KBRA Affirms Issuer Rating for Freedom Mortgage Corporation

KBRA affirms the BB+ Issuer rating for Mount Laurel, NJ-based Freedom Mortgage Corporation ("Freedom" or "the company"). The Outlook for the rating is Stable.

Key Credit Considerations

Freedom’s rating is supported by the company’s solid 1H24 operating results; a continuation of mostly favorable multiyear performance through the residential mortgage industry’s continued, significant cyclicality. In this regard, following record origination years (2020 and 2021), which incorporated strong-to-unprecedented production margins – led by Freedom’s efficient call center channel – effective operating expense management through sharp interest rate changes in 2022 allowed Freedom to still generate positive earnings; acknowledging the contribution of material, positive MSR FV marks. Freedom’s ability to generate positive earnings through variable and challenging operating environments (and largely retain them) remains instrumental to the company’s credit profile, as bulk MSR purchases have, in recent periods, stretched core leverage beyond management’s preferred operating levels; notably, a ~1.5x “corporate” debt-to-equity measure. Following an increase in core leverage during mid-2022 (to ~1.9x) – owing to 2Q22 MSR acquisitions and lower quarterly earnings – Freedom’s corporate debt-to-equity was back to ~1.5x by YE22, having remained at similar levels through 3Q23 (noting that KBRA includes Servicing Advance Facilities as part of Corporate Debt total).

Then, following the December 2023 issuer substitution, with ~$2.3 billion of senior unsecured notes transferred to Freedom Holdings, while the operating company’s core leverage has declined materially, on a parent consolidated basis, core leverage rose again in 2Q24 (to ~1.8x) stemming from $66 billion of bulk purchases closed in the quarter, MSR capitalization associated with higher originations, and positive 1H24 MSR FV marks.

Notwithstanding the meaningful increase in well-laddered, unsecured term debt issuance in recent years (now at Freedom Mortgage Holdings LLC), the company’s rating also considers some constraint associated with a short-to-intermediate term, market funded business model that is similar to most peers. Additionally, the strategic decision to not hedge its large MSR investment with financial instruments is considered less favorably; acknowledging that Freedom’s call center origination capacity in robust refinance markets has offered an effective “operational”, and in turn, financial performance hedge.

Rating Sensitivities

Given the recent increase in consolidated, parent company core leverage, a positive rating change is not currently expected. A deterioration in profitability and/or higher-than-expected core leverage, together with any diminution of liquidity profile, would likely facilitate a negative rating action.

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Methodologies