,163      $ —        $ —        $ 9,929,163  

Mortgage loans held for investment, subject to nonrecourse debt:

           

Reverse mortgage loans

     5,057,624        —          —          5,057,624  

Fix & flip mortgage loans

     338,543        —          —          338,543  

Mortgage loans held for investment:

           

Reverse mortgage loans

     661,790        —          —          661,790  

Agricultural loans

     69,031        —          —          69,031  

Mortgage loans held for sale:

           

Residential mortgage loans

     2,080,585        —          2,069,957        10,628  

SRL

     60,467        —          —          60,467  

Portfolio

     38,850        —          —          38,850  

Fix & flip mortgage loans

     42,909        —          —          42,909  

Mortgage servicing rights

     180,684        —          —          180,684  

Investments

     18,934        —          —          18,934  

Derivative assets:

           

Forward commitments and TBAs

     1,806        —          722        1,084  

IRLCs

     87,576        —          —          87,576  

Interest rate swaps and interest rate swap futures

     2,683        2,683        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 18,570,645      $ 2,683      $ 2,070,679      $ 16,497,283  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

HMBS related obligation

   $ 9,788,668      $ —        $ —        $ 9,788,668  

Nonrecourse debt

     5,257,754        —          —          5,257,754  

Deferred purchase price liabilities

     3,842        —          —          3,842  

Nonrecourse MSR financing liability

     14,088        —          —          14,088  

Derivative liabilities:

           

Forward MBS

     18,634        —          18,634        —    

Forward commitments and TBAs

     1,332        —          248        1,084  

Interest rate swaps and interest rate swap futures

     755        711        44        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 15,085,073      $ 711      $ 18,926      $ 15,065,436  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-50


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

     December 31, 2019  
     Total Fair
Value
     Level 1      Level 2      Level 3  

Assets

           

Reverse mortgage loans held for investment, subject to HMBS related obligations

   $ 9,480,504      $ —        $ —        $ 9,480,504  

Mortgage loans held for investment, subject to nonrecourse debt:

           

Reverse mortgage loans

     3,067,970        —          —          3,067,970  

Fix & flip mortgage loans

     443,242        —          —          443,242  

Mortgage loans held for investment:

           

Reverse mortgage loans

     1,083,586        —          —          1,083,586  

Fix & flip mortgage loans

     319,117        —          —          319,117  

Agricultural loans

     11,370        —          —          11,370  

Mortgage loans held for sale:

           

Reverse mortgage loans

     66,421        —          —          66,421  

Residential mortgage loans

     1,086,744        —          1,068,601        18,143  

SRL

     78,652        —          —          78,652  

Portfolio

     19,757        —          —          19,757  

Mortgage servicing rights

     2,600        —          —          2,600  

Debt securities

     102,110        —          —          102,110  

Investments

     20,508        —          —          20,508  

Derivative assets:

           

Forward commitments and TBAs

     838        —          838        —    

IRLCs

     14,008        —          —          14,008  

Forward MBS

     348        —          348        —    

Interest rate swaps and interest rate swap futures

     359        359        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 15,798,134      $ 359      $ 1,069,787      $ 14,727,988  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

HMBS related obligation

   $ 9,320,209      $ —        $ —        $ 9,320,209  

Nonrecourse debt

     3,490,196        —          —          3,490,196  

Deferred purchase price liabilities

     4,300        —          —          4,300  

Derivative liabilities:

           

IRLCs

     68        —          —          68  

Forward MBS

     2,048        —          2,048        —    

Forward commitments and TBAs

     84        —          84        —    

Interest rate swaps and interest rate swap futures

     138        —          138        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 12,817,043      $ —        $ 2,270      $ 12,814,773  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-51


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3, in thousands):

 

     Assets  
December 31, 2020    Mortgage
loans held
for
investment
    Mortgage
loans held
for
investment,
subject to
nonrecourse
debt
    Mortgage
loans held
for sale
    Derivative
assets
     Mortgage
servicing
rights
     Debt
securities
    Investments  

Beginning balance

   $ 10,894,577     $ 3,511,212     $ 182,973     $ 14,008      $ 2,600      $ 102,260     $ 20,508  

Total gain or losses included in earnings

     627,251       304,663       (2,158     74,470        4,562        2,288       (5,512

Purchases, settlements and transfers

                

Purchases and additions, net

     3,616,667       136,838       409,467       182        173,522        24,489       3,938  

Sales and settlements

     (1,536,977     (1,285,902     (605,018     —          —          (129,037     —    

Transfers in/(out) between categories

     (2,941,534     2,729,356       167,590       —          —          —         —    
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 10,659,984     $ 5,396,167     $ 152,854     $ 88,660      $ 180,684      $ —       $ 18,934  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Liabilities  
December 31, 2020    HMBS related
obligations
    Derivative
liabilities
    Deferred purchase
price liability
    Nonrecourse debt     Nonrecourse MSR
Financing Liability
 

Beginning balance

   $ (9,320,209   $ (68   $ (4,300   $ (3,490,196   $ —    

Total gain or losses included in earnings

     (359,951     (834     (3,014     (294,802     798  

Purchases, settlements and transfers

          

Purchases and additions, net

     (2,051,953     (182     (138     (3,110,368     (15,101

Sales and settlements

     1,943,445       —         3,610       1,637,612       215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ (9,788,668   $ (1,084   $ (3,842   $ (5,257,754   $ (14,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Assets  
December 31, 2019    Mortgage
loans held
for
investment
    Mortgage
loans held

for
investment,
subject to
nonrecourse
debt
    Mortgage
loans held

for sale
    Derivative
assets
     Mortgage
servicing
rights
    Debt
securities
    Investments  

Beginning balance

   $ 10,847,040     $ 1,560,867     $ 153,290     $ 10,551      $ 3,376     $ 2,793     $ —    

Total gain or losses included in earnings

     827,357       118,861       69       3,457        (1,357     (2,646     —    

Purchases, settlements and transfers

 

Purchases and additions, net

     3,547,545       45,782       287,121       —          3,702       120,581       2,063  

Sales and settlements

     (956,483     (747,124     (1,086,352     —          (3,121     (18,468     —    

Transfers in/(out) between categories

     (3,370,882     2,532,826       828,845       —          —         —         18,445  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,894,577     $ 3,511,212     $ 182,973     $ 14,008      $ 2,600     $ 102,260     $ 20,508  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

F-52


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

     Liabilities  
December 31, 2019    HMBS related
obligations
     Derivative liabilities      Deferred purchase
price liability
     Nonrecourse debt  

Beginning balance

   $ (9,438,791    $ (215    $ (5,325    $ (1,592,592

Total gain or losses included in earnings

     (545,758      147        1,804        (112,794

Purchases, settlements and transfers

           

Purchases and additions, net

     (1,310,343      —          (1,673      (2,343,618

Sales and settlements

     1,974,683        —          894        558,808  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ (9,320,209    $ (68    $ (4,300    $ (3,490,196
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Option

Presented in the tables below are the fair value and UPB at December 31, 2020 and December 31, 2019, of assets and liabilities for which the Company has elected the fair value option (in thousands):

 

December 31, 2020    Estimated Fair
Value
     Unpaid Principal
Balance
 

Assets at fair value under the fair value option

     

Reverse mortgage loans held for investment, subject to HMBS related obligations

   $ 9,929,163        9,045,104  

Mortgage loans held for investment, subject to nonrecourse debt:

     

Reverse mortgage loans

     5,057,624        4,457,805  

Commercial mortgage loans

     338,543        333,344  

Mortgage loans held for investment:

     

Reverse mortgage loans

     661,790        589,429  

Commercial mortgage loans

     69,031        69,127  

Mortgage loans held for sale:

     

Residential mortgage loans

     2,080,585        2,000,795  

Commercial mortgage loans

     142,226        140,693  

Liabilities at fair value under the fair value option

     

HMBS related obligations

     9,788,668        9,045,104  

Nonrecourse debt

     5,257,754        5,155,017  

Nonrecourse MSR financing liability

     14,088        14,088  

 

F-53


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

December 31, 2019    Estimated Fair
Value
     Unpaid Principal
Balance
 

Assets at fair value under the fair value option

     

Reverse mortgage loans held for investment, subject to HMBS related obligations

   $ 9,480,504      $ 8,685,134  

Mortgage loans held for investment, subject to nonrecourse debt:

     

Reverse mortgage loans

     3,067,970        2,773,017  

Commercial mortgage loans

     443,242        429,269  

Mortgage loans held for investment:

     

Reverse mortgage loans

     1,083,586        1,004,739  

Commercial mortgage loans

     319,117        308,170  

Agricultural loans

     11,370        11,370  

Mortgage loans held for sale:

     

Residential mortgage loans

     1,086,744        1,058,493  

Reverse mortgage loans

     66,421        66,890  

Commercial mortgage loans

     98,409        96,631  

Debt securities:

     

Mortgage backed securities

     102,110        101,786  

Liabilities at fair value under the fair value option

     

HMBS related obligations

   $ 9,320,209      $ 8,685,134  

Nonrecourse debt

     3,490,196        3,494,686  

Net Fair Value Gains on Mortgage Loans and Related Obligations

Provided in the table below is a summary of the components of net fair value gains on mortgage loans and related obligations (in thousands):

 

     For the year ended December 31,  
     2020      2019      2018  

Net fair value gains (losses) on mortgage loans and related obligations:

        

Interest income on mortgage loans

   $ 709,679      $ 749,240      $ 568,378  

Change in fair value of mortgage loans

     294,238        272,709        219,076  

Change in fair value of mortgage backed securities

     2,438        (153      —    
  

 

 

    

 

 

    

 

 

 

Net fair value gains on mortgage loans

     1,006,355        1,021,796        787,454  
  

 

 

    

 

 

    

 

 

 

Interest expense on related obligations

     (526,690      (527,646      (441,421

Change in fair value of derivatives

     (12,482      (15,068      (3,120

Change in fair value of related obligations

     (155,484      (149,556      (32,049
  

 

 

    

 

 

    

 

 

 

Net fair value losses on related obligations

     (694,656      (692,270      (476,590
  

 

 

    

 

 

    

 

 

 

Net fair value gains on mortgage loans and related obligations

   $ 311,699      $ 329,526      $ 310,864  
  

 

 

    

 

 

    

 

 

 

As the cash flows on the underlying mortgage loans will be utilized to settle the outstanding obligations, the Company’s own credit risk would not impact the fair value on the outstanding HMBS liabilities and nonrecourse debt.

Fair Value of Other Financial Instruments

As of December 31, 2020 and December 31, 2019, all financial instruments were either recorded at fair value or the carrying value approximated fair value. For financial instruments that were not recorded at fair value, such as cash and cash equivalents including restricted cash, servicer advances and other financing lines of credit, the carrying value approximates fair value due to the short-term nature of such instruments.

 

F-54


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

6.

Reverse Mortgages Portfolio Composition

The table below summarizes the Company’s serviced reverse mortgage portfolio composition and the remaining UPBs of the reverse mortgage loan portfolio (in thousands):

 

     December 31,  
     2020      2019  

Reverse mortgage loans:

     

Reverse mortgage loans held for investment, subject to HMBS related obligations

   $ 9,045,104      $ 8,685,134  

Reverse mortgage loans held for investment:

     

Non-agency reverse mortgages

     215,688        674,507  

Loans not securitized(1)

     168,292        152,928  

Unpoolable loans(2)

     197,395        166,742  

Unpoolable tails

     8,054        10,562  
  

 

 

    

 

 

 

Total reverse mortgage loans held for investment

     589,429        1,004,739  

Reverse mortgage loans held for sale:

     

Performing HECM buyouts

     —          66,890  
  

 

 

    

 

 

 

Total reverse mortgage loans held for sale

     —          66,890  

Reverse mortgage loans held for investment, subject to nonrecourse debt:

     

Performing HECM buyouts

     141,691        192,602  

Nonperforming HECM buyouts

     538,768        426,576  

Non-agency reverse mortgages

     3,777,346        2,153,839  
  

 

 

    

 

 

 

Total reverse mortgage loans held for investment, subject to nonrecourse debt

     4,457,805        2,773,017  
  

 

 

    

 

 

 

Total owned reverse mortgage portfolio

     14,092,338        12,529,780  

Loans reclassified as government guaranteed receivable

     49,255        78,788  

Loans serviced for others

     123,324        340,534  
  

 

 

    

 

 

 

Total reverse mortgage loans serviced

   $ 14,264,917      $ 12,949,102  
  

 

 

    

 

 

 

 

(1)

Loans not securitized represent primarily newly originated loans.

(2) 

Unpoolable loans represent primarily loans that have reached 98% of their MCA.

The table below summarizes the owned reverse mortgage portfolio by product type (in thousands):

 

     December 31,  
     2020      2019  

Fixed rate loans

   $ 5,010,659      $ 4,708,098  

Adjustable rate loans

     9,081,679        7,821,682  
  

 

 

    

 

 

 

Total owned reverse mortgage portfolio

   $ 14,092,338      $ 12,529,780  
  

 

 

    

 

 

 

 

F-55


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

7.

Reverse Mortgage Loans Held for Investment, Subject to HMBS Related Obligations, at Fair Value

Reverse mortgage loans held for investment, subject to HMBS related obligations, at fair value, consisted of the following for the dates indicated (in thousands):

 

     December 31,  
     2020      2019  

Reverse mortgage loans held for investment, subject to HMBS related obligations - UPB

   $ 9,045,104      $ 8,685,134  

Fair value adjustments

     884,059        795,370  
  

 

 

    

 

 

 

Total reverse mortgage loans held for investment, subject to HMBS related obligations, at fair value

   $ 9,929,163      $ 9,480,504  
  

 

 

    

 

 

 

 

8.

Mortgage Loans Held for Investment, Subject to Nonrecourse Debt, at Fair Value

Mortgage loans held for investment, subject to nonrecourse debt, at fair value, consisted of the following for the dates indicated (in thousands):

 

     December 31,  
     2020      2019  

Mortgage loans held for investment, subject to nonrecourse debt - UPB:

     

Reverse mortgage loans

   $ 4,457,805      $ 2,773,017  

Commercial mortgage loans

     333,344        429,269  

Fair value adjustments

     605,018        308,926  
  

 

 

    

 

 

 

Total mortgage loans held for investment, subject to nonrecourse debt, at fair value

   $ 5,396,167      $ 3,511,212  
  

 

 

    

 

 

 

The table below shows the total amount of mortgage loans held for investment, subject to nonrecourse debt that were greater than 90 days past due and on non-accrual status (in thousands):

 

     December 31,  
Loans 90 Days or More Past Due and on Non-Accrual Status    2020      2019  

Mortgage loans held for sale:

     

Fair value:

     

Commercial mortgage loans

     32,377        9,069  
  

 

 

    

 

 

 

Total fair value

     32,377        9,069  
  

 

 

    

 

 

 

Aggregate UPB:

     

Commercial mortgage loans

     33,888        8,823  
  

 

 

    

 

 

 

Total aggregate UPB

     33,888        8,823  
  

 

 

    

 

 

 

Difference

   $ (1,511 )     $ 246  
  

 

 

    

 

 

 

 

F-56


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

9.

Mortgage Loans Held for Investment, at Fair Value

Mortgage loans held for investment, at fair value, consisted of the following for the dates indicated (in thousands):

 

     December 31,  
     2020      2019  

Mortgage loans held for investment - UPB:

     

Reverse mortgage loans

   $ 589,429      $ 1,004,739  

Commercial mortgage loans

     69,127        308,170  

Residential mortgage loans

     —          11,370  

Fair value adjustments

     72,265        89,794  
  

 

 

    

 

 

 

Total mortgage loans held for investment, at fair value

   $ 730,821      $ 1,414,073  
  

 

 

    

 

 

 

 

10.

Mortgage Loans Held for Sale, at Fair Value

Mortgage loans held for sale, at fair value, consisted of the following for the dates indicated (in thousands):

 

     December 31,  
     2020      2019  

Mortgage loans held for sale - UPB:

     

Residential mortgage loans

   $ 2,000,795      $ 1,058,493  

Reverse mortgage loans

     —          66,890  

Commercial mortgage loans

     140,693        96,631  

Fair value adjustments

     81,323        29,560  
  

 

 

    

 

 

 

Total mortgage loans held for sale, at fair value

   $ 2,222,811      $ 1,251,574  
  

 

 

    

 

 

 

The table below shows the total amount of mortgage loans held for sale that were greater than 90 days past due and on non-accrual status (in thousands):

 

     December 31,  
Loans 90 Days or More Past Due and on Non-Accrual Status    2020      2019  

Mortgage loans held for sale:

     

Fair value:

     

Residential mortgage loans

   $ (2,608    $ (2,499

Commercial mortgage loans

     (5,051      (21,007
  

 

 

    

 

 

 

Total fair value

     (7,659      (23,506
  

 

 

    

 

 

 

Aggregate UPB:

     

Residential mortgage loans

     13,236        3,018  

Commercial mortgage loans

     5,317        20,871  
  

 

 

    

 

 

 

Total aggregate UPB

     18,553        23,889  
  

 

 

    

 

 

 

Difference

   $ 10,894      $ 383  
  

 

 

    

 

 

 

The Company originates or purchases and sells mortgage loans in the secondary mortgage market without recourse for credit losses. However, the Company at times maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.

 

F-57


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The following table summarizes cash flows between the Company and transferees as a result of the sale of mortgage loans in transactions where the Company maintains continuing involvement with the mortgage loans (in thousands):

 

     For the year ended December 31,  
     2020      2019      2018  

Cash flows:

        

Sales proceeds

   $ 21,410,022      $ 461,956      $ 154,665  

Fair value of retained beneficial interest(1)

     161,201        3,775        1,481  

Gross servicing fees received

     18,526        1,679        4,833  

Repurchases

     (3,679      (2,457      (19,122

Gain

     940,234        20,445        14,567  

 

(1) 

Fair value of retained beneficial interest includes retained servicing rights and other beneficial interests retained as of the balance sheet date.

 

11.

Mortgage Servicing Rights, at Fair Value

The servicing portfolio associated with capitalized servicing rights consists of the following (in thousands):

 

     December 31,  
     2020     2019  

Fannie Mae/Freddie Mac

   $ 20,501,504     $ 129,322  

Ginnie Mae

     1,727,831       104,527  

Private investors

     40,027       54,208  
  

 

 

   

 

 

 

Total UPB

   $ 22,269,362     $ 288,057  
  

 

 

   

 

 

 

Weighted average interest rate

     3.1     4.4

The activity in the loan servicing portfolio associated with capitalized servicing rights consisted of (in thousands):

 

     For the year ended December 31,  
     2020      2019  

Beginning balance

   $ 288,057      $ 283,229  

Originated MSR

     21,241,997        379,171  

Purchased MSR

     1,966,657        —    

Payoffs, sales and curtailments

     (1,227,349      (374,343
  

 

 

    

 

 

 

Total UPB

   $ 22,269,362      $ 288,057  
  

 

 

    

 

 

 

 

F-58


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The activity in the mortgage servicing rights asset consisted of the following (in thousands):

 

     For the year ended December 31,  
     2020      2019      2018  

Beginning balance

   $ 2,600      $ 3,376      $ 17,747  

Originations

     159,434        3,702        1,066  

Purchases

     14,088        —          —    

Sale of servicing rights

     —          (3,121      (17,167

Changes in fair value due to:

        

Changes in market inputs or assumptions used in valuation model

     14,817        (328      3,635  

Changes in fair value due to portfolio runoff and other

     (10,255      (1,029      (1,905
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 180,684      $ 2,600      $ 3,376  
  

 

 

    

 

 

    

 

 

 

The value of MSRs is driven by the net positive cash flows associated with servicing activities. The cash flows include contractually specified servicing fees, late fees, and other ancillary servicing revenue. The fees were $18.1 million, $0.8 million, and $2.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. These fees are recorded within fee income on the Consolidated Statements of Operations and Comprehensive Income. The following table provides a summary of non-performing loans:

 

     December 31, 2020     December 31, 2019  
     Number of
Loans
    Unpaid
Balance
    Number of
Loans
    Unpaid
Balance
 

Portfolio delinquency (1)

        

30 days

     0.5     0.5     3.8     3.7

60 days

     0.1     0.1     0.9     0.9

90 or more days

     0.2     0.1     1.6     1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     0.8     0.7     6.3     6.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreclosure/real estate owned

     0.0     0.0     1.5     1.4

 

(1) 

Represents the loan servicing portfolio delinquencies as a percentage of the total number of loans and the total unpaid balance of the portfolio.

 

12.

Derivatives and Risk Management Activities

The Company’s principal market exposure is to interest rate risk, specifically long-term U.S. Treasury and mortgage interest rates, due to their impact on mortgage-related assets and commitments. The Company is also subject to changes in short-term interest rates, such as LIBOR, due to their impact on certain variable rate asset-backed debt such as warehouse lines of credit. Various financial instruments are used to manage and reduce this risk, including forward delivery commitments on mortgage-backed securities or whole loans and interest rate swaps.

The Company did not have any derivative instruments designated as hedging instruments or subject to master netting and collateral agreements as of and for the years ended December 31, 2020, 2019 and 2018.

 

F-59


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

The following tables summarize the amounts recorded in derivative assets and payables and other liabilities related to derivative liabilities in the Consolidated Statements of Financial Condition for the periods indicated (in thousands):

 

     December 31, 2020  
     Derivative assets     Derivative liabilities  
     Fair
Value
     Notional
Amount
     Unrealized
gains
(losses)
    Fair
Value
     Notional
Amount
     Unrealized
gains
(losses)
 

Interest rate lock commitments

   $ 87,576      $ 2,897,479      $ 73,568     $ —        $ 13,822      $ 68  

Forward commitments and TBAs securities

     1,806        399,612        968       1,332        389,422        (1,248

Interest rate swaps and swap futures contracts

     2,683        1,386,400        2,324       755        744,500        (617

Forward MBS

     —          —          (348     18,635        3,187,000        (16,587
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net fair value of derivative financial instruments

   $ 92,065      $ 4,683,491      $ 76,512     $ 20,722      $ 4,334,744      $ (18,384
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31, 2019  
     Derivative assets      Derivative liabilities  
     Fair
Value
     Notional
Amount
     Unrealized
gains
     Fair
Value
     Notional
Amount
     Unrealized
gains
 

Interest rate lock commitments

   $ 14,008      $ 914,606      $ 3,457      $ 68      $ 20,630      $ 147  

Forward commitments and TBAs securities

     838        36,167        481        84        100,000        45  

Interest rate swaps and swap futures contracts

     359        43,500        35        138        185,600        291  

Forward MBS

     348        217,000        323        2,048        996,500        2,259  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value of derivative financial instruments

   $ 15,553      $ 1,211,273      $ 4,296      $ 2,338      $ 1,302,730      $ 2,742  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company is exposed to risk in the event of non-performance by counterparties in their derivative contracts. In general, the Company manages such risk by evaluating the financial position and creditworthiness of counterparties, monitoring the amount of exposure and/or dispersing the risk among multiple counterparties. While the Company does not presently have master netting arrangements with its derivative counterparties, it does either maintain or place cash as margin collateral with its clearing broker to the extent the relative value of its derivatives are above or below their initial strike price. The Company pledged initial deposits of $1.8 million and $2.7 million as of December 31, 2020 and 2019, respectively. Additional deposits of $10.2 million were pledged as of December 31, 2020 as a result of changes in fair value of these derivatives subsequent to the trade date. Total margin collateral is included in other assets, net, in the Consolidated Statements of Financial Condition.

 

13.

Fixed Assets and Leasehold Improvements, Net

Fixed assets and leasehold improvements, net, consisted of the following (in thousands):

 

     December 31,         
     2020      2019      Estimated
Useful Life
 

Computer hardware and software

   $ 53,584      $ 44,538        3 - 5 years  

Furniture and fixtures

     5,039        4,698        5-7 years  

Leasehold improvements

     3,102        2,467        *  

Building under lease

     —          1,241        10 years  

Vehicles

     92        87        10 years  
  

 

 

    

 

 

    

Total fixed assets

     61,817        53,031     

Less: Accumulated depreciation

     (37,305      (26,345   
  

 

 

    

 

 

    

Total fixed assets and leasehold improvements, net

   $ 24,512      $ 26,686     
  

 

 

    

 

 

    

 

*

Shorter of life of lease or useful life of assets.

 

F-60


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

Depreciation expense was $11.3 million, $10.1 million, and $6.5 million for the years ended December 31, 2020, 2019, and 2018 respectively, which is included in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.

 

14.

Goodwill

During the annual qualitative assessment of goodwill for the year ended December 31, 2020, the Company determined that it is not more likely than not that the fair value of any reporting unit is less than their carrying amounts. For the year ended December 31, 2019, the Company determined that goodwill within one of the operating segments was impaired and recorded impairment expense of $0.4 million in general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income. The Company did not identify any impairment for the year ended December 31, 2018.

Goodwill consisted of the following (in thousands):

 

     December 31,  
     2020      2019  

Beginning balance

   $ 121,137      $ 119,275  

Additions from acquisitions

     96        2,284  

Impairment

     —          (422
  

 

 

    

 

 

 

Ending balance

   $ 121,233      $ 121,137  
  

 

 

    

 

 

 

The Company performs the annual goodwill impairment test as of October 1 and monitors for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. In connection with the review of our financial condition in light of the COVID-19 pandemic, management determined that one or more triggering events had occurred as a result of the effects the COVID-19 pandemic had on the national and global economy. As a result, the Company conducted a quantitative goodwill impairment test for its Commercial Originations and Portfolio Management reporting units as of June 30, 2020. Based upon management’s quantitative assessment of goodwill, the Company determined that the fair value of the reporting units continued to exceed the carrying value of the reporting units at June 30, 2020. In addition, the Company performed a qualitative assessment for all reporting units during the third quarter of 2020 and determined that it was more likely than not that no impairment of goodwill existed at December 31, 2020. During the year ended December 31, 2019, there was also no goodwill impairment recorded.

The amount of goodwill allocated to each reporting unit consisted of the following (in thousands):

 

     December 31,  
     2020      2019  

Reporting units:

     

Mortgage Originations

   $ 44,429      $ 44,429  

Commercial Originations

     43,113        43,113  

Lender Services

     25,247        25,151  

Portfolio Management

     8,444        8,444  
  

 

 

    

 

 

 

Total goodwill

   $ 121,233      $ 121,137  
  

 

 

    

 

 

 

 

F-61


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

15.

Intangible Assets, Net

Intangible assets, net, consisted of the following (in thousands):

 

December 31, 2020    Amortization
Period
(Years)
     Cost      Accumulated
Amortization
     Net  

Non-amortizing Intangibles

           

Domain name

     N/A      $ 5,422      $ —        $ 5,422  
     

 

 

    

 

 

    

 

 

 

Total non-amortizing intangibles

      $ 5,422      $ —        $ 5,422  
     

 

 

    

 

 

    

 

 

 

Amortizing Intangibles

           

Customer list

     5 - 12      $ 12,754      $ (5,100    $ 7,654  

Broker relationships

     10        7,627        (5,429      2,198  

Trade names

     5 - 20        2,495        (1,487      1,008  

Technology assets

     5        805        (156      649  
     

 

 

    

 

 

    

 

 

 

Total amortizing intangibles

      $ 23,681      $ (12,172    $ 11,509  
     

 

 

    

 

 

    

 

 

 

Total intangible assets, net

      $ 29,103      $ (12,172    $ 16,931  
     

 

 

    

 

 

    

 

 

 

 

December 31, 2019    Amortization
Period
(Years)
     Cost      Accumulated
Amortization
     Net  

Non-amortizing Intangibles

           

Domain name

     N/A      $ 5,422      $ —        $ 5,422  
     

 

 

    

 

 

    

 

 

 

Total non-amortizing intangibles

      $ 5,422      $ —        $ 5,422  
     

 

 

    

 

 

    

 

 

 

Amortizing Intangibles

           

Customer list

     5 - 12      $ 12,730      $ (3,843    $ 8,887  

Broker relationships

     10        7,717        (4,594      3,123  

Trade names

     5 - 20        2,386        (1,165      1,221  

Technology assets

     5        146        (56      90  
     

 

 

    

 

 

    

 

 

 

Total amortizing intangibles

      $ 22,979      $ (9,658    $ 13,321  
     

 

 

    

 

 

    

 

 

 

Total intangible assets, net

      $ 28,401      $ (9,658    $ 18,743  
     

 

 

    

 

 

    

 

 

 

Amortization expense was $2.5 million, $2.6 million and $3.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The estimated amortization expense for each of the five succeeding fiscal years and thereafter as of December 31, 2020 is as follows (in thousands):

 

Year Ending December 31,

   Amount  

2021

   $ 2,478  

2022

     2,463  

2023

     1,638  

2024

     1,270  

2025

     999  

Thereafter

     2,661  
  

 

 

 

Total future amortization expense

   $ 11,509  
  

 

 

 

 

F-62


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

16.

Other Assets, Net

Other assets, net, consisted of the following (in thousands):

 

     December 31,  
     2020      2019  

Receivables, net of allowance of $788 and $795, respectively

   $ 67,011      $ 31,736  

ROU assets

     46,609        57,393  

Government guaranteed receivables, net

     46,481        75,080  

Loans subject to repurchase from GNMA

     42,148        5,663  

Investments, at fair value

     18,934        20,508  

Prepaid expenses

     17,536        10,173  

Deposits

     14,188        2,418  

Servicer advances, net of allowance of $1,661 and $1,299, respectively

     5,795        5,570  

Receivable from clearing organization

     2,043        1,018  

Other

     37,328        32,281  
  

 

 

    

 

 

 

Total other assets, net

   $ 298,073      $ 241,840  
  

 

 

    

 

 

 

As of December 31, 2020 and 2019, there were $380.3 million and $452.0 million, respectively, of foreclosure proceedings in process which are included in mortgage loans held for investment, at fair value, on the Consolidated Statements of Financial Condition.

 

17.

HMBS Related Obligations, at Fair Value

HMBS related obligations represent the issuance of pools of HMBS, which are guaranteed by GNMA, to third-party security holders. The Company accounts for the transfers of these advances in the related HECM loans as secured borrowings, retaining the initial HECM loans in its Consolidated Statements of Financial Condition as reverse mortgage loans held for investment, subject to HMBS related obligations, and recording the pooled HMBS as HMBS related obligations. Monthly cash flows generated from the HECM loans are used to service the outstanding HMBS.

HMBS related obligations, at fair value, consisted of the following as of December 31, 2020 and 2019 (in thousands):

 

     December 31,  
     2020     2019  

GNMA loan pools - UPB

   $ 9,045,104     $ 8,685,134  

Fair value adjustments

     743,564       635,075  
  

 

 

   

 

 

 

Total HMBS related obligations, at fair value

   $ 9,788,668     $ 9,320,209  
  

 

 

   

 

 

 

Weighted average remaining life

     4.5       3.4  

Weighted average interest rate

     3.0     4.4

The Company was servicing 1,693 and 1,573 GNMA loan pools at December 31, 2020 and 2019, respectively.

 

F-63


Finance of America Equity Capital LLC and Subsidiaries

Notes to Consolidated Financial Statements

 

 

 

18.

Nonrecourse Debt, at Fair Value

Nonrecourse debt, at fair value, consisted of the following for the dates indicated (in thousands):

 

     Issue Date    Class of
Note
     Final Maturity
Date
     Interest Rate     Original
Issue
Amount
     December 31,  
     2020      2019  

Securitization of nonperforming HECM loans:

 

             

2020 FASST HB2

   July 2020     

A, M1,
M2, M3,
M4, M5
 
 
 
     July 2030        1.71% - 7.75   $ 594,171      $ 476,147      $ —    

2020 FASST HB1

   February 2020     

A, M1,
M2, M3,
M4, M5
 
 
 
     February 2030        2.0% - 6.0     373,912        298,883        —    

2019 FASST HB1

   April 2019     

A, M1,
M2, M3,
M4, M5
 
 
 
     April 2029        3.3% - 6.0     309,015        —          237,013  

2018 FASST HB1

   October 2018     

A, M1,
M2, M3,
M4, M5
 
 
 
     September 2028        2.3     399,031        —          223,147  

Securitization of performing HECM loans:

                   

2019 FAHB 19-1

   December 2019     


A, M1,
M2, M3,
AM1,
AM2
 
 
 
 
     December 2049        2.7% - 4.0     267,146        —          254,425  

Securitization of proprietary jumbo reverse loans:

 

          

2019 FASST JR2

   June 2019      A, A2        June 2069        2.0     499,000        440,141        469,828  

2018 FASST JR1

   May 2018      A        May 2068        4.3     559,197        428,671        501,145  

2019 FASST JR3

   September 2019      A        September 2069        2.0     450,104        404,057        428,335