The reverse mortgage industry has seen a number of proprietary products hit the market this year, and Kroll Bond Rating Agency is betting on their success.
A significant number of seniors are expected to exit the workforce as Baby Boomers continue to age, but studies show many lack the financial resources needed to sustain themselves in retirement.
And that’s why many experts are saying that tapping home equity through a reverse mortgage could be part of the solution for many of America’s retirees.
But HECM volume stifled by recent program changes, lenders are getting innovative, releasing non-agency reverse mortgage products designed to grant equity access to borrowers with higher home values and a need for cash.
In a report issued this week, KBRA said these factors suggest that the proprietary reverse mortgage market could gain momentum and possibly lead to an increase in both private and public securitizations of these jumbo loans.
In its report, titled “Five Things to Know About Reverse Mortgages,” KBRA pointed out that an analysis of reverse mortgages on a loan and securitization level requires “analytical considerations that can differ significantly from forward mortgages.”
Here’s what the ratings agency said interested parties should know:
1. RM lenders are offering more product options, including forward mortgages.
Many HECM originators are expanding into proprietary reverse mortgages, even exploring traditional forward mortgage products, KBRA writes. The agency calls this “product agnostic” trend a healthy development, because it could decrease the risk that a HECM-only originator would sell a reverse mortgage to an unsuitable borrower.
KBRA also points out that disclosures for proprietary products and financial counseling that mirrors FHA’s HECM counseling further improve the landscape. “KBRA believes that these enhancements may result in better suitability for some borrowers, which should ultimately translate to fewer defaults and/or early voluntary repayments.”
2. Borrower credit and capacity matter
Data from crisis-era proprietary RM vintages regarding loss severities, liquidation timelines, mortality and morbidity-based repayments may not show the whole picture, the report states. The current proprietary landscape mirrors FHA’s credit requirements to curtail T&I default.
“Today’s U.S. proprietary RM originators now typically follow HUD guidelines for financial assessments to determine the borrower’s willingness and ability to pay non-debt service amounts such as taxes, insurance, and property maintenance,” KBRA writes.
3. As in RMBS, property value is key, but there are nuances.
While senior borrowers on fixed incomes may fail to take care of ongoing home maintenance, KBRA points out that for proprietary reverse mortgages, the properties in question have higher values.
“The home is likely to have been owned by the borrower for some time, typically with attendant pride in ownership over most of that period,” KBRA writes. “Moreover, the home will have a significant amount of embedded home price appreciation and/or equity to be eligible for an RM in the first place.”
The report also points out that certain factors on the forward side pertaining to home price and default dynamics do not apply in the reverse space.
“It will not necessarily be the case that falling home prices will coincide with an increase of properties being offered for sale into the declining market, as one would expect for forward mortgages,” KBRA writes. “This lower causal relationship of decreasing home prices with liquidations for RMs can lead to lower loss exposure during periods of stagnant growth or downturn.”
4. Negative amortization does have a couple positives.
Reverse mortgages negatively amortize and accumulate servicing fees over the life of the loan. But while negatively amortizing loans on the forward side are less than desirable, this is not so in reverse. “A decreasing RM equity position does not increase the borrower’s propensity to default because no regular payments are due,” according to the report.
That said, the absence of monthly payments means that repayments are unpredictable and are typically made in full. This factor did cause ratings downgrades for proprietary and HECM securitizations in the post-crisis area, KBRA notes.
5. Prepayments are not dependent on interest rates.
Lastly, the majority of the return of principal in an RM securitization is driven by mortality and morbidity events. KBRA notes that the goal of reverse mortgages is to typically age in place, therefore borrowers who chose to prepay will be rare, and life expectancy plays an important role.
“An important consideration for the future cashflow of an RM portfolio depends on the investors’ expectations for changes to life expectancy over time,” the report states.