Nationstar Mortgage, a loan servicer, is in the market with the second rated securitization of what are nonperforming Home Equity Conversion Mortgage (HECM) loans, according to Moody’s Investors Service.

The transaction, dubbed Nationstar HECM Loan Trust 2016-1, is the sponsor’s fourth overall.

Reverse mortgages allow borrowers 62 years or older to convert a portion of the equity in their homes into cash. Unlike a traditional home equity loan or second mortgage, however, borrowers do not have to repay the loan until they sell the home or no longer use it as their principal residence. In the meantime, the interest payment is added to the balance of the loan each month.

Reverse mortgages become inactive if a borrower or their estate fails to pay the amount due upon maturity, fails to pay property taxes or insurance, or otherwise defaults. When that happens, the property is repossessed and sold to recover the amount owed.

The deal will issue $195 million of notes provisionally rated ‘AAA’ by Moody’s that benefit from subordinate of 35.5%; $53 million of notes rated ‘A3’ with 18% subordination; and $33 million of note rated ‘Ba3’ with 7% subordination. All of the notes have a legal final maturity of February 2026.

The notes are backed by 1,085 mortgage assets with a balance of $302,891,615. Some are from a unrated deal completed in 2014 that Nationstar recently called. All are insured by the Federal Housing Administration for lesser of the appraised value of the property at origination or the related FHA loan limit at the time of origination. In addition, certain expenses of the servicer along with certain amounts of accrued debenture interest are also reimbursable

Payments to the notes will come from a combination of sales proceeds from the liquidated properties and insurance claim payments from FHA insurance. Timing of the receipt of these funds is dependent on local real estate markets and liquidation timelines. A number of factors can lead to delays in liquidating properties as well as the amount of proceeds.

As a mitigant, the pool has a large number of mortgage assets in various states of seasoning which should smooth funds coming into the deal. A liquidity reserve fund also provides a buffer for any potential mismatch between due dates on obligations and proceeds from the collateral.

 

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