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MARCH 2010 O
NEW JERSEY MORTGAGE PROFESSIONAL MAGAZINE
O www.NationalMortgageProfessional.com
finance, corporate finance and capital markets with a product that had a clear and tangible benefit to society. There existed an opportunity to lend the credibility of a global mortgage franchise in Lehman Brothers to a struggling asset class with unlimited potential. We believed it would become a mainstream product with sufficient education, secondary markets distribution and innovative product development.
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structuring work involved. We also had to design a reserve fund feature to fund the borrower advances. Finally, we had to use an unusual “FASIT” tax structure, as reverse mortgages were not yet eligible for REMICs.
What is a prepayment curve? What are the factors that go into its design? What is a reserve fund feature? And what is FASIT? The prepayment curve is a measureDo you still hold that belief in the ment of the rate at which loans pay off unlimited potential of reverse mort- over time. For reverse mortgages, the gages? Why? most significant variable We still believe that is generally borrower reverse mortgages are an age, but the reverse essential financial prodmortgage prepayment uct that will grow dracurve predicts the rate of matically in numbers and payoffs using empirical importance over the next data regarding mortality, several years. The recent mobility and refinancing. financial crisis took away In a securitization, a mortgage alternatives for reserve fund is an amount seniors and has reduced of cash or securities that wealth, thus increasingly provides cash for the bormaking reverse mortrower’s credit line draws. “The recent financial gages the last, best alter“FASIT” stands for native to supplement crisis took away mort- Financial Asset Securitization income. The demographInvestment Trust, a tax vehigage alternatives for ic wave is too strong and cle designed to accommoseniors and has the need is too great, and date the securitization of reduced wealth, thus we also believe that revolving asset types, such increasingly making necessity being the mothas home equity lines of reverse mortgages the credit or HELOCs. With a er of invention, the industry can adapt to the last, best alternative to few exceptions, like the supplement income. changes in the financial SASCO 1999-RM1 transacmarkets. The demographic wave tion, the FASIT was rarely used. In 2004, FASITs were is too strong and the How was the experidisallowed by Congress, need is too great …” ence of creating the and reverse mortgages —Michael McCully first reverse mortgage and other HELOCs were securitization for your allowed, for the first time, investors, for Financial Freedom, for to be securitized using the more popular Lehman Brothers, and for you? real estate mortgage investment conduit The SASCO 1999-RM1 securitization or REMIC tax vehicle. required a great deal of work to create the valuation and credit analysis frame- How informed were investors about work required to securitize a new asset reverse mortgages as an asset class class. There were no rating agency crite- when you began, and how educated ria and very little historical data regard- are they today? ing prepayments, mortality, mobility, Investors were either uninformed, or crossover losses and other critical vari- worse, disinclined to invest because of ables. Investors had to analyze actuarial the bad publicity surrounding reverse risk, territory unfamiliar for most of mortgage fees and contingent interest. them. Financial Freedom had to learn But a small number of enlightened how to service loans in a securitization investors were smart enough to grasp for the first time, while simultaneously the relative value story of stable predealing with a major acquisition. payments and credit protection. The Lehman Brothers had to commit a lot of relatively low LTVs [loan-to-values] of resources to make it all work, including jumbo reverse mortgages and the very the two of us, Craig Corn, Jim Mahoney, conservative rating agency criteria also Al Benedetti and many others. helped give them comfort. With each successive securitization, the number of Without a model, what were some investors grew a little larger. structural challenges you faced, and how did you overcome them? How has the secondary market for The modeling challenges were consid- reverse mortgages evolved since your erable. The standard structuring model pioneering work? Where is it headed? had no “reverse gear.” We had to con- No securitized reverse mortgage classes struct a prepayment curve (which have suffered any ratings downgrades turned out to be very accurate), so continued on page 9 there was a lot of programming and
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paid upfront fees to bad actors who promised loan modifications but never delivered,” said Treasury Secretary Timothy Geithner. “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.” The proposed rule also would bar providers from telling consumers to stop communicating with their lenders or mortgage servicers, and from misleading them about key facts such as: The likelihood of getting the results they want, and how long it will take; their affiliation with public or private entities; payment and other existing mortgage obligations; and refund and cancellation policies. In addition, the proposed rule would require providers to tell consumers that they are for-profit businesses, the total amount consumers will have to pay, that neither the government nor the consumer’s lender has approved their services, and that there is no guarantee that the lender will agree to change their loan. The proposed rules would apply to for-profit companies that, in exchange for a fee, offer to work with lenders and servicers on behalf of consumers to modify the terms of mortgage loans or to take other steps to avoid foreclosure on those loans. The proposed rules generally exempt entities that own or service mortgage loans. Attorneys would have a limited exemption from the proposed advance fee ban if they represent consumers in a bankruptcy or other legal proceeding. For more information, visit www.ftc.gov.
FHFA announces oneyear extension of HARP Federal Housing Finance Agency (FHFA) Acting Director Ed DeMarco has announced the extension of the Home Affordable Refinance Program (HARP), a refinancing program administered by Fannie Mae and Freddie Mac, to June 30, 2011. The program is a key component of the Administration’s Making Home Affordable Program announced in February 2009. The HARP program expands access to refinancing for qualified individuals and families whose homes have lost value. The program was set to expire June, 2010. “FHFA has reviewed the current market situation and the state of mortgage insurance availability and has determined that the market conditions that necessitated the actions taken last year have not materially changed,” said DeMarco. “Accordingly, to support and promote market stability, and to encourage lenders and other mortgage market participants to fully adopt the HARP program, including the implementation of the October 2009 expansion of loan-to-value ratios (LTVs) to 125 percent, FHFA is authorizing the
extension of HARP until June 30, 2011.” In 2009, Fannie Mae and Freddie Mac purchased or guaranteed more than four million refinanced mortgages. Of this total, 190,180 were HARP refinances with LTVs between 80 percent and 125 percent. The HARP began in April 2009 and has grown over the past few months. For more information, visit www.fhfa.gov.
HUD launches new Office of Sustainable Housing and Communities U.S.Departmentof Housing& Urban Development (HUD) Secretary Shaun Donovan has announced the launch of HUD’s new Office of Sustainable Housing and Communities (OSHC). The office will be overseen by HUD Deputy Secretary Ron Sims who won national recognition for turning King County, Wash. into a model for sustainable communities. OSHC is designed to help build stronger, more sustainable communities by connecting housing to jobs, fostering local innovation and building a clean energy economy. Funded by Congress for the first time in HUD’s 2010 Budget, OSHC is a key component of the Obama Administration’s Partnership for Sustainable Communities. “Through our new Office of Sustainable Housing and Communities, we will begin to tie the quality and location of housing to broader opportunities such as access to good jobs, quality schools, and safe streets,” said Donovan. “By working with DOT, EPA and other federal agencies, and with Deputy Secretary Sims’ guidance, we will finally begin to meet the needs of today without compromising the futures of our children and grandchildren.” Under the management of Director Shelley Poticha, the OSHC will be the focus of all of HUD’s sustainability efforts. The average household spends more than half of its budget on housing and transportation, which have become American families’ two single biggest expenses. With OSHC as lead, HUD will work to improve access to affordable housing and transportation options, saving money for American families while allowing them more time to spend at home and less time traveling. The office will also invest in energyefficient homes and buildings, in renewable energy, and in next-generation infrastructure to lay the foundation for the clean energy economy America needs to compete and create jobs in the 21st century. To meet that goal, OSHC will strengthen HUD’s Energy Efficient Mortgage product and other energy retrofit financing optionsfor both single family homes and multi-family rental housing—through a $50 million Energy Innovation Fund. continued on page 8