The slow-going REO sales process is beginning to take a toll on private label reverse mortgage securities, despite the government insurance those reverse mortgages carry, Moody’s Investor Services stated in a new report released Tuesday.
Moody’s recently downgraded $5 billion in reverse mortgage bonds, citing falling home prices and longer liquidation timelines.
“Falling home prices and longer liquidation timelines have combined to expose certain Home Equity Conversion reverse mortgage-backed securitizations to potential losses that would otherwise have been covered by mortgage insurance from the Federal Housing Administration,” Moody’s writes. “In many cases in which liquidation proceeds do not meet or exceed the properties’ appraised values, insurance proceeds will be insufficient to cover the balance of the defaulted loans and will result in losses to the trusts.”
But there is little to no impact on Ginnie Mae HMBS, for which investors are protected by a government guarantee. Those securities still look good to investors in light of the down housing market.
“The possible affect it will have on HMBS is on timeline projections someone may potentially use for projecting default resolution,” says Jeff Traister, Managing Director for Cantor FItzgerald. “Considering most HMBS trade at fairly lofty premium dollar prices, I would be willing to bet that anything that points to a slowdown in payments is a positive development.”
However, Moody’s reiterated that private label securities, which are structured for potential losses, may begin to feel some impact at the REO sale process continues to slow.
After the property has been in REO for six months, HUD’s reimbursement of the loan is based on property appraisals, rather than the outstanding loan amount.
In its ResiLandscape report, the rating agency outlined the process by which appraisal-based claims expose private label trusts to losses despite the government insurance. “The appraisal-based reimbursement stipulation exposes HECM-backed private-label securitizations to potential uncovered losses because, in the event that the liquidation proceeds are lower than the appraisal amount, HUD does not cover the difference between the appraisal amount and the liquidation proceeds,” Moody’s writes. This shortfall results in a loss for the securitization trust.
Moody’s restated that roughly 7% to 10% of the matured loans that HUD has verified as due and payable have been in REO longer than six months, with an average loss of 20%.
Written by Elizabeth Ecker