A banner year for reverse-mortgage originations and a flourishing borrower base may open the floodgates for future securitization of the product, sources say, including a second transaction from previous issuer Financial Freedom Senior Funding Corp., slated for sometime during 2002 - possibly early in the year if originations keep up their impressive pace.
After being delayed several months due to legal and compliance issues, Irvine, Calif.-based Financial Freedom, officially part of Lehman Brothers Bank (a subsidiary of Lehman Brothers Holdings), is readying the second securitization of its proprietary jumbo reverse-mortgage product, according to the company's chief operating officer, Jim Mahoney. The deal will probably be in the range of $200 million to $300 million.
Lehman Brothers had been steadily working with the lender on its second deal ever since Financial Freedom issued its first transaction, a $317.4 sale of reverse-mortgage bonds, in August 1999. The company became a subsidiary of Lehman Brothers Bank last spring and the Office of Thrift Supervision approved the acquisition in August.
"All reverse mortgage products lend themselves to securitizations, and the product itself is being realized as a great versatile financial planning tool for senior citizens," said Mahoney. "So given the rate of originations this year, there should be increasing pipelines for these deals."
Financial Freedom's deal would have come sooner, Mahoney said, if not for the fact that lending laws have changed in several states over the last six months, and the company had been rolling the products out through multiple states. Also, an issuer must aggregate about $100 million to get a transaction underway, and about 1,000 loans are needed to produce predictable cashflows.
A reverse mortgage, typically available to senior citizens only, occurs when money is paid to a homeowner by a bank, whereupon the collateral is the cashflow the home raises the next time it hits the real estate market. In this way, the usual payment stream is reversed: instead of the borrower making monthly payments to a lender, the lender makes payments to the borrower in return for equity in the home.
The maturity of a reverse mortgage is then determined by an event such as a move by the homeowner, or more frequently, by the death of the homeowner.
According to sources at Lehman, the recent acquisition of Financial Freedom has afforded the company several benefits, including a license to do business in all 50 states as an OTS-approved thrift. However, in terms of the broad licensing of the company's cash-account reverse-mortgage product, Financial Freedom is currently only licensed for 25 states, thereby slowing down the process of aggregating loans.
Still, Lehman has made a concerted effort this year to expand the popularity of the product, working with mortgage and non-mortgage originators alike, including financial planners and insurance planners, educating them on how reverse mortgages can fit into a more comprehensive retirement solution.
"Not only are we working with our existing correspondents on this product, but we have more and more new correspondents, beyond traditional mortgage originators," said a source at Lehman. "Some of these companies are not necessarily in the business of originating reverse mortgages but can use the product as part and parcel of their overall financial and retirement planning solutions. We are forming strategic partnerships with many different companies in an attempt to get this product out to more high quality, high credit institutions."
Education, outreach programs
The reverse mortgage, geared towards senior citizens, has had a booming year. Last week the National Reverse Mortgage Lenders Association (NRMLA) announced that the industry is on pace for a record origination year for the Federal Housing Administration's Home Equity Conversion Mortgage (HECM) product. FHA-insured HECMs comprise the majority of the reverse market, and Fannie Mae buys 100% of them for its own portfolio. So far, however, the GSE has not securitized the FHA product, although it has considered doing so in the past.
Because Fannie Mae buys the majority of the FHA product, Street bankers consider the agency product to be the best bid in the marketplace. Only a small minority of reverse-mortgage business is non-agency, and it often takes a long time to accumulate enough of it to conduct a securitization, sources say.
Since the GSE has such a competitive bid for the agency product, it ends up buying the lion's share - just about 100% - of FHA-insured reverse-mortgage loans.
But given that originations have increased so much this year across the board, even for the jumbo private-label product, securitization may become a more feasible option down the road.
While reverse mortgages had always been considered an attractive asset class, a confluence of factors has helped the industry bloom this year. Firstly, public education has increased drastically, helped by the involvement of the NRMLA and the AARP, Mahoney said.
Additionally, the popularity of reverse-mortgage loans has also been aided by good press, favorable demographics, record-low interest rates, as well as a falling stock market. This has led to a falling 401K market, as well as stable home values. "This is a good time to access home equity," Mahoney added.
A great year
Only private-label reverse mortgages have been securitized thus far, including Financial Freedom's proprietary product, but a velocity in the pace of overall originations may just be what is needed to spark further interest in the product as a securitizable asset, Mahoney said.
According to the NRMLA, there have been 7,155 of the loans closed so far this year, with an additional 7,286 in the pipeline. Based on these numbers, the organization projects that 10,000 of the loans will close in fiscal year 2001.
There were 7,937 HECMs closed in fiscal year 1998 and 7,973 closed the following year, according to the association. Production declined to 6,650 in fiscal year 2000.