UBS analyst Douglas Harter recently made waves after he took a closer look at the stock of reverse mortgage industry leader Finance of America (FOA). Harter downgraded the company’s stock rating on from “buy” to “neutral” even after it reported strong earnings results in the third quarter of 2024.
In a note published this week that was reviewed by HousingWire’s Reverse Mortgage Daily (RMD) — and previously reported by the The Wall Street Journal and Seeking Alpha — Harter offered his reasoning for the downgrade by saying that it comes down to the pace of the stock price.
FOA’s shares, he said, are not likely “to appreciate meaningfully from current levels.” But on a longer-term basis, there is likely to be more appreciation owing to the demographics working in the reverse mortgage industry’s favor.
“Signs of progress of deeper adoption of reverse mortgage poses the biggest upside risk to our downgrade, while the negative impact of higher rates on volumes/revenue margins could pose additional downside risk to shares,” the note read.
The firm raised its target share price from $14 to $24. After hitting a recent high of $27.49 on Nov. 19, the share price dropped to $20.74 in after-market hours on Thursday. Seeking Alpha reported that the decline occurred on the back of the UBS downgrade.
In an interview with RMD, an FOA executive said that while the rating has had an impact on the stock price in the short term, the overarching trajectory of the share price and the company as a whole that stem from recent activities like its bond exchange agreement shows that the metrics are moving in the right direction.
The executive also noted that despite the downgrade, it was also written with an expectation that the company will see improved performance in 2025 compared to this year. They also said that Harter’s perspective is appreciated internally at FOA given his commitment to covering the company since it went public.
In a recent interview with RMD to assess the landscape of reverse mortgage companies in the stock market, Harter mentioned the unrealized potential of the reverse mortgage industry as a possible tailwind for investor perceptions and — potentially — their activity.
“People have looked at the demographics, the under-savings of seniors and the significant amount of home equity seniors hold as a potentially large opportunity,” he said in the interview. “That potential has existed for a long time, but it hasn’t truly translated into volume. There’s always that push and pull between the long-term potential and the challenges the industry has faced, especially after regulatory changes affecting the amount of draws and more recently, the RMF bankruptcy.”
Seeking Alpha noted that the UBS downgrade to neutral “disagrees” with its own rating, as well as the average Wall Street rating that continues to characterize FOA as a “strong buy.” Earlier this month, prior to FOA’s earnings release, credit ratings agency Fitch noted the success of the company’s recent exchange agreement by upgrading the company’s issuer default rating after an initial downgrade.
In its Q3 2024 earnings, FOA delivered adjusted net income of $15 million, or $0.67 per share. The company noted that Q3 2024 marked the fifth consecutive quarter of improved operating performance, including a recovery from the second quarter in which it posted a net loss of $5 million.
