Moody’s announced the downgrades of $5 billion of private-label HECM bonds Wednesday, comprising 13 securities from 10 deals. Many of the bonds were previously downgraded in November 2011 to Aa1 and Aa2 ratings and this week have dropped further to Ba3 status due to sustained losses in home value and reverse mortgage properties that have been held in REO status longer than six months.
Because they are private-label securities, they have no bearing on the market for Ginnie Mae HMBS, sources told RMD, but the downgrade is indicative of falling home prices and under-collateralization of the bonds initially.
“With falling home prices and longer liquidation timelines, the risk that loans will take longer than six months to sell after entering REO has risen significantly, a trend corroborated by data from servicers,” Moody’s writes. “Losses on loans that have sold six months after entering REO have averaged 20%, that is, on average, properties are selling for 20% less than their appraised amounts. These trends are generally consistent with that of forward mortgages where REO properties are sold on average at about 15% lower than their updated appraisal values and where the majority of the REO properties are sold six months after the foreclosure sale.”
The current climate is leading to higher risks associated with the securitized loans, based on Moody’s assumptions in rating the bonds.
“Moody’s assumed that HUD would pay the loan in full that servicers assign to them upon loan balance reaching 98% of the MCA and that the borrower estate would pay the loan in full if the loan has positive equity upon maturity, both scenarios resulting in no loss to the trust,” Moody’s wrote. “For the rest of the matured loans with no equity, Moody’s assigned an 85% probability that an appraisal based claim will be filed resulting in a loss of 20% of the latest appraisal value to the trust. Moody’s further assumed that there will be no loss from the appraisal based claims after the next 2, 3, and 5 years for B, Ba, and Baa rating levels respectively.”
The rationale for downgrading is similar to that in the previous downgrades, announced in November 2011.
See a full list of the Moody’s downgrades.
Written by Elizabeth Ecker