Lender gets credit rating downgrade after deciding to sell wholesale unit
Home Point Capital and its subsidiary HomePoint Financial have been downgraded by Fitch Ratings after entering a deal to sell its wholesale origination business to The Loan Store.
Fitch cut Home Point’s ratings from ‘B’ to ‘B-’ and placed the wholesale lender on Rating Watch Negative (RWN). The company’s senior unsecured debt ratings have also been downgraded from ‘B-’/’RR5’ to ‘CCC+.’
According to Fitch, the downgrade reflects its view that the sale represents a significant shift in Home Point’s business strategy away from being a large originator and servicer of mortgage loans focused on the wholesale channel towards a more opportunistic and evolving approach.
“Fitch views this as a weakening of Home Point’s business model and franchise position,” the rating agency said in its report. “Fitch also believes the transaction introduces execution risk associated with further right-sizing the expense base given the ongoing revenue reduction following the asset sales. These changes come at a time when senior management depth has been reduced through recent turnover, including the departure of CFO in April 2023 as well as the departure of its head of originations following the closing of the transaction.”
What the rating means
On the rating scale, a ‘B-’ rating indicates that the capacity for continued payment is vulnerable to deterioration in the business and economic environment. The rating was supported by Home Point’s continued market position as a large servicer with an outsourced servicing operation, the absence of any near-term debt maturities, adequate liquidity to cover any operational needs over the horizon, an appropriate risk control framework, strong asset quality performance.
As of Dec. 31, 2022, Home Point had $97 million of unrestricted cash, $392 million of available capacity on its mortgage servicing right (MSR) facility, considering covenants and borrowing base requirements, and no available capacity on its operating line of credit. Additionally, it has $2.3 billion of unused capacity under its warehouse lines of credit and $67.4 million of available capacity on its servicing advance facility to support ongoing origination and servicing activities.
Spiraling negative ratings
While Fitch said the proposed transaction is unlikely to impact the company’s liquidity position, the RWN reflects continued uncertainty regarding the financial impact of its deal with The Loan Store. The companies have not yet disclosed any financial details of the transaction. Fitch expects to resolve the RWN once Home Point provides information that shows it will benefit from the sale, which could lead to a positive rating upgrade.
However, the negative rating momentum could continue if Home Point faces regulatory scrutiny or incurs substantial fines that negatively impacted its franchise or operating performance.
“While there is limited potential for further positive rating actions in the near term, growth of the business that enhances Home Point’s franchise, improved profitability and earnings consistency, a continuation of strong asset quality, a sustained reduction in total leverage below 1.0x, an increase in longer-duration funding and a stronger liquidity profile, including an increase in committed funding and maintenance of the proportion of unsecured funding could drive positive rating momentum over time,” Fitch said.
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