At this weeks Secondary Marketing Conference in Boston, Ginnie Mae mortgage banking analyst, Justin Burch hosted the session “Reverse Mortgages – Outlook for Industry”. According to the National Mortgage News, Mr. Burch told attendees that the Home Equity Conversion Mortgage REMIC, which has been discussed for the past six months, “is coming.”
Mr Burch believes the financial instrument is the next critical piece in the evolution of the secondary market for reverse mortgages. Not sure what a REMIC is? Here is a quick summary from Calculated Risk:
REMICs are very complex, and so we’re just going to skim here. The basic idea is that the cash-flow from an underlying pool of whole loans—even one or more underlying pass-through MBS—can be sliced up or “tranched” into separate securities with differing cash-flow characteristics and time-to-maturity horizons. The simplest approach is “sequential pay”: a structure of classes is set up, with each tier getting its scheduled pro-rata share of the pool interest, but the top tier getting all the scheduled (and all or most of the unscheduled) payments of principal, until that tranche or class is paid off. Then the next tier gets principal payments, and so on. This lets you take an underlying pass-through with an expected maturity of 25 years and turn it into one 2-5 year bond, one 5-7 year bond, one 7-10 year bond, and so on. It also creates a “yield curve” within the REMIC, as the shorter-maturity classes earn a lower rate of interest than the longer ones. This is true even if the underlying loans are all 30-year fixed rates.
If you want to get even deeper into it check out their post MBS For UberNerds II: REMICs, Dogs, Tails, and Class Warfare.