Waterfall Asset Management is marketing $571 million of bonds backed by jumbo reverse mortgages that were originated before the credit crisis and are still performing.
It’s the first deal of its kind with a public credit rating since 2007, according to Kroll Bond Rating Agency.
Reverse mortgages allow borrowers to pull some of the equity from their home without paying a monthly mortgage payment; no payments are due until the entire loan is repaid. In the meantime, accrued interest is added to the balance of the loan.
Over the past several years, there have been a number of securitizations of reverse mortgages that had defaulted and were in the process of being liquidated; the loans backing these deals were also insured by the Federal Housing Administration.
By comparison, the 915 loans backing Cascade Funding Mortgage Trust 2018-RM2 are what’s known as “proprietary” reverse mortgages; they are not insured by the FHA. Waterfall Asset Management acquired them over a period of eight years from various originators.
That means the primary risks to investors are different from both those of traditional residential mortgage bonds and defaulted reverse mortgage bonds. These risks include the timing of repayment, which could be triggered by a number of events, including the borrower’s sale or refinancing of the property, move into long-term care or death.
The weighted average age of the youngest active borrower in each loan in the pool is approximately 84 years of age.
Also, the borrower typically remains responsible for timely payment of taxes and insurance on the property and for keeping the property in good repair over the life of the loan. This introduces liquidity risk into the transaction, since a borrower’s failure to meet any of these obligations could result in a default.
Another risk is that a decline in housing prices could leave the borrower underwater on the mortgage. The weighted average original loan-to-value ratio loans in this deal is 39.6%; Kroll estimates that the accrual of unpaid interest has pushed this up to 63.8%, based on updated broker price opinions. Adding in the available amounts on borrower lines up credit brings this up to 66.9%.
The rating agency also notes that approximately 56.6% of the pool is located in California, with a particular concentration in Los Angeles. So a prolonged period of home price declines would have a disproportionate impact on the pool versus a more diversified portfolio.
Both Kroll and Morningstar Credit Ratings expect to assign a triple A to the senior tranches of accrual notes, which benefit from 38% credit enhancement. Kroll alone is assigning an AAA to a tranche of variable funding notes which will be used to fund future advances to borrowers. There are also five subordinate tranches of accrual notes with ratings ranging from AA-/AA+ to B-/B+.
Waterfall is an SEC-registered institutional asset manager focused on structured credit and private equity investments with approximately $7.4 billion in assets under management, according to Kroll. The company was founded in 2005 and has been managing investments in reverse mortgage loans since 2012.
The loans being securitized were acquired from five entities: Aurora Loan Services (2012 acquisition), Merrill Lynch (2012), Lehman RE (2013), SASC2005-RM1 (2016) and Financial Freedom (2018).
Approximately 83.5% of the portfolio is serviced by Compu-Link Corp. and approximately 16.5% is serviced by Reverse Mortgage Solutions.
