Finance of America Reverse has issued a pool of securities associated with inactive Home Equity Conversion Mortgages — a strategy that could represent a solution to liquidity issues in the space.
The pool consists of 2,078 inactive loans with a total balance of just under $420 million, according to an analysis from Moody’s Investors Service. The loans entered inactive status for a variety of reasons: a plurality, about 46%, consist of foreclosures, with a remaining mix of loans in default due to non-occupancy or tax-and-insurance defaults, homes in real estate owned (REO) status, and a very small amount of bankruptcies.
The goal, according to an HECM-backed securities (HMBS) analyst who spoke to RMD, is to solve the issue of liquidity, a major stumbling block for issuers in the secondary market. When a reverse mortgage reaches 98% of its maximum claim amount, the issuer is responsible for buying it out of the security. For active loans, this process generally isn’t a problem: the loan is assigned to the Department of Housing and Urban Development, and the Federal Housing Authority pays the issuer after about a month or so.
But HUD and FHA won’t accept inactive loans, making the buyout difficult for issuers. By issuing securitized pools associated with these HECMs, issuers can raise the necessary capital to buy the loans out — and bondholders get a rated security.
With the issuance, FAR joins Nationstar Mortgage Holdings, Inc. (NYSE: NSM) in the inactive securitized HECM space.
While the Tulsa, Okla.-based company will be the named servicer for the pool, Celink and Reverse Mortgage Solutions will act as subservicers for roughly half of the pool each. The split-subservicer arrangement will serve as a failsafe in case the ongoing Chapter 11 process at RMS’s parent, Walter Investment Management Corp. (NYSE: WAC.BC), affects its servicing abilities, according to Moody’s; RMS is not named in Walter’s bankruptcy-protection filing.
Liquidity among issuers remains a top concern of Ginnie Mae officials, with senior vice president Michael Drayne saying that delays in FHA assignments — caused by a sustained surge in the number of loans hitting 98% of their maximum claim amounts — has increased capital strains on HMBS issuers.
“One of the main things that will be driving us is: What can we do that limits the capital demand on issuers?” Drayne told an audience at the National Reverse Mortgage Lenders Association’s annual conference in San Francisco last month. “Because that could be dangerous for them, and dangerous for us as well.”
Written by Alex Spanko