The reverse mortgage capital markets experienced another important milestone Tuesday as Structured Asset Securities Corporation Reverse Mortgage Loan Trust Series 1999-RM1 (“SASCO 1999-RM1”) became the second securitization trust of such loans to pay off completely. The remaining B class bondholders received their final payments on June 25th, 2014; all bondholders have now received their principal and interest payments in full. The trust closed in August 1999, and was the first reverse mortgage securitization in U.S. history. (The second was SASCO 2002-RM1, which paid off in January.)
SASCO 1999-RM1 paved the way for all reverse mortgage securitizations, both proprietary and HECM. This transaction proved that reverse mortgages could be securitized in the U.S., despite skepticism that investors would reject bonds backed by loans without regular payments. It also established a conservative but durable set of rating agency criteria that have stood the test of time, including the Great Recession and collapse of housing prices. It whetted investors’ and originators’ appetites for further issuance and importantly, a change in federal tax law that allowed reverse mortgages and other HELOCs to be issued in REMICs. This loosened Fannie Mae’s grip on the HECM market, as dealers began to bid on HECM pools for whole loan securitization. FHA and Ginnie Mae took note, and the HMBS and H-REMIC markets were born.
The beginning of a successful partnership between Lehman Brothers and Financial Freedom, SASCO 1999-RM1 issued 4 bond classes: Class A, M1, M2, and B, in order of seniority. These bonds, totaling approximately $317 million, were secured by 2,500 proprietary reverse mortgage loans. These loans included adjustable rate “Cash Account” and fixed rate “Lifetime” loans originated by HomeFirst, the reverse mortgage division of Transamerica. Financial Freedom also acquired the HomeFirst origination and servicing platform.
The possible revival of the proprietary or “jumbo” reverse mortgage origination market is a hot topic in the industry, born of opportunity and necessity. Reverse mortgage lenders need new products as the FHA turns the screws on the HECM program. Meanwhile, mortgage investors are seeking supply and yield as “forward mortgage” refinancing burns out from interest rates ticking upward. Proprietary loan origination peaked in 2007, and ground to a halt with the mortgage crisis, crashing home prices and the virtual destruction of the non-agency securitization market. Currently, only a handful of proprietary reverse mortgages are originated each year.
Like SASCO 2002-RM1, SASCO 1999-RM1’s history can only help this revival by reinforcing the relative value story of proprietary reverse mortgages. If properly structured, proprietary reverse mortgage securities provide substantial credit protection with (like their HECM cousins) very stable prepayments. The transaction’s successful payoff continues a winning streak of 15 years, including the darkest years of the mortgage crisis, in which no proprietary reverse mortgage bond has suffered a principal loss or write-down.
The stability of the prepayments can be seen in many ways, such as the relatively tight band of prepayment rates experienced by the trust during its 15 year life. The predicted weighted average life for the Class A was 5.0 years at 100% of the Base Case Prepayment Curve (“100% PPC”). The actual result was almost exactly 5 years. Class M1 paid to its schedule until Class A paid off, but still paid almost exactly to its predicted 7.5 year weighted average life. Class M2 paid to its schedule, giving investors exactly the 5 year average life predicted. Even the Class B, which by virtue of its place at the bottom of the cash flow waterfall bore the brunt of both credit and prepayment risk, had a 14.3 year weighted average life, compared to the 14.0 and 11.7 predicted at origination for 75% PPC and 100% PPC, respectively.
A complete history of SASCO 1999-RM1’s bond paydowns can be found here.