Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

v3.23.2
Summary of Significant Accounting Policies
 6 Months Ended
Jun. 30, 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 and six months ended June 30, 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 June 30, 2023, its results of operations for the three and six months ended June 30, 2023 and 2022, and its cash flows for the six months ended June 30, 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").
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
During the first half of 2023, the operating results of the Company were negatively impacted by macroeconomic factors including persistent high inflation and increased market interest rates. These factors significantly reduced customer demand and compressed margins. 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. As a result, for the six months ended June 30, 2023, the Company generated net losses of $165.1 million from its continuing operations largely due to these noncash fair value adjustments. Cash flows have also been negatively affected by the above factors and the discontinuation of our previously reported mortgage originations, commercial originations, and lender services businesses. As of June 30, 2023, the Company had total equity of $274 million, net of an accumulated deficit of $710 million.
In light of the conditions noted above, Management has extended the maturity date of its revolving working capital lines of credit to November 30, 2024, and has taken the actions described in Note 4 - Discontinued Operations and Note 3 - Acquisitions.
The Company was not in compliance with certain financial covenants with its warehouse lending facilities as of December 31, 2022, March 31, 2023 and June 30, 2023. Subsequent to each measurement date, the Company obtained financial covenant waivers, amended such financial covenants, or paid off the respective lines of credit, as needed. The Company expects to operate within the amended requirements of its warehouse lending facilities and the associated financial covenants and to continue to renew its warehouse lending facilities in the normal course of its operations at terms consistent with its operating needs.
The Company believes its actions, as described in the prior paragraphs, combined with the Company’s operating results will provide sufficient liquidity for the Company to meet its financial obligations and covenants over at least the twelve-month and a day period from the date the condensed consolidated financial statements are issued.
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 June 30, 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
20. 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 June 30, 2023
Retirement Solutions Portfolio Management Total Operating Segments Corporate and Other Eliminations Total
REVENUES
Loss on sale and other income from loans held for sale, net $ (2,265) $ (1,845) $ (4,110) $ —  $ 56  $ (4,054)
Net fair value gains (losses) on loans and related obligations 32,926  (126,059) (93,133) —  —  (93,133)
Fee income 10,073  2,978  13,051  2,045  (1,272) 13,824 
Net interest expense — 
Interest income —  3,200  3,200  —  —  3,200 
Interest expense —  (24,106) (24,106) (7,628) —  (31,734)
Net interest expense —  (20,906) (20,906) (7,628) —  (28,534)
Total revenues 40,734  (145,832) (105,098) (5,583) (1,216) (111,897)
Total expenses 58,767  22,238  81,005  30,216  (1,216) 110,005 
Other, net 28  —  28  (1,965) —  (1,937)
Net loss before taxes $ (18,005) $ (168,070) $ (186,075) $ (37,764) $ —  $ (223,839)
Depreciation and amortization $ 11,911  $ 34  $ 11,945  $ 427  $ —  $ 12,372 
Total assets $ 332,516  $ 26,063,685  $ 26,396,201  $ 1,250,637  $ (1,222,574) $ 26,424,264 
For the six months ended June 30, 2023
Retirement Solutions Portfolio Management Total Operating Segments Corporate and Other Eliminations Total
REVENUES
Loss on sale and other income from loans held for sale, net $ (3,577) $ (12,903) $ (16,480) $ —  $ —  $ (16,480)
Net fair value gains on loans and related obligations 57,401  25,860  83,261  —  —  83,261 
Fee income 13,253  8,441  21,694  4,998  (6,516) 20,176 
Net interest expense — 
Interest income —  4,670  4,670  621  —  5,291 
Interest expense —  (48,102) (48,102) (15,188) —  (63,290)
Net interest expense —  (43,432) (43,432) (14,567) —  (57,999)
Total revenues 67,077  (22,034) 45,043  (9,569) (6,516) 28,958 
Total expenses 94,291  46,917  141,208  59,090  (6,516) 193,782 
Other, net 59  —  59  (1,060) —  (1,001)
Net loss before taxes $ (27,155) $ (68,951) $ (96,106) $ (69,719) $ —  $ (165,825)
Depreciation and amortization $ 21,554  $ 48  $ 21,602  $ 875  $ —  $ 22,477 
Total assets $ 332,516  $ 26,063,685  $ 26,396,201  $ 1,250,637  $ (1,222,574) $ 26,424,264 
For the three months ended June 30, 2022
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 $ 78  $ (4,740) $ (4,662) $ —  $ (101) $ (4,763)
Net fair value gains (losses) on loans and related obligations 77,872  (72,249) 5,623  —  (3,458) 2,165 
Fee income 4,935  1,198  6,133  8,240  (7,533) 6,840 
Net interest expense
Interest income —  1,515  1,515  94  —  1,609 
Interest expense —  (20,287) (20,287) (6,738) —  (27,025)
Net interest expense —  (18,772) (18,772) (6,644) —  (25,416)
Total revenues 82,885  (94,563) (11,678) 1,596  (11,092) (21,174)
Total expenses 50,443  34,554  84,997  38,758  (10,936) 112,819 
Other, net 38  37  75  13,923  156  14,154 
Net income (loss) before taxes $ 32,480  $ (129,080) $ (96,600) $ (23,239) $ —  $ (119,839)
Depreciation and amortization $ 9,711  $ 106  $ 9,817  $ 1,169  $ —  $ 10,986 
Total assets $ 418,005  $ 19,880,825  $ 20,298,830  $ 1,746,031  $ (1,728,600) $ 20,316,261 
For the six months ended June 30, 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 $ 78  $ 6,188  $ 6,266  $ —  $ (818) $ 5,448 
Net fair value gains (losses) on loans and related obligations 183,627  (175,034) 8,593  —  (3,458) 5,135 
Fee income 8,740  55,723  64,463  17,279  (19,729) 62,013 
Net interest expense
Interest income 43  2,562  2,605  188  —  2,793 
Interest expense (54) (37,010) (37,064) (13,441) —  (50,505)
Net interest expense (11) (34,448) (34,459) (13,253) —  (47,712)
Total revenues 192,434  (147,571) 44,863  4,026  (24,005) 24,884 
Total expenses 97,870  69,265  167,135  80,848  (23,954) 224,029 
Other, net 3,252  64  3,316  13,771  51  17,138 
Net income (loss) before taxes $ 97,816  $ (216,772) $ (118,956) $ (63,051) $ —  $ (182,007)
Depreciation and amortization $ 19,309  $ 197  $ 19,506  $ 1,678  $ —  $ 21,184 
Total assets $ 418,005  $ 19,880,825  $ 20,298,830  $ 1,746,031  $ (1,728,600) $ 20,316,261 
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.