Bank of America to Unload $92 Million of HECMs in Private MBS

NewImage.jpgBank of America Merrill Lynch is looking to sell a $92 million bond backed by “troubled” reverse mortgages backed by the Federal Housing Administration according to Reuters.

The bond includes 760 HECMs with borrowers are all in distress situations, including foreclosure. Whether or not they’re T&I defaults isn’t clear, but one analyst told RMD they’re likely “fall-out from various trades and flawed originations.”

Issuance of Ginnie Mae backed HMBS has been the dominant vehicle for reverse mortgage lenders, with $4.566 billion of HMBS issued during the first five months of 2010.  It’s likely the group of loans are not HMBS eligible and is the reason BofA is turning to the private market.

There has been other attempts at issuing a private RMBS but few if any have been able to find a buyer.

BofA’s issue will be priced with an interest rate of 4 percent, with about 21 percent of the underlying collateral set aside as credit enhancement, or investor protection from loss, the term sheet said.

BofA Merrill to sell $92 mln reverse mortgage RMBS

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  • Emergence of a “scratch and dent” market for HECM would be a very healthy development given the significant liquidity requirements imposed on HMBS issuers for loan buyouts.

    If this transaction can help facilitate development, that could have a significant impact on loss projections and capital requirements for HMBS issuers.

    • John,

      Can you please elaborate on your first paragraph? This would help many of us who are not familiar with the secondary market and its buzz words.


      • One of the major challenges for HMBS issuers is that they must buyout loans when their balance reaches 98% of MCA, regardless of whether they can successfully assign those loans to HUD or not.

        Given that most defaults (including T&I) render a loan unassignable, the issuer is then stuck with funding that loan in some other way outside the HMBS security until it terminates. This could be years until the borrower moves out, which creates a significant drag on issuer cash positions.

        If these loans can be sold into the market (typically referred to as “scratch and dent” because of their imperfect characteristics), then it can greatly ease the cash flow concerns of HMBS issuers.

  • Are these adjustable rate HECMs? With the average loan balance due apparently less than $122,000 and these loans being classified as “distressed,” they probably are which means they were held in their mortgage portfolio. Were they held in the B of A mortgage portfolio because Fannie Mae is not buying these loans?

    Is this a move to produce liquidity or a strategic move by B of A? Are the servicing rights being sold? Far too many questions than answers.

  • This is all related to the tax and insurance default issue that was brought up back in June on RMD. It looks like B of A is trying to off-load HECMs that are in default on either taxes or insurance so when the the properties are placed in foreclosure, B of A's name/reputation is not at risk.

    I say this is a very smart move by B of A and I would not be surprised to see other lenders do the exact same thing.

    • There is nothing smart about unloading junk on investors! Have we learned anything from the recent financial crisis? The originating lender can not escape liability and reputation damage. That is why these lending decisions should be made prudently and holistically in the first place. The smart thing to do is keep these junk loans in the portfolio, take some losses, and work them out.

      Well, if there are investors who knowingly want to buy them, that is a different story.

      • Atare,

        Your last sentence is well taken. It does not appear these loans are being integrated into other loans. It seems B of A is doing the right thing.

      • Critic: It would depend on the structure of the transaction and what the warrants, reps, and indemnifications are but yes, the “headlne risk” would transfer to the purchaser.

        Atare: There is nothing inherently wrong with unloading “junk” as you call it, if the buyer is aware that it is junk.

        ReverseStash: You are 100% spot-on!!

  • Hey The_Critic – the bigger point here is that if BofA can develop a -private market for HECM loans that cannot be included in HMBS, this is a huge plus for the industry. The ability to offload HECM loans for whatever reason, is critical to the further development of a strong and active secondary market for HECM loans. If we are limited to executing loans through HMBS only, then there will never be private market growth in the secondary markets for these products. As an industry, we must have growth in the capital markets, both private money and GNMA options need to be available.

    • ReverseStash,


      My first reaction to this story was about the same as that of the reversemaniac. You bring up some very valid points. However, I believe that they are important by-products of a process whose primary motive is that described by the reversemaniac.

  • Critic: It would depend on the structure of the transaction and what the warrants, reps, and indemnifications are but yes, the “headlne risk” would transfer to the purchaser.rnrnAtare: There is nothing inherently wrong with unloading “junk” as you call it, if the buyer is aware that it is junk. rnrnReverseStash: You are 100% spot-on!!rnrn

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