FAR Recycles Collateral in Series of New Defaulted HECM Bonds

The next offering of bonds from Finance of America Reverse (FAR) that are backed by defaulted reverse mortgages includes a higher percentage of loans from a 2017 transaction which collapsed recently. This is according to a story in Asset Securitization Report (ASR).

“Nearly 67% of the loans in the $309 million loans and repossessed properties backing FASST 2019-HB1 were recycled from FASST 2017-HB1, according to Moody’s Investors Service,” the story reads. “This collateral has been inactive for a significant period of time without re-performing or successfully liquidating.”

Even though Home Equity Conversion Mortgages (HECMs) are insured by the Federal Housing Administration (FHA), the claims associated with them are capped, with ASR offering the fact that FHA reimburses only two-thirds of foreclosure costs and attorneys’ fees as an example. This means that a longer overall liquidation timeline could potentially result in, “a larger percentage of liquidation losses being non-reimbursable by insurance,” the article says.

Other identified weaknesses in this transaction include a high concentration of loans (23.9 percent) backed by Hurricane Maria-affected properties in Puerto Rico, with risk compounded by the poor performance of the Puerto Rican economy, its housing market and general difficulty in resolving delinquent tax issues and foreclosures on those properties.

A high concentration of the affected loans are also currently involved in bankruptcy proceedings (4.2 percent), and as a sponsor of the loans, FAR is unrated. Without a backup servicer and in the event of a servicer termination, “the trustee will facilitate the replacement of the servicer. To replace the servicer, additional servicing fees may be added to the top of the deal waterfall and certain reimbursements to the servicer will no longer be subordinated,” the article reads.

There are only a small number of qualified servicers of defaulted FHA-insured HECMs.

“To mitigate the risk, Finance of America has engaged Celink as a backup sub-servicer,” the article reads.

Representatives of FAR did not respond to a request for comment as of press time. For more, read the article at ASR (membership required).

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