People familiar with their development say there are at least a few products that could come off the shelf within several months should the government decide to lower HECM loan limits.

The Department of Housing and Urban Development has said it will keep the current loan limits in place until December 31, 2011, but from there on out, it’s anybody’s guess as to where they go.

If they return to pre-recession levels, some feel the potential looks to be in place, but not without a few hurdles. First, there need to be investors interested in the product or some company willing to place the loans on its balance sheet.

Lenders also need to be able to originate a certain level of critical mass to pique investor interest—another challenge, should market conditions improve.

“Actual core development of the product is part of the process, then you have to educate the sales force,” says Mike McCully, partner at New View Advisors, which has helped in the development of past private products.

The development process could take a matter of months, he says, but finding the investor is the critical step. “If you originate it, someone has to buy [the loans],” McCully says.

Jumbo reverse mortgages are not new to the industry. When the financial markets collapsed, the government stepped in to raise HECM loan limits to $625,500 in 2009 and the private products—once offered by Financial Freedom, Bank of America and others—disappeared overnight.

A return of the private market seemed inevitable when Generation Mortgage released a jumbo product in 2010, the first since the subprime crisis. Today, there might be a market for the product, but it’s a different level compared with before.

“We’ve been writing them pretty consistently, but nothing like the old days when the factors were higher,” says Jeff Lewis, chairman of Generation.

“When jumbos were en vogue, houses were worth a lot more and loan limits were much higher.” The average home value for a jumbo during the boom time was around $900,000, Lewis notes. Today, that same home, now worth $600,000, qualifies for the government-insured HECM.

Without values upwards of $1.5 million, he says, there’s not much chance for the loans to compete with traditional HECMs.

Despite only one product on the market, some feel the investor interest is there, and could be realized as soon as today.

“Investors would like to see something, but haven’t seen anything yet,” says Jeff Traister, managing director for Cantor Fitzgerald. “If it’s priced correctly, there’s always money available, even if there are only five [loans].”

With home prices at their current levels and government projections of sustained losses and a painfully slow recovery, the outlook is not great, McCully says, but secondary market interest is a good sign.

“I think if you do get that bullish investor, it would be very good for the industry,” he says.

Written by Elizabeth Ecker

The downgrade actions came from three mortgage deals and were driven primarily based on the loans concentrated in California, where house prices have declined more than 40% since 2006, Moody’s noted. Analysts expect those home prices to decline an additional 5% from current levels until 2012, after which a slow recovery will follow.

The secondary market impact is unlikely to be significant.

“Downgrades are never good, but none of the bonds have had writedowns yet,” Michael McCully, partner at New View Advisors told RMD in an email. “Other rating agencies have previously downgraded these securities, so most of the market impact has probably already occurred.”

The six bonds from three reverse mortgage deals issued by Structured Assets Securitization Corporation (SASCO) from 2005 to 2007 mainly comprise first lien, non-recourse and uninsured reverse mortgages, Moody’s said in a report.

“All of the deals have a lot of overcollateralization,” McCully said. “A number of bonds (mostly mezzanine bonds) have paid off in their entirety. The rating agencies are basically re-calibrating the ratings by testing what happens if home prices fall another 30%.”

Moody’s noted that given the age profile of the borrowers, it expects a large percentage of maturities to take place over the next five years, while the housing market is still very weak. As a result, the ratings service said, cash flows to the bonds are expected to be impacted negatively.

For more information, see here.

Written by Elizabeth Ecker

Prior to the financial crisis, there were several lenders offering a variety of proprietary products and no one would’ve argued about the important role they would play in the future growth of the industry. But almost five years later, the markets are starting to rebuild and it remains to be seen exactly what type of role the private market will play in the future of the industry.

Housing: A New Reality

At the peak of reverse mortgage activity in 2007, the proportion was as high as 16% of total value* according to data gathered by Reverse Market Insight.

Today, the proportion is much smaller. With the decline of Lehman Brothers—formerly the largest issuer of private reverse mortgage securities—in 2008, the products became scarce. Non-HECM reverse mortgages comprised just 2% of reverse mortgage volume in 2010.

Whether private products will overcome the challenges necessary in order to rebound remains to be seen, but many believe that resurgence could be the key to growing the industry.

“The body of homes that were in the pool as prospective borrowers was enormous,” says Jeff Lewis, Generation Mortgage chairman, of recent years when private products were more mainstream.

“A million dollar house was a dime a dozen; $800,000 or $900,000 would be in the sweet spot of jumbo. There were a lot of those before,” he says. Generation has been known for its Generation Plus loan, which is offered to borrowers higher home values in the $1 million to $6 million range.

Today, post-housing bubble, the peak-to-current home value index shows a 32% decline, according to the most recent data from the S&P/Case-Shiller Home Price Indices. Nationally, some areas are still seeing declines and the few gains in some regions have been modest.

While the market was previously poised for such independent products with a secondary market that was receptive to the loans, the economic climate today is a major deterrent.

Steps to Recovery

The stabilization of home values is just one of several challenges facing private reverse mortgage products, says David Fontanilla, director for Knight Capital Americas, owner of top-5 reverse mortgage lender Urban Financial Group.

“The thing I think that holds it back today is that the securities market hasn’t returned. Property values are still uncertain. The economy is mixed. All that combined, when you’re dealing with a product that doesn’t have government insurance. It’s a different risk profile for investors,” he says.

“The required yields are too high to be competitive with HECMs, especially at the higher loan limits. It will be interesting to see if loan limits normalize, [whether] we’ll see more,” says Fontanilla.

Until conditions turn around, Knight’s Fontanilla doesn’t see it happening. Pending a rebound, however, the outlook for private products should be brighter.

With one active jumbo product today and the number that were around before the market crash, says John Lunde, president of Reverse Market Insight, “we can be sure there are many tweaked jumbos waiting to come off the shelf once secondary markets allow non-government backed securitizations again.”

Since the financial crisis of 2008, there has been little private-label mortgage securitization. Redwood Trust is the only company to have closed any private jumbo securitizations since the market crashed in 2008; first in a $237.8 million deal in early 2010, and more recently in its second deal totaling $290 million. Until the securities market gains steam, the likelihood of private securitization for reverse mortgages is slim.

“Effectively, it will return on pace or a little behind other products returning. I can’t necessarily see it’s an environment that warrants that yet,” says Fontanilla.

“There might be some balance sheet lending in advance of securitization becoming available, but that’s a relatively small supply of lending capacity compared to securitization potential for these products,” says Lunde.

The Future of Private Products

While the time frame is unknown, some industry veterans are certain the products will come back with time. The question is, will they be as good as they once were?

“Three or four years ago, the product was way too good,” says Lewis. “Growth rates were too good.”

Bart Johnson, CEO of new broker roll-up entity National Senior Home Equity says the comeback of proprietary products will be essential to expansion of the industry. The company is currently focusing on rolling up HECM production, but does not see the industry as being limited to government backed loans.

“Just having HECM in the industry puts us at the point where we’re always goign to be at 2%, and it will take the proprietary market coming back to get higher. We ought to have 8-10% market penetration based on needs and longevity.”

“[We] might not have recovered from the shock of the last recession, but it’s inevitable that the private sector will happen,” says Johnson. “It’s too big and lucrative to ignore.”

*Editor’s note: A previous version of this article reported in error that 16% of volume, rather than value, was attributed to private products. RMD regrets the error.

Jeff Lewis, chairman of Generation Mortgage, told the Boston Globe it not only meets the needs of borrowers with higher home values, but will also serve aging boomers who are still raising children and helping to support their own parents.  Describing an experience at a conference he attended, Lewis asked if they or their parents had a reverse mortgage.

“No hands went up. When they were asked how many were writing a check every month to help their folks, more than half the people in the room raised their hands. For most of their parents, a reverse mortgage would make sense.”

Generation is the first lender to release a jumbo reverse mortgage market since the financial meltdown and closed its first loan in August.  It’s the first reverse mortgage product that requires a minimum FICO score of 700, why?

Investors want to ensure that borrowers have the ability to maintain the property and pay taxes and insurance.

“The owners are obliged to keep up the property like the other properties in the neighborhood. Since there is no mortgage insurance to protect the lender, the lender wants some assurance that the owner will continue to maintain the property when there is a potential for a negative adjustment (value decreases).”

A jumbo mortgage that works in reverse

According to S&P, the seven downgraded classes from series Securities Corp.’s (SASCO’s) series 2006-RM1 and Structured Asset Securities Corporation Reverse Mortgage Loan Trust 2007-RM1 reflect that the amount of credit enhancement available is not sufficient to cover projected losses under revised stress scenarios for the previous rating levels.

“Factors that contributed to higher projected losses on these transactions include increased market-value decline assumptions, stresses at various constant prepayment rate (CPR) speeds, and declines in home prices over the past few years,” said analysts.

In addition to home price depreciation that already occurred for assets within the pool, S&P will apply an additional 35.0% and 21.0% market-value decline assumption for ‘AAA’ and ‘BBB’ rating scenarios, respectively, over the next three years.  These additional market-value decline assumptions, when aggregated with the current home price depreciation, are consistent with S&P’s market-value decline assumptions of 45.0% and 38.0% for ‘AAA’ and ‘BBB’ rating stresses, respectively

Adding, the transaction’s performance characteristics are unlikely to improve to original levels in the foreseeable future as a result of economic conditions and the current status of the housing market.

At the same time, the S&P placed ratings on two classes from Structured Asset Securities Corp. Reverse Mortgage Loan Trust 2005-RM1 on CreditWatch negative.

While private reverse mortgages have been non-existent until recently, the agency emphasizes the importance of financial institutions mitigating the compliance and reputation risks associated with the loans.

Unlike HECM origination fees, which are expressly limited by statute, the FFIEC said the costs and risks of proprietary loans may be different and therefore does not intend to set fee limits.

“The Agencies expect institutions offering proprietary reverse mortgages to reasonably price such products, including with respect to origination fees, consistent with safe and sound banking practices, and with appropriate consideration of costs, risks, and returns,” said the agency.

Institutions should comply with any applicable law or regulation, and follow guidance governing fees.

“Taking these steps would help to ensure that institutions are addressing the full range of consumer protection concerns raised by reverse mortgages,” said the FFIEC. “Moreover, the Agencies expect institutions to take appropriate steps to determine or ensure that consumers will be able to pay required taxes and insurance.”

While the regulator is not imposing a credit underwriting standard, institutions are expected to take appropriate steps to determine or ensure that borrowers have the ability to pay taxes and insurance.  Possibly through escrow or set-aside arrangements.

Rather than establish any of these type of arrangements, Generation Mortgage decided to use a credit underwrite earlier this year when it released the first jumbo reverse mortgage product in at least two years.

Jeff Lewis, Chairman of Generation, told RMD that eventually the industry will see a credit underwrite in all reverse mortgage products.  ”It is better for the investor when the borrower has the means to stay current on their other obligations and maintain the home properly,” he said.  The company requires that borrowers have a minimum FICO of 700.

The guidance will be effective 60 days after publication in the Federal Register.

After rolling out the first new jumbo reverse mortgage product in two years, Generation Mortgage announced it closed the first Plus product on Wednesday.

“The Generation Plus loan caters to an underserved segment of senior homeowners living in higher-valued homes,” said Scott Peters, President and CEO, Generation Mortgage Company. “We’re very pleased with the quick market acceptance of our jumbo product as it demonstrates that Generation Mortgage is filling a genuine market need among seniors seeking to obtain the highest payout possible on one of their most valuable assets.”

Available for seniors with homes appraised between $500,000 and $6 million, the product can offer certain borrowers with more proceeds than the Federal Housing Administration’s reverse mortgage product.

“Getting this reverse mortgage gives new meaning to the phrase, ‘house proud,’” said Barbara, a Newport Beach resident who closed on the loan.  ”Until now, we were unable to leverage our home equity. This was a huge frustration as we did not want to move and we had all this money tied up in home equity. The Generation Plus loan has been the perfect solution allowing us to access this money, stay in our home, and gave us peace of mind.”

According to the couple, tapping into their home equity allows them to invest for their personal goals of providing financial security to their heirs.

“Most homeowners I’ve spoken with are strategically re-evaluating their estate and are considering using a jumbo reverse mortgage to re-distribute their assets in a manner that promotes their legacy,” said Raymond Denton, a reverse mortgage originator with iReverse Home Loans and Generation partner.  ”The Generation Plus loan may allow consumers to reduce inheritance taxes and provides maximum financial benefit to heirs.”

Different than jumbo reverse mortgages offered in the past, the Plus requires a minimum FICO score of 700, a first for the industry.  The product also provides borrowers and their estate an extra benefit through its Gen Plus Estate Guard.  

”The benefit is that despite the non-recourse nature of the loan, borrowers and heirs are potentially exposed to significant tax liability if the future home value is not sufficient to cover the accrued loan balance,” said the company in materials provided to correspondents.  ”By having the ability to monitor the home value versus the loan balance, they can potentially help keep the loan from becoming grossly upside down.”

RMD previously covered more of the unique aspects of the loan here.

Signaling the future of reverse mortgages will include some sort of a credit underwrite, the Plus products requires a minimum FICO score of 700, a first for the industry.

“Eventually we will see credit underwriting in all reverse mortgage products,” said Jeff Lewis, Chairman of Generation Mortgage in an email to RMD.  ”It is better for the guarantor/investor when the borrower has the means to stay current on their other obligations and maintain the home properly.”  Since the PLUS product is private, Generation was able to make a change it cannot impose on the government’s product unilaterally he said.

Targeted at borrowers whose home values higher than $1 million, the program is offered at two different rates, 7.875% and 8.875%.  The higher rate provides the borrower more money upfront.  ”The proceeds difference is about 10% on average between the two coupons,” said Lewis.  Compensation for each rate is the same, so there is no benefit for the lender to steer a consumer into the higher rate unless they’re looking for additional proceeds.

The product also provides borrowers and their estates with an extra benefit through its Gen Plus Estate Guard.  ”The benefit is that despite the non-recourse nature of the loan, borrowers and heirs are potentially exposed to significant tax liability if the future home value is not sufficient to cover the accrued loan balance,” said the company in materials provided to correspondents.  ”By having the ability to monitor the home value versus the loan balance, they can potentially help keep the loan from becoming grossly upside down.”

Essentially, the feature allows borrowers to order a new appraisal after the loan has been originated and if it indicates the value of the Property is less than 80% of the outstanding balance of the note, the mortgage amount due will cease to accrue interest.

However, Generation has the right to order a subsequent appraisals at its discretion and if the appraisal finds the value of the property is more than 90% of the outstanding balance of the note at the time of the subsequent appraisal, interest will start to accrue again.