Hedge fund claims first reverse mortgage securitization
Waterfall Asset Management, a credit-focused hedge fund that specializes in ABS investments, is in the market with what it claims is the first publicly rated securitization of reverse mortgages.
Kroll Bond Rating Agency on Wednesday published the presale report for the $571.76m Cascade Mortgage Funding Trust 2018-RM2. The deal is backed by a pool of 915 reverse mortgages issued between 2002 and 2008 and acquired by Waterfall.
In a reverse mortgage, a homeowner borrows against a portion of the equity value in their home. Reverse mortgage borrowers make no repayments until a repayment event occurs for the last surviving borrower, such as the sale of the property. The loan does not amortize and accrues interest until the repayment event. Borrowers are still responsible for paying property taxes.
Kroll notes that reverse mortgage borrowers are typically older, and that the minimum age to qualify for a government guaranteed reverse mortgage is 62, though none of the loans in this deal carry a guarantee.
Classes ‘A’ to ‘F’ in the Waterfall deal are fixed rate and rated AAA to B-, while there is also a AAA rated floating rate tranche. Barclays is leading the transaction.
Kroll notes that normal probability of default considerations applied to traditional RMBS are not applicable with reverse mortgages, and instead the rating agency focused on probabilities of borrower mortality, morbidity and the likelihood that they sell the property during the term of the mortgage.
The deal marks yet another new flavour of RMBS that has come to market since the financial crisis. While the private label MBS sector is still a fraction of its pre-crisis size, deal types have become more varied. The market in 2018 is a mixed bag of re-performing, non-performing, prime jumbo and agency credit risk transfer MBS, with a good portion of mortgage servicing rights securitizations also in the mix.
Reverse mortgages have been eyed as the next step of the post crisis RMBS evolution for some time, but observers have said that what little paper has emerged has largely been in private deals.
Other RMBS sources have also eyed home equity line of credit securitizations as the next step in growing the private label RMBS market, but the complexities of that investment, as well as their dodgy crisis-era legacy could make them a tough sell for investors.