Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of Home Point Capital Inc. and its subsidiary Home Point Financial Corporation (collectively Home Point) to 'B-' from 'B' and placed them on Rating Watch Negative (RWN).

The actions follow the company's announcement that it has entered into a definitive agreement to sell certain assets of its wholesale originations channel to The Loan Store, Inc. in exchange for an equity stake in the company. Senior unsecured debt ratings have also been downgraded to 'CCC+' from 'B-'/'RR5'.

Key Rating Drivers

IDRs and SENIOR DEBT

The downgrade reflects Fitch's view that this transaction 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. Fitch also believes the transaction introduces execution risk associated with further right sizing the expense base given the on-going 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 closing of the transaction.

The RWN reflects continued uncertainty regarding the financial impact of the transaction including the impacts on leverage and profitability, if any, as well as on future strategic actions. Fitch expects to resolve the RWN once more information is available regarding the financial impacts, if any, from the transaction, and the company's strategic direction and execution plan.

The 'B-' IDR remains 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 Outlook horizon, an appropriate risk control framework, and strong asset quality performance.

As of YE 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. In addition, 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. The proposed transaction is unlikely to impact the company's liquidity position.

Home Point's leverage (gross debt to tangible equity) decreased to 2.4x as of YE 2022; down from 3.8x at 2Q22, which is below the current covenant maximum under the company's MSR facility. Corporate non-funding leverage, which excludes funding-related debt, increased to 1.6x at YE 2022 up from to 1.2x at 2Q22 driven by continued equity erosion from operating losses and incremental borrowings. The proposed transaction is unlikely to lead to deleveraging in the near term and potentially could increase leverage if assets are written down, but Fitch will evaluate the impact when exact terms are known.

The unsecured debt rating is one notch below the Long-Term IDR 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's assets.

RATING SENSITIVITIES

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

Negative rating action could result if the transaction does not substantially improve the financial profile of the company including profitability, leverage and liquidity metrics, taking into consideration the potential offsetting declines in franchise value and business model. A decline in the company's liquidity position as a result of non-renewal or acceleration of any secured financing facilities due to the transaction could also lead to negative action. Lastly, 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 RWN could be resolved if Home Point demonstrates sufficient financial benefits from the transaction including an immediate improvement in its profitability outlook through expense structure resizing, reduction in leverage below 1.5x and maintenance of an appropriate liquidity position. Depending on the materiality of these improvements, this could be accompanied by a Stable Outlook (if sufficiently material) or a Negative Outlook (if more modest).

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.

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

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Home Point Financial Corporation has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to its exposure to compliance risks that include fair lending practices, debt collection practices, and consumer data protection, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

Home Point Financial Corporation has an ESG Relevance Score of '4' for Governance Structure due to its private equity ownership and board effectiveness as they relate to protection of creditor and shareholder rights, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

Home Point Financial Corporation has an ESG Relevance Score of '4' for Management Strategy due to uncertainty regarding long term business strategy and the recent erosion of management depth, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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