Nationstar is preparing its third securitization this year, and sixth overall, of non-performing and inactive reverse mortgages under a Federal Housing Authority reverse mortgage program.
Nationstar HECM Loan Trust Asset-Backed Notes, Series 2016-3, is a $246.21 million asset-backed notes issuance supported by a $251 million collateral pool of properties tied to reverse mortgages or properties that have become bank-owned assets under the FHA’s HECM (Home Equity Conversion Mortgage) program.
Nationstar’s HECM reverse mortgages are loans issued to borrowers 62 or older to convert a portion their home equity into cash. The loans in the inactive pool that are included in this and other Nationstar HECM securitizations are either in default, foreclosure, due and payable or have fallen into bank-owned status – both from deceased and non-deceased borrowers.
The capital structure includes three classes of notes, led by a $170.69 million Class A structure with a preliminary ‘Aaa’ rating from Moody’s Investors Service. The fixed-rate notes feature 32% subordination, and carry a coupon of 2.24%.
A Class M1 series totaling $40.16 million is rated ‘A3’, with 16% subordination and has a rate of 3.6%; the Class M2 notes for $26.36 million are rated ‘Ba3’ and have a coupon of 6.41%.
The pool is split between $217.3 million in properties with inactive HECM (Home Equity Conversion Mortgage) reverse loans and $33.7 million in bank-owned REO properties, sponsored and serviced by Nationstar.
The mortgage servicer has had five previous transactions of inactive HECM reverse mortgages, and Moody’s has rated three of them.
Reverse mortgages preclude the payment of principal and interest by eligible homeowners, until the home is either sold or no longer used for the borrower’s principal resident. The loans are guaranteed by FHA and securitized by Ginnie Mae, which sells the loans to Nationstar and other servicers. More than $3 billion in guaranteed reverse mortgages become inactive each year, according to Moody’s.
Investors are interested in the loans because of the FHA guarantee of a cash-flow pay-off during inactive status. But that cash flow can be variable due to irregular receipt of sales proceeds and insurance claim payments from the FHA.
Some drawbacks are that the FHA doesn’t fully reimburse at the stated interest rate of the loan (rather the lower debenture rate set by Housing and Urban Development) nor does it provide full reimbursement of the foreclosure costs of a property (at about $4,500 per home).
Loans are removed from the pool as they are liquidated or assigned to HUD after becoming performing again with an adequate loan balance. Loans with significant equity are likely to be bought out by the trust.
Moody’s notes the 2016-C pool contains increased exceptions on valuations and corporate advances that exceed the FHA allowable limit; there are also increased number of tax lien issues and borrower-age discrepancies from origination documents.
The pool also has a slightly higher concentration of loans in Texas and Massachusetts, non-judicial foreclosure states in which timelines tend to be shorter than states that require judicial approval on foreclosure actions.