Finance of America’s next offering of bonds backed by defaulted reverse mortgages includes a larger percentage of loans from a 2017 transaction that was recently collapsed.
Nearly 67% of the loans in the $309 million loans and repossessed properties backing FASST 2019-HB1 were recycled from FASST 2017-HB1, according to Moody’s Investors Service. This collateral has been inactive for a significant period of time without re-performing or successfully liquidating. While reverse mortgages are insured by the Federal Housing Administration, claims are capped. The FHA only reimburses two-thirds of foreclosure costs and attorney fees, for example.
As a result, a long liquidation timeline could result in a larger percentage of liquidation losses being non-reimbursable by insurance.
Another weakness in the new transaction is the high concentration of loans backed by properties in Puerto Rico (23.9%), which present additional risks due to the continuing effects of Hurricane Maria, the poor state of the Puerto Rico economy and housing market, and the difficulty of resolving delinquent tax issues and foreclosing on these properties.
There is also a high concentration of loans currently in bankruptcy proceedings (4.2%).
In addition, there are 170 loans Optional Delay Mortgages in the pool, 7.7% by asset balance, that have remained in the same liquidation status since the first half of 2017 or earlier. Based on HUD rules, servicers may delay calling loans due and payable if the total amount owed for missed taxes and insurance is less than $2,000 and meet certain criteria. Such loans will likely remain in the pool for a significant period of time without liquidating and may experience large losses if they eventually cure and get assigned to HUD.
In this transaction, the weighted average loan-to-value-plus-insurance ratio (measured as the current unpaid principal balance divided by the most recent appraisal value plus the maximum claim amount) is 54.7%, which is high compared to other defaulted reverse mortgage bonds issued by Finance of America.
The sponsor, Finance of America Reverse, is also unrated and there is no backup servicer in the transaction. In the event of a servicer termination, the trustee will facilitate the replacement of the servicer. To replace the servicer, additional servicing fees may be added to the top of the deal waterfall and certain reimbursements to the servicer will no longer be subordinated. And there are a small number of qualified servicers of defaulted reverse mortgages covered by FHA insurance.
However, the transaction provides what Moody's describes as a "strong" mechanism to ensure continuous advancing for the assets in the pool. If the servicer fails to advance and such failure is not remedied for a period of 15 days, the sub-servicers can fund their advances from collections and from an interim advancing reserve account. Given the significant amount of advancing required to service defaulted reverse mortgages with tax delinquencies, this provision helps to minimize operational disruption in the event Finance of America encounters financial difficulties, the presale report states.
In addition, the transaction establishes a “clear and efficient process” for choosing a successor servicer following the removal of the servicer. Unlike most other such transactions Moody’s has rated, the servicer will provide a list of eligible successor servicers that are included on a list published by Ginnie Mae to the indenture trustee on an annual basis and a successor servicer will be selected based on a voting process that does not require a supermajority of the senior noteholders to actively consent.
Moody’s also has concerns about the future of RMS, which is sub-servicing 49.75% of the collateral. On Feb. 11, RMS's corporate parent Ditech Holding Corp. filed for Chapter 11 bankruptcy. Unlike Ditech's previous bankruptcy, which concluded in February 2018, RMS was included in the current bankruptcy filing. The bankruptcy filing and the company's weak financial condition create uncertainty with regard to the future of RMS and the effectiveness of its sub-servicing operations. To mitigate the risk, Finance of America has engaged Celink as a backup sub-servicer.
