Add this to the long list of alternative ways to put money to work in the U.S. housing market: reverse mortgages that are in default.
Reverse mortgages allow borrowers 62 years or older to convert a portion of the equity in their homes into cash. Unlike a traditional home equity loan or second mortgage, however, borrowers do not have to repay the loan until they sell the home or no longer use it as their principal residence. In the meantime, the interest payment is added to the balance of the loan each month.
Once considered a lifeline for the desperate, underwriting has tightened over the past couple of years as the result of regulations introduced by the Federal Housing Administration, which insures reverse mortgages, and Ginnie Mae, which securitizes them.
As a result, reverse mortgages are increasingly being seen as a retirement planning tool, rather than as a loan of last resort.
Nevertheless, some $3 billion of reverse mortgages insured by the FHA become “inactive” each year, according to Moody’s Investors Service.
Reverse mortgages become inactive if a borrower or their estate fails to pay the amount due upon maturity, fail to pay property taxes or insurance, or otherwise defaults. When that happens, the property is repossessed and sold to recover the amount owed.
Nationstar Mortgage, a loan servicer, is in the market with the first rated securitization of what are formally known as Home Equity Conversion Mortgage (HECM) loans.
The transaction, dubbed Nationstar HECM Loan Trust 2015-2, is the sponsor's third backed by the asset class.
Moody's assigned preliminary ratings of 'Aaa' to the class A notes, which benefit from 35% credit enhancement; 'A3' to the class M1 notes that benefit from 15% credit enhancement; and 'Ba2’ to the class M2 notes that benefit from 5% credit enhancement. All of the notes are structured with a final maturity of November 2025.
NHLT 2015-2 is backed by a collateral pool of 1,106 reverse mortgages with a balance of $228 million. The loans are in either default, due and payable, foreclosure or the property has been repossessed (real-estate owned). Loans that are in default may move to due and payable; due and payable loans may move to foreclosure; and foreclosure loans may move to REO.
Nationstar acquired the mortgage assets from Ginnie Mae-sponsored HECM securitizations.
Moody's said that there is about one year worth of performance history available from the sponsor’s previous two transactions. "Having limited performance information on static pools that have been securitized introduces uncertainty on how the portfolio of mortgage assets might perform under different conditions," the ratings agency stated in its presale report.
Payments to the trust notes originate from a combination of sales proceeds from the liquidated properties and insurance claim payments from the FHA. "A number of factors can lead to delays in liquidating properties as well as the amount of proceeds," the presale report states.
To mitigate such possible timing irregularities in cash flow to the notes, the pool has a large number of mortgage assets in various states of seasoning which Moody’s said "should somewhat smooth funds coming into the deal." A liquidity reserve fund also provides a buffer for any potential mismatch between due dates on obligations and proceeds from the collateral.
Nationstar's previous deals backed by the asset class were unrated. In December 2014, it issued the $343.6 million HECM Loan Trust 2014-1, in which it retained approximately $70.4 million of the class A notes as well as $36.2 million of class M notes.
In the second quarter of 2015, the company issued $269.4 million of notes, also through a private placement.