One of the big culprits pointed to in the current mortgage fiasco is the rapid growth of mortgage “securitization”. This term refers to the practice of bundling lots of individual mortgages into investment securities for sale to investors throughout the world. The big benefit of securitization is that a larger pool of investors is attracted meaning more money can be raised for additional loans while, at the same time, investor competition (and GNMA guarantees) help keep interest costs down.

But when traditional mortgages are securitized, it seems that banks and other lenders tend to pay less attention to the underlying credit worthiness of the frontline borrowers than they do when mortgage loans are held in their own loan portfolio. In the rush to generate fees and maintain loan production, too many lenders lost sight of the simple fact the system ultimately depends on the ability of the borrower to make their monthly loan payments.

It seems ironic, then, that just as securitization of traditional mortgages undergoes close scrutiny, the Government National Mortgage Association (Ginnie Mae) unveils a new program aimed at expanding the securitization of HECM reverse mortgages.

Of course, risk factors associated with reverse mortgages are far different than for traditional forward mortgages: with HECM reverse mortgages there are no monthly loan payments made by borrowers and the borrowers’ creditworthiness is not a major concern. The main risk that investors in HECM MBS face will be the uncertainty of when principal and interest will be paid. And this is a function of life expectancies, health care advances and similar factors. The Base Prospectus for the HECM MBS released by Ginnie Mae makes this very clear:

Each investor should carefully consider that the actual rate and timing of (principal and interest payments) could differ significantly from such investor’s expectation. Rapid progress in the health sciences or increased availability of health care, for example, could prolong the lives of borrowers or postpone relocation of borrowers into long-term care facilities. The availability of home nursing care could cause borrowers who would otherwise relocate to remain in their homes, delaying the occurrence of a Maturity Event. Conversely, other factors such as the absence of health care insurance available to borrowers or required life-sustaining medical treatments could accelerate the occurrence of a Maturity Event. Considered scientific opinion as to life expectancy could simply be wrong. In general, the life spans and life expectancy of Americans have increased over time.

Neither Ginnie Mae nor the Ginnie Mae Issuer has undertaken any investigation of the health of the borrowers under the HECMs. It is highly unlikely that a Maturity Event, voluntary payment by the borrower or any Ginnie Mae Issuer purchase event will occur at any constant rate or at the same rate at any one time. The timing of changes in the rate of Maturity Events, voluntary prepayment events or Ginnie Mae Issuer purchase events may affect the actual yield to an investor, even if the average rate of Maturity Events, voluntary prepayment events or Ginnie Mae Issuer purchase events is consistent with the investor’s expectation. As a result, the effect on an investor’s yield of the occurrence of Maturity Events, voluntary prepayment events or Ginnie Mae Issuer purchase events occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the Issue Date of the Security as set forth in the related prospectus supplement is not likely to be offset by a later equivalent reduction (or increase) in the rate of occurrence of Maturity Events, voluntary prepayment events or Ginnie Mae Issuer purchase events.

In sum, securitization of the HECM reverse mortgages should result in tangible benefits for borrowers (lower interest rates, better loan availability, etc.) without most of the negative side effects seen with traditional mortgage securitization. Clearly, HECM MBS securities are complex and will likely attract only sophisticated, knowledgeable investors. And, there may well be a tainting effect from troubles in the traditional mortgage markets that stunts the initial growth of these new securities.

It will be interesting to see how this important new development in the reverse mortgage arena plays out over the next several months.

Social tagging: Ginnie Mae > Ginnie Mae reverse mortgage > HECM > HECM MBS > HMBS > mortgage backed securities > Reverse Mortgage Products

A Few More Related Articles of Interest:

HECM Lender Comparison 10/31/2007 vs 10/31/2006

July is Second Best Month Ever for HECM Endorsements

Growth in HECM Loans

Death of the HECM 100?

HECM Endorsements Surpass 10K in March