Given the demographics of our senior population, you would think the reverse mortgage industry would be much larger than it is. Some might wonder what is holding the industry back?
On the product side, there is the mainstay Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM), which captures more than 85% of the market, plus Fannie Mae's Home Keeper product and a handful of proprietary reverse mortgages designed more for the jumbo market.
FHA has continued to expand the HECM product with its recent introduction of LIBOR-based HECMs as well as a closed-end HECM Fixed product. There are more tweaks and modifications necessary by the FHA to help the HECM product along. However, for the most part, the produce is in pretty good shape.
On the investor side, however, the industry has been extremely limited. For the HECM products, Fannie Mae has been a whole loan purchaser for more than 15 years and, for most of this time, stood alone in that role.
At the end of 2006 and beginning of 2007, the industry had enough volume to attract investment banks to the table. For the first time, the industry had multiple bids on pools of HECM loans.
The challenge is not in gaining confidence in the whole loan mortgages, with the U.S. Department of Housing and Urban Development (HUD) insuring each loan and with assignment to HUD when the loan reaches 98% of the original maximum claim amount.
The challenge is creating a securitization structure that can support the cashflow requirements of a pool of reverse mortgages. These cashflow requirements include fees to the servicer, line of credit draws to the borrowers, monthly term or tenure payments to borrowers and, if required by the security, monthly payments to the security holders.
Ginnie Mae's input
Ginnie Mae recognized this cash flow challenge and set out to structure a Ginnie Mae HECM mortgage-backed security that could address these securitization issues. They devised the Ginnie Mae Home Equity Conversion Mortgage-Backed Securities (HMBS).
This allows the reverse mortgage industry to create securities that are backed by the full faith and credit guarantee of the U.S. government. This also serves to significantly broaden the investor base and expand the secondary market.
The only reverse mortgages eligible for the HMBS program are the FHA-insured HECM loans. This includes the monthly and annually adjustable HECM loans based on the weekly average yield on U.S. Treasury securities, adjusted to a constant maturity of one year or indexed against the one-year or one-month LIBOR, as well as fixed HECM loans.
The HMBS structure addresses the cashflow requirements for these loans by creating participation in HECM loans. The HMBS participation structure allows issuers to securitize the outstanding balance on a HECM, including the initial draw, accrued interest, servicing fees and future draws or advances made to the borrower.
Once participation is established and made part of a HMBS, the HMBS has no additional funding obligations to the borrower or servicer. As the borrower draws more money and pays more servicing fees after the first participation, these advances can be rolled into another HMBS security as the second participation for that HECM loan. There is no limit to the number of participations in which any one HECM loan can be divided, so this process can continue as often as the issuer wishes.
Issuers pay a monthly guaranty fee to Ginnie Mae equal to one-twelfth of six basis points (0.06%) of the outstanding balance of the HMBS. These fees can also be rolled into future participations.
The one cashflow issue this structure does not address is structured monthly payments to the security holders. What the security holder gets is a pro rata portion of any payments, whether the borrower pays off in full or partially, based upon the percentage of the outstanding balance that each HECM participation comprises.
As HECM loans do not have stated maturity dates, there are no specific terms associated with HMBS. Instead, loans are considered due and payable upon whichever event is first to occur: the death of all mortgagors on the loan; a refinance of the property; the mortgagors no longer occupy the home as their primary residence; or if they default on the mortgage by not paying their real estate taxes.
What happens now?
As of this writing, there have only been a small handful of HMBSs issued. The reason this structure has not taken off as originally anticipated is two-fold. The first concern would be the servicing aspect of the participations. As with most new programs, there were no systems developed or third-party servicers available to support the servicing and reporting requirements of the new HMBS program.
To date, only a few companies have developed systems and have been approved to issue HMBS.
The second reason is the state of the economy and the skittishness of the secondary market to invest in any MBS. This is a real disappointment in relation to the kickoff of the Ginnie Mae HMBS program. However, this structure really is brilliant and will serve the reverse mortgage industry well once some stability comes back to the marketplace.
So, where will the industry be in the next three to five years with Ginnie Mae HMBS? It would not be a surprise to see 75% or more of all HECM loans broken up into HMBS participations.
There is also a good chance we will also see security structures developed where HMBS are combined with other types of Ginnie Mae securities, creating a structure that could support monthly payments to security holders.
It is easy to also envision this participation structure catching on in the proprietary reverse mortgage product market.
Jeff Birdsell is first vice president, secondary marketing and product development, at Financial Freedom Senior Funding Corp., Irvine, Calif. He can be reached via email at firstname.lastname@example.org.