Moody’s Investors Service is taking a new approach to rating home equity conversion mortgages (HECMs) in line with recent actions taken on $4.5 billion of reverse mortgage bonds issued between 2005 and 2008.
Moody’s has downgraded 13 securities from 10 deals backed by HECM, Moody’s announced Wednesday. Moody’s also downgraded six HECM reverse mortgage backed resecuritization bonds from two deals. In addition, Moody’s has upgraded the rating of class A-1 issued by Structured Assets Securitization Corporation (SASCO) 2005-RM1 and the rating of class A1 issued by SASCO 2007-RM1.
The collateral backing HECM transactions transactions consists primarily of HECM reverse mortgages. The collateral backing SASCO transactions consists primarily of first lien, non-recourse and uninsured reverse mortgage loans, Moody’s says in a statement.
The rating actions on HECM reverse mortgage bonds are primarily based on the application of the company’s new methodology “Moody’s Global Approach to Rating Reverse Mortgage Securitizations.”
The new methodology details Moody’s assumptions for assessing whether the value of the homes at their maturities will be sufficient to pay off the original loans and any accrued interest.
“The global methodology is based on the analysis of the following factors: the future price of the home; the timing of mortality and mobility events; interest rate risk; liquidity risk; legal and operational risk; and the structure of the transaction,” Moody’s says. “Our bond ratings incorporate not only quantitative modeling results, but also numerous other factors, including for example the results of sensitivity analyses of the model outputs to certain assumptions and qualitative analyses relating to factors such as underwriting and servicing practices.”
Factors that would lead to an upgrade or downgrade of the rating are when projected loss assumptions remain subject to uncertainty with regard to general economic activity, house prices, interest rates, rates of mortality, morbidity and voluntary prepayments.
Lower-than-expected mortality and morbidity rates, higher interest rates, and lower house prices would negatively affect the ratings; higher-than-expected mortality and morbidity rates, lower interest rates, and higher house prices would positively affect the ratings. And deterioration in credit quality of the transaction counterparties may negatively affect the rating as well
Written by Cassandra Dowell