Will Frontier Communications Be Able to Reverse Its Decline? (The Motley Fool)

Frontier Communications (NYSE: FTR - News) reported a steep 30% fall in third-quarter net income, to $20.4 million, mainly due to a decrease in its subscriber base. Let's take a closer, Foolish look at Frontier's problems.

The numbers
The company's total revenues fell by 8%, to $1.3 billion. The reason for this drop was the fall in the number of subscribers across various segments, including business and residential customers, video, switched access, and directory. The drop in net income came from acquisition expenses and reduced operating incomes that were in part offset by lower taxes.

Local and long-distance service revenues fell sequentially and year over year, dropping by 12%, to $605 million, from last year's third quarter. Data and Internet service revenues remained relatively flat from the previous year's quarter at $457 million.

The sky is falling!
The previous year saw Frontier virtually triple its revenues after gaining 4.8 million rural landlines from Verizon (NYSE: VZ - News). This reversed the trend of falling revenues as the company saw its top line jump after the acquisition. But that was just temporary.

The company continues to bleed both customers and revenues mainly because of the increasing obsolescence of landline telephones. A look at sequential and year-over-year data shows this trend. Residential customer count fell sequentially by 2.3%, as well as from the previous year's quarter by 10.2%, to 3.1 million subscribers. Business customers also dropped sequentially by 2.2% and 9.8% from the previous year to 319,379 subscribers. But Frontier has made sure it's able to compensate for this and trim costs as much as possible.

Shaving off unprofitability
Some of the subscriber cuts were due to the company's efforts to reduce the number of customers for the unprofitable FiOS offering that was inadvertently acquired through its Verizon acquisition. FiOS is Verizon's bundled fiber optic offering that combines television, Internet, and telephone services.

So far, the company has been successful in shaving off 9,900 FiOS TV subscribers and 3,100 FiOS Internet subscribers. It has also discouraged customers from ordering the new service, using tactics like raising the installation fee to $500 in Oregon. Having done that, the company wants to shift focus to providing telephone and high-speed Internet services in Oregon and other markets that it got hold of through the Verizon deal. Frontier has also entered into tie-ups with DISH Network (Nasdaq: DISH - News) and DIRECTV (Nasdaq: DTV - News) to resell their satellite TV packages to its customers.

Frontier's efforts seem to be paying off, as it has witnessed the strongest broadband growth rate since the acquisition. The company has been able to bring broadband access to 592,000 new homes and has managed a net addition of 16,200 high-speed Internet subscribers while removing almost $500 million in annual costs.

The Foolish bottom line
With the industrywide trend of shrinking landline subscribers, Frontier has not made the mistake of hard-selling the obsolete technology. Instead, it has shifted focus to promoting its high-speed broadband services in order to retain and grow its precious customer base. This could very well be the solution to the company's falling revenues. However, until Frontier begins to show some improvement at least in terms of top-line numbers, I'd rather stay on the sidelines.

Keki Fatakia does not hold shares in any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Reverse Mortgage Problems Raising Red Flags (U.S. News & World Report)

The government-insured reverse mortgage program is struggling with a host of serious problems. The loans, available only to homeowners at least 62 years old, are designed to help people use the equity in their home to pay off any mortgage debt, tap a portion of any remaining equity, and live mortgage-free in their home for the rest of their life, should they choose.

Reverse mortgages have been controversial, however, due to high loan and insurance fees and because some lenders convinced seniors several years ago to spend loan proceeds on inappropriate investments.

[See the Top 10 Individual Tax Breaks.]

The Federal Housing Administration (FHA) reverse mortgage is called the Home Equity Conversion Mortgage (HECM). It insures lenders against losses and guarantees seniors that they will not lose access to any funds promised as part of their loans. The agency created a program of mandatory consumer counseling before a reverse mortgage loan can be approved with a participating lender. It also instituted a lower-cost loan last year, called HECM Saver, to reduce high fees and make it easier for seniors to take out reverse mortgages.

However, even though the program frees seniors from making mortgage payments, thousands of seniors have fallen behind on property taxes and home insurance premiums for their homes. Under current rules, lenders are not allowed to determine if borrowers will have enough money to pay taxes and insurance. Lenders are seeking rule changes that would allow them to include tests of prospective borrowers' ability to afford these payments.

The FHA required lenders to report on problem loans so it could fashion better oversight rules. But those reports, due more than four months ago, have been delayed and the agency says it still does not have an accurate picture on loans in default. Accordingly, a spokesman said, it still hasn't issued the rules sought by industry lenders.

[See Why Working Longer Won't Close Retirement Shortfalls.]

This continued delay contributed to the announcement by Wells Fargo last week that it would stop making reverse mortgages. Wells Fargo is the nation's largest reverse mortgage lender with more than a 26 percent share of all activity as of April, according to statistics assembled by industry data provider Reverse Market Insight. Earlier in the year, the industry's second leading lender, Bank of America, said it would exit the business as well.

The volume of HECM loans averaged about 110,000 a year from 2007 through 2009, according to government reports. It dropped to less than 79,000 in 2010 and has continued at this lower pace in 2011. As of April--seven months into the government's fiscal year--there were slightly more than 45,000 HECM loans taken out.

Beyond reduced loan volume, borrowers in many older HECM loans have run into financial problems in recent years. An estimated 20,000 to 25,000 of 550,000 active HECM loans are in default because of non-payment of taxes and insurance premiums, according to government and industry projections.

To date, lenders have not foreclosed on these loans, says Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA). There is a long foreclosure process, he notes, which may include up to two years for borrowers to solve their default problems. "It's not until you've exhausted all opportunities" that the lender would then ask HUD to classify a loan as immediately due and payable, he says. "As far as I know, few if any cases have gotten to that point."

[See 5 Retirement Planning Reminders.]

Bell's organization has worked with the FHA to fashion new financial eligibility requirements for HECM borrowers. The process is complex, he says, because retirement income sources extend beyond paychecks to include Social Security, pensions, and retirement savings. Despite the obstacles, lenders are pushing the government for more guidance and clarification.

"Our official position here is that we're hoping that Wells's decision to depart [the HECM program] becomes a call to action," Bell says.

Reverse mortgage lenders have funded a pilot counseling program to see if borrowers in default can solve their problems by working with credit counseling agencies. "Even among those borrowers with the most challenging problems, we're finding that many of these cases are able to be resolved," says Barbara Stucki, vice president for home equity initiatives with the National Council on Aging.

The pilot program has involved only 26 reverse mortgage borrowers, however, so extending its intensive counseling support a thousand-fold would be a major undertaking. "I think it's absolutely possible to scale up," Stucki says. The costs, while substantial, are "clearly much, much less" than it would cost a lender and the FHA to go through a foreclosure. "Plus," she adds, "no one wants to force seniors to move out of their homes."

Twitter: @PhilMoeller

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Wells Fargo to stop making reverse mortgages (AP)

DES MOINES, Iowa – Wells Fargo Home Mortgage said Thursday that it will no longer make so-called reverse mortgage loans, citing unpredictable home values and restrictions that make it difficult to determine if borrowers can afford homeowners' insurance and other financial obligations.

Reverse mortgages are typically sold to people over age 62 who want to access the equity in their homes for personal expenses, such as medical bills. But unlike home equity loans, reverse mortgages don't have to be repaid until the homeowner sells the property or passes away.

However, the housing downturn has made it harder for banks to gauge the trajectory of home values, and thus how much they should loan. Foreclosures have contributed to falling home prices, often vaporizing the amount of equity that borrowers have in their home. In addition, reverse mortgages aren't subject to the same types of tests as traditional loans. Eligibility is determined by an FHA formula that calculates age and the home's appraised value. Seniors aren't subject to the same types of income and credit score restrictions that protect banks making traditional loans. Wells Fargo said that makes it difficult to figure out if seniors are able to afford property tax and homeowners' insurance payments.

Wells Fargo began originating reverse mortgages in 1990. As of last year, the funded volume of its reverse mortgage business was about 2.2 percent of all its retail mortgage volume and 1.2 percent of overall mortgage volume. The lender said it will stop taking new applications for reverse mortgages after June 30, but will continue to service the loans of its existing reverse mortgage customers. The 1,000 workers in the bank's reverse mortgage division will be given opportunities to apply for other jobs at Wells Fargo.

In February, Bank of America also announced that it would exit the reverse mortgage origination business.

Wells Fargo Home Mortgage is a unit of San Francisco-based bank Wells Fargo & Co. Shares rose 25 cents to close earlier at $26.80.

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