Moody’s Downgrades $5 Billion in Reverse Mortgage Bonds

Moody’s announced last week the downgrades of $5 billion in reverse mortgage bonds comprising 12 deals. The 16 securities remain on review for further downgrade, Moody’s said, citing falling home prices and longer liquidation timelines.

The deals were structured to include some potential losses and the downgrades now reflect a greater loss expectation.

“Falling home prices and longer liquidation timelines expose these transactions to potential losses,” Moody’s stated. “Even though these mortgages are insured by HUD, they could be exposed to losses if the properties backing them are not liquidated within six months of entering REO.”

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The rating agency further explained that the risk that loans will take longer than six months to sell after entering REO has risen significantly, a trend which Moody’s corroborated by data from servicers. Currently, approximately 7%-10% of the matured servicer portfolios where HUD has verified that loans are due and payable, consist of loans that have been in REO for longer than six months, Moody’s said, indicating that losses on loans that have sold after six months of entering REO have averaged 20%—in other words, are selling for 20% less than their appraised amounts, on average.

Some of the deals have been consistently plagued with slow prepayment speeds, Joe Kelly, partner of New View Advisors, told RMD.

Moody’s based the downgrade on assumptions including the sale of REO properties at 20% lower than their appraised values, and that all properties in foreclosure will go into REO.

Written by Elizabeth Ecker