Moody's Investors Service has downgraded 16 private-label HECM reverse mortgage-backed securities from 12 deals in a move that affects $5 billion in bonds.
This is the first time Moody's has downgraded securities backed by HECM collateral, Debashish Chatterjee, associate managing director, structured finance group, at Moody's Investors Service, told this publication.
Moody's cited longer liquidation times and depreciating home prices that affect the amount of government insurance claims under HUD policies in downgrading the securities.
While the Department of Housing and Urban Development insures Home Equity Conversion Mortgages through the Federal Housing Administration, HECMs can be exposed to losses if the properties backing them are not liquidated within six months of entering REO under HUD's liquidation guidelines, Moody's noted.
Under these guidelines, the borrower's estate has six months to pay the loan in full before initiating foreclosure. If the property does not sell during the foreclosure sale, it enters REO and the servicer starts marketing the property.
If the property does not sell after six months in REO, the servicer has to provide HUD with an approved appraiser's valuation for the property. HUD provides reimbursement for the liquidated property based on that latest appraisal and the unpaid loan balance.
A loss could occur at this point because while HUD will cover the difference between the unpaid loan balance at liquidation and the appraisal, it will not cover any shortfalls between that appraised amount and the actual amount received for the property when it actually is sold, leaving the trust responsible for the shortfall.
This appraisal-based claim “is becoming more predominant,” Chatterjee said.
“What we are hearing from servicers is there are more and more properties…entering these appraisal-based claims," he said.
“No losses are allocated to the certificates, only at the end of the term are the losses realized,” Chatterjee said. He added that that it should also be noted that some transactions do carry some additional credit enhancement, but it tends to be relatively thin and some of the deals are undercollateralized.
Ultimately, the risk is not commensurate with Moody's top Aaa rating, Chatterjee said.
The affected bonds remain on review for further downgrade and during that review Moody's plans to further refine its assumptions for the frequency of appraisal-based claims and the losses arising from them.
Two of the downgraded transactions, Riverview 2007-4 and Riverview 2008-1, are resecuritizations backed by HECM bonds.
