Nationstar Mortgage is issuing its fifth securitization of nonperforming reverse mortgages, a unique esoteric RMBS class the mortgage servicer has engaged in four previous transactions.
The collateral involves $221.1 million in inactive reverse mortgage loans and real-estate owned (REO) bank properties that were all tied to the Federal Housing Administration’s federally guaranteed Home Equity Conversion Mortgage (HECM) loans.
Nationstar HECM Loan Trust (NHLT) Asset-Backed Notes Series 2016-2 includes a $152.6 million Class A series of notes given a provisional ‘Aaa’ rating by Moody’s Investors Service. The Class A notes will carry a coupon of 2.36% and 31% subordination.
A Class M1 series of notes totaling $33.18 million is rated ‘A3’ by Moody’s, with a 3.72% coupon and 16% subordination. A junior Class M2 notes series is sized at $3.2 million, with a 6.65% coupon and 5.5% subordination.
The reverse mortgages in the NHLT 2016-2 collateral were loans issued to borrowers 62 or older to convert a portion their home equity into cash. The loans in the pool are either in default, foreclosure, due and payable or have fallen into bank-owned status.
The loan does not require repayment until the home is sold or no longer used for the borrower’s principal residence. The loans are guaranteed by the FHA and securitized by Ginnie Mae, which sells the loans to Nationstar and other servicers.
The loans in the Nationstar pool are among the $3 billion of reserve mortgages insured by the FHA which become inactive each year, according to Moody’s.
Investors take to the residential asset-backed loan class because of the guaranteed cash-flow pay-off from the FHA when they become inactive. That cash flow, however, is variable due to the payments coming “subject to irregular and disruptive timing of receipt of funds” from a combination of sales proceeds from property liquidations, as well as insurance claim payments from FHA insurance.
Foreclosure costs are estimated at $4,500 perloan, of which two/thirds is reimbursable by the FHA.
Another drawback is that the FHA doesn’t fully reimburse at the stated interest rate of the loan, but rather the HUD debenture loan rate that is on average up to 100 bps tighter. (For NHLT 2016-2, the average weighted interest rate of the pool is 4.92%, while the weighted average HUD rate for reimbursements is 4.02%, according to Moody’s).
Nearly 80% of the loans are in default to the delinquent tax and insurance payments, and approximately 56% are in foreclosure.
Loans are removed from the pool as they are liquidated, or if they are assigned to HUD after becoming performing loans again with an adequate loan balance. Loans with significant equity are likely to be bought out by the trust.
Moody’s noted latest Nationstar deal's collateral carries a similar risk profile to previous transactions, but a third-party review of the collateral indicated slightly weaker results and higher exception rates for documentation, fee allowances and tax-lien data.