KBRA Affirms Issuer Rating for Freedom Mortgage Corporation

KBRA affirms the BB+ Issuer rating for Freedom Mortgage Corporation ("Freedom" or "the company"). The Outlook for the rating is Stable.

Key Credit Considerations

Freedom’s rating remains supported by largely solid, multiyear operating performance through the residential mortgage industry’s significant cyclicality. In this regard, benefitting most from effective operating expense management through sharp interest rate changes during the 2022- 2023 period, Freedom has consistently generated positive earnings; admittedly supported by sometimes material, positive MSR FV marks. Such bottom-line performance – largely retained as core capital – through variable and challenging operating environments remains instrumental to Freedom’s credit profile, as 2024 and 1H25 bulk MSR purchases, as well as more active participation in the correspondent channel, have stretched Freedom Mortgage Parent LLC’s (“Freedom Parent”) core leverage beyond management’s preferred operating levels recently; most notably, a ~1.5x consolidated “corporate” debt-to-equity measure. Positively, following a similar increase in core leverage during 1H22 (to ~1.9x), Freedom was able to delever during 2H22.

More specifically, following $164 billion of net UPB MSR bulk purchases during 2024 and 1H25, ~$167 billion of originations / MSR creation (over the 18 month period), and moderate ‘consolidated’ 1H25 earnings (pre-tax ROA of ~0.6%), core leverage for Freedom Parent was back up to 2.2x at 2Q25 (noting that KBRA includes Servicing Advance (SA) Facilities as part of its calculation of Residential Mortgage Company Corporate Debt). At 2Q25, Freedom Parent’s consolidated balance sheet reflected ~$4.8 billion of unsecured senior notes (up from ~$4.2 billion at YE24), with ~$5.5 billion of primarily MSR-secured notes and facilities (including a smaller portion secured by SAs), a slight increase from the year-end borrowings. Importantly, with respect to KBRA’s expectation surrounding Freedom Parent’s anticipated, near-term deleveraging, a new LLC created outside of the “restricted” Freedom subsidiaries that are the guarantors of the company’s corporate debt – completed a $750 million private financing – which was contributed to Freedom Parent as common equity. The $750 million of equity contributed to Freedom Parent, along with proceeds associated with a pending bulk MSR sale (~$22 billion UPB), is expected to reduce pro forma core leverage.

The company’s rating also considers some constraint associated with the short-to-intermediate term, market funded residential mortgage company business model, notwithstanding Freedom’s well-laddered unsecured term debt structure, which has been built through demonstrated access to unsecured debt markets over the years. 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

With higher-than-peer core leverage, positive rating momentum is not expected over the near-term, while a deterioration in profitability and/or higher-than-expected core leverage, together with any diminution of the company’s liquidity profile, would likely facilitate a negative rating action.

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Methodologies