Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Home Point Capital Inc. and its wholly-owned subsidiary, Home Point Financial Corporation (collectively Home Point), at 'B'.

The Rating Outlook remains Negative. Concurrently, Fitch has also affirmed the senior unsecured debt rating of Home Point at 'B-'/'RR5'.

Today's rating action has been taken as part of a periodic peer review of non-bank mortgage companies, which is comprised of six publicly rated firms.

Key Rating Drivers

IDRs and SENIOR DEBT

The ratings affirmation reflects Home Point's market position as a large wholesale lender in the U.S., an experienced management team with extensive industry background, adequate liquidity to cover any operational needs over the Outlook horizon, an appropriate risk control framework and strong asset quality performance.

The Negative Outlook continues to reflect Home Point's weaker than expected financial performance and a stressed profitability outlook given rising interest rates and heightened competition in the mortgage origination market. Fitch believes that there is execution risk associated with Home Point's recently announced initiatives to right-size the business and its plan to specialize in the wholesale lending channel while maintaining adequate profitability.

Furthermore, Home Point's liquidity profile has weakened significantly given ongoing operating losses, although Fitch believes liquidity remains sufficient for operating needs and there are no near-term maturities.

As of June 30, 2022, Home Point had $136 million of unrestricted cash, $468.1 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. In addition, it has $4.1 billion of unused capacity under its warehouse lines of credit and $28.8 million of available capacity on its servicing advance facility to support its origination and servicing activities.

Home Point reported a pre-tax operating loss and negative EBITDA in 1H22, a sharp decline from 2021 levels, which was driven by a significant reduction in origination volume and deteriorating gain on sale margins. Home Point's annualized pre-tax return on average assets (ROAA) declined to negative 1.0% in 1H22, relative to 3.5% for FY 2021, as cost reduction actions have lagged the reduction in revenues. For calculating ROAA, Fitch adjusts reported total assets to remove the Ginnie Mae loans eligible for repurchase and includes income from equity method investments if they relate to the core business.

Fitch does not expect the competitive environment to ease in the near-term, thus maintaining downward pressure on profitability. Home Point has executed on some cost reductions and announced additional plans in response to the reduced volume and more competitive environment, which should support earnings in 2023. However, Fitch believes it is unlikely to accrete to tangible equity materially without a change in the margin or volume environment.

Home Point's leverage (gross debt to tangible equity) decreased to 3.8x as of June 30, 2022; down from 7.8x at YE 2021, which is below the current covenant maximum under the company's MSR facility. Corporate non-funding leverage, which excludes funding-related debt declined to 1.2x at 2Q22, from 1.6x at YE 2021, driven by planned deleveraging actions by management, including MSR sales and divestitures of non-core businesses. Fitch expects gross leverage to remain relatively stable but corporate leverage is expected to grow with near-term operating losses until planned cost reduction actions take effect.

Consistent with other mortgage companies, Home Point is reliant on the wholesale debt markets to fund its operations. Secured debt, which accounted for 80% of total debt at June 30th 2022, includes warehouse facilities, a servicing advance facility and a term loan facility secured by MSRs.

Home Point is not subject to material asset quality risks as nearly all originated loans are government or agency eligible and sold to third parties shortly after origination. However, it has exposure to repurchase or indemnification claims from third-parties under certain warranty provisions. Fitch considers the asset quality performance of Home Point's servicing portfolio to be solid, as delinquencies have been low relative to the overall market.

The unsecured debt rating is one notch below the Long-Term IDR with a recovery rating of 'RR5' reflecting below average recovery prospects, given the subordination to substantial secured debt in the capital structure and a limited pool of unencumbered assets mostly consisting of MSRs, which could have significant valuation volatility.

SUBSIDIARY AND AFFILIATED COMPANY

The ratings of Home Point Financial Corporation are equalized with the ratings of Home Point Capital Inc. given it is a wholly owned subsidiary and represents substantially all of the parent assets.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action could be driven by continued operating losses which result in a sustained increase in corporate non-funding leverage above 1.5x and/or an inability to maintain total leverage below 7.5x, an inability to maintain sufficient liquidity to manage future servicer advance requirements or margin calls, and/or an inability to refinance secured funding facilities.

Should regulatory scrutiny of the company or industry increase meaningfully, or if Home Point incurred substantial fines that negatively impacted its franchise or operating performance, this could also drive negative rating momentum.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch believes the Negative Outlook could be revised to Stable if Home Point successfully executes on its stated plan to improve profitability and maintain total and corporate leverage below negative sensitivities.

While there is limited potential for further positive rating actions in the near term, an improvement in the broader economic and competitive backdrop, 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 5.0x, 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, above 15%, could drive positive rating momentum over time.

The unsecured debt rating is primarily sensitive to changes in the Long-Term IDR and secondarily to the funding mix and available collateral. A material increase in unencumbered assets and recovery prospects could narrow the notching between the Long-Term IDR and the unsecured notes, while a material increase in secured debt could result in a wider notching.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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