1st Security for Scratch and Dent Reverses
A recent Bank of America securitization that appears to be the first of its type raises the question of the value of investing in "scratch and dent" reverse mortgages, a specialized part of this government product-dominated market that a select investor base is said to have an appetite for.
"There's strong demand among a growing specialized group that has taken the time to figure out the cash-flow models and figure out how these bonds will perform," said Bob Yeary, chairman of reverse mortgage servicer and REO management company Reverse Mortgage Solutions, Spring, Texas.
Yeary told National Mortgage News (NMN) to his knowledge the transaction is the first securitization of this type done in the reverse mortgage market. Yeary said the BofA securitization is also the first private-label reverse mortgage deal seen since the downturn. It could signify that "the private securitization market is coming back, maybe starting the return of the HECM securitization process on a private basis," he said.
A BofA spokesman told NMN the loans are "scratch and dent" quality. The RMS executive, who said he was involved in a portion of the deal, said the loans he has seen are government Home Equity Conversion Mortgages (HECM) that are not in government or agency securities pools for one reason or another. They are "most likely in portfolio," he said, noting that they might be Fannie Mae buybacks, have a shortfall in equity or taxes and insurance, or be in a foreclosure situation.
They do not involve borrower distress and are nonrecourse loans, he added.
However, they may involve situations where the borrower's heirs may not want the property because it is in an underwater equity position. Heirs have up to one year to refuse the property.
"These are not distressed loans, they're just in the process of being liquidated. It takes time because of various state and federal regulations regarding foreclosure properties," Yeary said.
The Federal Housing Administration (FHA) claim process allows the investor to be reimbursed for carry costs during the time the property is in foreclosure, he said.
Independent reverse mortgage industry consultant Atare Agbamu, president/CEO of ThinkReverse, Oakdale, Minn., told NMN he is not familiar with the deal but he noted that in general investors should keep in mind that reimbursement for HECM carry costs is limited to 98% of HUD's maximum claim amount.
He said there are two main types of risks in "scratch and dent" reverse product he has seen: taxes and insurance or repair defaults.
T&I defaults in particular have been "a big problem in the industry," Agbamu said. T&I is a major concern for reverse mortgage lenders because tax liens supersede all other liens.
Generally if a HECM isn't included in an agency or government security it most likely has T&I problems or a repair default, he said.
In a repair default, a property requiring major repairs that have not been completed violates the mortgage contract, which requires the property be maintained to a certain standard.
Either T&I or a repair default could occur in cases where the property is passing to an heir but it often involves borrower distress, he said. "The borrower runs out of reverse capacity" in some cases, he said, particularly given recently equity challenges and tighter HECM rules. Medical expenses could also exhaust that capacity.
Agbamu, a former originator of reverse mortgages, stresses that while he is a big proponent of the product, "there are risks involved" that investors, the industry and consumers should all understand.
Barclays Capital in a research report earlier this year said the main types of loan repayment seen in HECMs are "mortality" and "mobility," based respectively on circumstances where either the passing of the borrower results in repayment of the loan or when the borrower moves out and the property is no longer his or her primary legal residence.
Foreclosure and voluntary assignment in which a lender can assign a HECM to the U.S. Department of Housing and Urban Development when the loan balance crosses certain loan-to-value ratio thresholds are "minor causes" of loan repayment in this niche, according to Barclays.
About 2% of all repayments are due to foreclosure because of situations where the borrower fails to maintain the property or pay all taxes in time, the researchers said. Voluntary assignments have accounted for about 3% of repayments to date. Refinancing is listed as the third "minor cause" of HECM repayment.
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