Nationstar preps reverse mortgage bonds with heavy exposure to judicial states
Investing in Nationstar’s next defaulted reverse mortgage securitization may require some patience.
The collateral for Nationstar HECM Loan Trust Asset-Backed Notes, Series 2017-1 involves 1,360 loans and 200 properties totaling $422.3 million, according to Moody’s Investors Service. Reverse mortgages are loans issued to borrowers 62 or older to convert a portion their home equity into cash. Nationstar, which is controlled by Fortress Investment Group, acquired all of the loans from Ginnie Mae-sponsored securitizations.
As with the servicer’s previous seven deals, payments to the notes will primarily come from the sale of repossessed properties and insurance claim payments from the Federal Housing Administration. However, the timing of the receipt of these funds depends on local real estate markets. And nearly half of the properties are in New York (30.3%), New Jersey (10.4%) or Florida (8.7%), states that require a court to sign off on a foreclosure, a lengthy process.
In its presale report, Moody’s noted that the New York concentration is higher than in any of the other five NHLT transactions it has rated, while the combined New York, New Jersey, and Florida percentage is the second highest. “As such, there is a risk that the payment profile in NHLT 2017-2 will be slower than previously rated NHLT transaction,” the report stated.
This risk is partially offset by the fact that loans in the pool are in various stages of seasoning, which Moody’s said should smooth the timing of funds coming into the deal. There is also a liquidity reserve that can be tapped to fund payments to noteholders.
The older loans are not necessarily closer to being repaid, however. Nearly a fifth (18.2%) of the loans have been recycled from two prior securitizations that were “collapsed” — the assets were liquidated and proceeds used to repay the notes. Presumably because so little collateral was left that the deals, NHLT 2015-2 and NLHT 2016-1, were uneconomical. The loans being rolled into the new deal were inactive for a long period of time without either returning to making timely payments or being liquidated.
The weighted average seasoning of the pool is 84 months, “significantly longer” than previous NHLT transactions that Moody’s has rated.
Another potential red flag: 16% of the mortgages are backed by properties that may have been affected by Hurricane Harvey or Hurricane Irma, which could also delay foreclosures and sales of the properties. Mortgage assets backed by properties that suffered hurricane damage are likely to have longer liquidation timelines, incur more expenses that are not fully reimbursable under FHA insurance, and are more likely to file for FHA insurance as an appraisal based claim, per Moody’s.
Some drawbacks for all securitizations of nonperforming reverse mortgages are that the FHA doesn’t fully reimburse at the stated interest rate of the loan or that does it provide full reimbursement of the foreclosure costs of a property (at about $4,500 per home).
Moody’s expects to assign an Aaa to $268.1 million of senior, Class A notes, which benefit from 36.5% subordination; there are also two subordinated tranches of notes: $86.6 million of M1 notes with 16% subordination are rated A3 and $44.3 million of M2 notes with 5.5% subordination are rated Ba3.
This is Nationstar’s eighth transaction backed by inactive HECMs and the sixth one rated by Moody's.