Finance of America’s next offering of bonds backed by defaulted reverse mortgages features higher loan-to-value ratios that its previous deal, completed last year.
The $399 million Finance of America Structured Securities Trust 2018-HB1 has a weighted average loan-to-value ratio is 94.72%, more than 10 percentage points lower than the weighted average LTV of 106.4% for the prior deal, according to Moody’s Investors Service. It’s also lower than the LVTs of any of the six deals that Nationstar, a more frequent issuer, completed over the past three years, which ranged from a low of 120% to as high as 183%.
The LTVs are high because collateral for the deals includes principal advances, accrued interest at the note rate, servicing advances, servicing fees and mortgage insurance premium payments.
While reverse mortgage are insured by the Federal Housing Administration, claims are capped. It only reimburses two-thirds of foreclosure costs and attorney fees, for example. So the more equity in the homes, the less likely it is that the loans will suffer losses.
In most other respects, the credit quality of FASST 2018-HB1 is similar to that of other defaulted reverse mortgage bonds rated by Moody’s. The mortgages are either in default (14.76%), due and payable (33.99%, referred (0.23%), in bankruptcy (6.33%), foreclosure (40.46%) or repossessed (4.11%).
Typically, a defaulted loan is any loan where the borrower has either not occupied the property for 12 consecutive months, not completed repairs prescribed at the time of origination or not made tax or insurance payments.
While there is less risk of losses on loans in the pool, Moody’s expects that the liquidation timelines will be longer than those of either Finance of America’s previous deal or any of Nationstar’s deals. That’s because the new transaction has a lower percentage of properties that have already been repossessed.
In addition, the majority of the loans in bankruptcy are in Chapter 13, which can take five years to resolve.
Another concern is the number of loans backed by properties in Puerto Rico, 11.7% of the unpaid principal balance. They pose additional risk due to the poor state of Puerto Rico's economy, the uncertainty in the housing market, the aftermath of Hurricane Maria that led to a mass exodus and the bureaucratic foreclosure process, according to Moody’s.
Finally, FASST 2018-HB1 has a relatively high percentage of loans in due and payable status, which may take longer to liquidate as they are not in foreclosure or REO status.
Moody’s expects to assign an Aaa rating to the senior tranche of notes to be issued in the transaction, which has an expected coupon of 3.29% and benefits from 31.5% subordination. There are also four tranches of subordinate notes with ratings ranging from Aa3 to Ba3 and an unrated tranche of notes.
