Bank of America Merrill Lynch closed a $92 million private placement security backed by “troubled” reverse mortgages insured by the Federal Housing Administration according to Total Securitization. The deal is the first private label reverse mortgage securitization seen in the market since the downturn.
Issued by Mortgage Equity Conversion Asset Trust Corporation, a shelf issuer that houses a large pool of assets for BofA, the deal’s senior notes came in with a 4.75% yield.
One trader with knowledge of the deal told Total Securitization he thought the pricing was high, but then reconsidered on the basis of the FHA-guaranteed reverse mortgage collateral. “It’s a fairly esoteric product but it will probably trade cheap because of the lack of presence in the market these days,” he said. “If you can get an FHA-insured product with a four handle yield that is enough to make people comfortable.”
It was previously reported that the security contained 760 HECMs of “scratch and dent” quality, likely fall-out from various trades, flawed originations, and or loans that are in taxes and insurance default. According to John Lunde, President of Reverse Market Insight, the deal should provide a pricing benchmark for how Ginnie Mae HMBS issuers handle HECM defaults.
“We are getting a much better handle on how often these occur, and with this pricing helping to set a loss severity benchmark it adds greater clarity to the financial obligations of HMBS issuers for risk management and valuations,” he said.
Unlike selling loans to Fannie Mae, which handles the default process for HECM loans, Ginnie Mae requires issuers to purchase HECM loans that reach 98% of the max claim amount. If the loans are in default (typically from failure to pay T&I), issuers can’t assign the loan to HUD and are forced to hold onto the loan.
“Now issuers can point to a public market deal for an important assumption in setting HMBS reserves,” said Lunde.
Standard & Poor’s assigned all the notes a preliminary rating of AA, but does not plan to release the presale report.