KBRA Affirms Issuer Rating for Freedom Mortgage Corporation and Revises Outlook to Stable

KBRA affirms the BB+ Issuer rating for Freedom Mortgage Corporation (“Freedom” or “the company”) and revises the Outlook to Stable from Negative.

Key Credit Considerations

The change to a Stable Outlook for Freedom’s Issuer rating is principally two-fold: first, core leverage – defined here as “corporate” debt (including servicing advance financing)-to-equity – has recently tracked at the 1.6x level following a 2Q22 uptick to 1.9x associated with the company’s largely debt-financed, active bulk MSR acquisition strategy of recent periods, and second, core earnings (exclusive of MSR FV marks) have been positive during 1H23, with favorable operating cash flows, owing principally to strong servicing revenues and meaningfully reduced operating expenses. Freedom’s 1H23 operating performance, which has incorporated very limited production levels, and a focus on efficiently servicing its low coupon MSR portfolio, has been better than most industry participants. While the potential for some modest increase in Freedom’s core leverage exists, we currently consider that likelihood somewhat lower than during 2022.

Over its more than 30-year operating history, Freedom has managed well through challenging mortgage business environments, with the current cyclical origination downturn no different, as the company has reduced operating costs efficiently and significantly, mostly through sharp staff reductions. Core profitability in challenging operating environments – including 2019 and 1H23 – remains a key element supporting the company’s rating. Freedom also reflects a substantial equity base that has grown consistently through retention of the vast majority of the company’s multiyear earnings.

The rating also considers Freedom’s predominantly short-to-intermediate term, market funded business model; one that is similar to most mortgage banking peers. Additionally, though theoretically more understandable in the current interest rate environment, Freedom’s strategic decision not to at least partially hedge its substantial MSR investment with financial instruments is considered less favorably; acknowledging that the company’s call center origination capacity in robust refinance markets has done well providing an “operational”, and in turn, financial performance hedge.

Rating Sensitivities

With the return to a Stable Outlook, additional positive ratings momentum is unlikely over the near-term. Over the intermediate-term, reduced corporate leverage, a continued, largely favorable operating performance track record, and an effective MSR financial instrument hedging program could benefit Freedom’s creditor profile. With that said, a deterioration in profitability / cash flow generation, a return to higher-than-expected core leverage, and any recognizable diminution of the company’s current liquidity profile, could have negative ratings ramifications.

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Methodologies