Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

v3.23.1
Summary of Significant Accounting Policies
 3 Months Ended
Mar. 31, 2023
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements comprise the financial statements of FoA and its controlled subsidiaries for the three months ended March 31, 2023 and 2022, respectively. The condensed consolidated financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") for interim financial statements and pursuant to the accounting and disclosure rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). The accompanying financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of its financial condition as of March 31, 2023 and its results of operations and cash flows for the three months ended March 31, 2023 and 2022. The Condensed Consolidated Statement of Financial Condition at December 31, 2022 was derived from audited financial statements but does not contain all of the footnote disclosures from the annual financial statements. Operating results for the interim periods are not necessarily indicative of the results that may be expected for any future period or for the full year. The condensed consolidated financial statements, including the significant accounting policies, should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2022 within the Company's Annual Report on Form 10-K ("Form 10-K"). There have not been any material changes to our critical accounting policies and estimates as disclosed in the Form 10-K, except for the valuation of the Company's MSR is no longer considered a critical accounting estimate.
The significant accounting policies, together with the other notes that follow, are an integral part of the condensed consolidated financial statements.
Use of Estimates
The preparation of condensed 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 condensed 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.
Liquidity and Going Concern
For the year ended December 31, 2022, the Company incurred net losses of approximately $715.5 million, including operational losses in its discontinued Mortgage Originations, Commercial Originations, and Lender Services segments. Revenues generated for 2022 were negatively impacted by macroeconomic factors including persistent high inflation and increased market interest rates. These factors significantly reduced customer demand and compressed margins in our business segments. The Company also observed significantly widened market spreads for assets that we hold for investment at fair value, which combined with higher interest rates, resulted in negative fair value adjustments. These fair value losses recognized in accordance with GAAP resulted in the Company using cash during 2022 to pay down or repay certain credit facilities. During the first quarter of 2023, the Company generated $58.0 million in pre-tax income from its continuing operations, however, macroeconomic factors continued to impact our discontinued operations, resulting in a $37.5 million pre-tax net loss for discontinued operations and overall pre-tax income of $20.5 million for the Company. At March 31, 2023, the Company had total equity of $490.4 million, net of an accumulated deficit of $631.2 million. As of December 31, 2022 and March 31, 2023, the Company was in violation of the profitability and other covenants for certain of its warehouse lending facilities. The Company has subsequently obtained financial covenant waivers, amendments to such financial covenants, or paid off the lines of credit, in order to avoid breaching such financial covenants.
When evaluated in the aggregate, and before consideration of management’s plans, these conditions raise questions as to our ability to meet our obligations and covenants for the twelve-month and a day period from the date of the issuance of the condensed consolidated financial statements.
To address the conditions noted above, Management has taken certain actions, including the prior extension of its revolving working capital lines of credit which mature on May 15, 2024, and the actions described in Note 3 - Acquisitions and Note 4 - Discontinued Operations, and is implementing the following plans and actions that we believe will address the Company’s liquidity needs over at least the twelve-month period and a day from the date of the issuance of the condensed consolidated financial statements.
On February 1, 2023, the Company entered into an agreement to sell BNT and ANTIC for a cash purchase price of $100.0 million, which is expected to close in the third quarter 2023. Additionally, the Company expects to continue to renew its warehouse lines of credit in the normal course of its operations at terms consistent with its operating needs.
The Company believes management’s plans, as described above, combined with its normal operating results will provide sufficient liquidity to meet the financial obligations and covenants over at least the twelve-month and a day period from the date the condensed consolidated financial statements are issued and that the execution of these plans is probable.
Asset Acquisitions and Business Combinations
In accordance with Accounting Standards Codification ("ASC") 805, Business Combinations ("ASC 805"), as of the acquisition date, the Company evaluates acquisitions to determine whether the Company has acquired a business or a group of assets. The evaluation includes a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. The results of this evaluation impacts whether the Company accounts for an acquisition under business combination or asset acquisition guidance.
If the screen test is met, the acquisition is not considered to be a business, and is instead accounted for as an asset acquisition. Under ASC 805, asset acquisitions are measured following a cost accumulation and allocation model, whereby the costs to acquire the assets, including transaction costs, are accumulated and then allocated to the individual assets and liabilities acquired based upon their estimated fair values. No goodwill or bargain purchase gain is recognized in an asset acquisition.
The Company applies the acquisition method to all transactions and other events in which the entity obtains control over one or more other businesses. Under business combination, 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.
Under ASC 805, there is an option to apply push-down accounting, which establishes a new basis for the assets and liabilities of the acquired company based on a “push-down” of the acquirer’s stepped-up basis. The push-down accounting election is made in the reporting period in which the change in control event occurs. Refer to Note 3 - Acquisitions for further information about the Company’s acquisition related transactions.
Discontinued Operations and Assets Held for Sale
The Company classifies assets and liabilities as held for sale when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. We also consider whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate it is unlikely significant changes to the plan will be made or the plan will be withdrawn.
In accordance with ASC 205, Presentation of Financial Statements ("ASC 205"), we classify operations as discontinued when they meet all the criteria to be classified as held for sale and when the sale represents a strategic shift that will have a major impact on our financial condition and results of operations. The Company considers a component of the entity that is being exited to be discontinued operations when all operations, including wind-down operations, cease.
Recently Issued Accounting Guidance, Not Yet Adopted as of March 31, 2023
Standard Description Date of Planned Adoption Effect on Condensed 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







ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 		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 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.

In December 2022, the FASB issued ASU 2022-06 that defers the sunset date for applying the reference rate reform relief in Topic 848 to December 31, 2024 (originally December 31, 2022), thereby extending the period over which entities can apply the guidance in ASU 2020-04, which provides “optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.” 		TBD This ASU is effective from March 12, 2020 through December 31, 2024.

The Company continues to monitor the impact associated with reference rate reform, and will apply the amendments in these updates to account for contract modifications due to changes in reference rates once those occur. The adoption of this standard is not expected to have a material impact on our condensed consolidated financial statements and related disclosures.
ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions The amendments in this Update clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments in this Update also require the following disclosures for equity securities subject to contractual sale restrictions:

1. The fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet
2. The nature and remaining duration of the restriction(s)
3. The circumstances that could cause a lapse in the restriction(s). 		January 1, 2024 This ASU is effective for fiscal years beginning after December 15, 2023.

The adoption of this standard is not expected to have a material impact on our condensed consolidated financial statements and related disclosures.
Business Segment Reporting
22. Business Segment Reporting
The following tables are a presentation of financial information by segment for the periods indicated (in thousands):
For the three months ended March 31, 2023
Retirement Solutions Portfolio Management Total Operating Segments Corporate and Other Eliminations Total
REVENUES
Gain (loss) on sale and other income from loans held for sale, net $ (1,312) $ (11,058) $ (12,370) $ —  $ (56) $ (12,426)
Net fair value gains on loans and related obligations 24,475  151,919  176,394  —  —  176,394 
Fee income 3,180  5,463  8,643  2,953  (5,244) 6,352 
Net interest expense — 
Interest income —  1,470  1,470  621  —  2,091 
Interest expense —  (23,996) (23,996) (7,560) —  (31,556)
Net interest expense —  (22,526) (22,526) (6,939) —  (29,465)
Total revenues 26,343  123,798  150,141  (3,986) (5,300) 140,855 
Total expenses 35,524  24,679  60,203  28,874  (5,300) 83,777 
Other, net 31  —  31  905  —  936 
Net income (loss) before taxes $ (9,150) $ 99,119  $ 89,969  $ (31,955) $ —  $ 58,014 
Depreciation and amortization $ 9,643  $ 14  $ 9,657  $ 448  $ —  $ 10,105 
Total assets $ 296,417  $ 26,327,259  $ 26,623,676  $ 1,912,801  $ (1,861,938) $ 26,674,539 

For the three months ended March 31, 2022
Retirement Solutions Portfolio Management Total Operating Segments Corporate and Other Eliminations Total
REVENUES
Gain on sale and other income from loans held for sale, net $ —  $ 10,928  $ 10,928  $ —  $ (4,707) $ 6,221 
Net fair value gains (losses) on loans and related obligations 105,755  (102,785) 2,970  —  3,990  6,960 
Fee income 3,805  54,525  58,330  9,039  (12,196) 55,173 
Net interest expense
Interest income 43  1,047  1,090  94  —  1,184 
Interest expense (54) (16,723) (16,777) (6,703) —  (23,480)
Net interest expense (11) (15,676) (15,687) (6,609) —  (22,296)
Total revenues 109,549  (53,008) 56,541  2,430  (12,913) 46,058 
Total expenses 47,427  34,711  82,138  38,283  (13,018) 107,403 
Other, net 3,214  27  3,241  (152) (105) 2,984 
Net income (loss) before taxes $ 65,336  $ (87,692) $ (22,356) $ (36,005) $ —  $ (58,361)
Depreciation and amortization $ 9,598  $ 91  $ 9,689  $ 509  $ —  $ 10,198 
Total assets $ 417,791  $ 19,628,648  $ 20,046,439  $ 1,769,059  $ (1,734,835) $ 20,080,663 
The Company has identified three reportable segments: Retirement Solutions, Portfolio Management, and Corporate and Other.
Retirement Solutions
Our Retirement Solutions segment is where we fulfill our goal to help older homeowners achieve their financial goals in retirement. This segment includes all loan origination activity for the Company, including reverse mortgage and home improvement loans. We originate or acquire reverse mortgage loans through our FAR operating subsidiary. This segment originates HECM and non-agency reverse mortgages. We securitize HECM into HMBS, which Ginnie Mae guarantees, and sell them in the secondary market while retaining the rights to service. Non-agency reverse mortgages, which complement the FHA HECM for higher value homes, may be sold as whole loans to investors or held for investment and pledged as collateral to securitized nonrecourse debt obligations. Non-agency reverse mortgage loans are not insured by the FHA. We originate reverse mortgage loans through a retail channel (consisting primarily of field offices and a centralized retail platform) and a third-party originator channel (consisting primarily of a network of mortgage brokers).
Additionally, this segment originates home improvement loans through our FAM subsidiary. Through these operations, the Company assists homeowners in the financing of short-term home improvement projects such as windows, HVAC, or remodeling, and relies on a network of partner contractors across the country to acquire, interact with, and serve these customers. These home improvement loans are then sold in the secondary market through our capital markets platform.
Portfolio Management
Our Portfolio Management segment provides product development, loan securitization, loan sales, risk management, servicing oversight, and asset management services to the enterprise. As part of the vertical integration of our business, our Portfolio Management team acts as the connector between borrowers and investors. The direct connections to investors, provided by our Financial Industry Regulatory Authority registered broker-dealer, allows us to innovate and manage risk through better price and product discovery. Given our scale, we are able to work directly with investors and where appropriate, retain assets on balance sheet for attractive return opportunities. These retained investments are a source of growing and recurring earnings. The Portfolio Management segment generates revenue and earnings in the form of gains on sale of loans, fair value gains on portfolio assets, interest income, and fee income related to mortgage servicing rights, underwriting, advisory, valuation, and other ancillary services.
Corporate and Other
Our Corporate and Other segment consists of our corporate services groups.
The Company's segments are based upon the Company's organizational structure which focuses primarily on the services offered. Corporate functional expenses are allocated to individual segments based on actual cost of services performed based on a direct resource utilization, estimate of percentage use for shared services or headcount percentage for certain functions. Non-allocated corporate expenses include administrative costs of executive management and other corporate functions that are not directly attributable to the Company's operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties. To reconcile the Company's consolidated results, certain inter-segment revenues and expenses are eliminated in the "Eliminations" column in the previous tables.