Ginnie Mae’s HMBS and HREMIC programs serve as the main engine of finance for the reverse mortgage industry. According to Ginnie Mae’s published data, a record 31 HREMICs totaling $6.013 billion were issued in 2012, double the amount issued in 2011. For 2012, BofA Merrill Lynch was again the top underwriter/sponsor, leading 10 offerings totaling just under $2.2 billion. Knight Capital and Barclays placed second and third, with 8 HREMICs apiece totaling $1.6 and $1.5 billion, respectively. BAML has captured the top spot all 4 years the program has existed, beginning in 2009 when they sponsored the one and only HREMIC of that year.
Since the first HREMIC was issued in 2009, 83 transactions totaling over $14.8 billion have been issued. Despite the decline in reverse mortgage origination, new HREMIC origination far outstrips the paydowns of these bonds. The overall HREMIC float could top $20 billion as early as the 4th quarter of 2013.
In 2012, HREMIC sponsors used a total of 495 unique HMBS pools (or portions thereof) to create 222 classes of bonds. In doing so, they securitized over 300 of the 556 new HMBS pools issued in 2012. Since 2009, nearly 1,000 unique HMBS pools have been securitized into HREMICs; we estimate that at least 70% of all HECM supply is finding its way into HREMICs. The $6 billion HREMIC volume in 2012 was very neatly split between fixed and adjustable-rate HMBS, comprising 49.7% and 50.3% of the total, respectively.
HREMIC collateral consists of HMBS, which are Ginnie Mae guaranteed pass-through securities. HMBS are backed by pools of participations of HECMs, which are FHA-insured reverse mortgages. In other words, the HECM loans are the collateral for the HMBS, which in turn serve as the collateral for the HREMIC. This double layer of government guarantee, combined with the relatively high coupon and favorable prepayment patterns of the underlying loans, results in very favorable execution, even when compared to other Ginnie Mae “forward mortgage” securities.
The basic structuring method in HREMIC involves bifurcating the underlying HMBS cash flow into a conventional, principal and interest bond and an interest-only (“IO”) class. The conventional bond pays a pass-through rate that results in a price at or near par and is typically sold to a traditional MBS investor (bank, insurance company, bond fund, etc.). The conventional bond’s pass-through rate is typically less than the HMBS pass-through rate, leaving an excess interest strip that is paid to the IO Class. The IO security is sold to a more risk-seeking investor, such as a hedge fund. The HREMIC is profitable if this structure creates total value that exceeds the price of the underlying HMBS: in other words, the sum of the bond parts exceeds the collateral whole. This concept is not unique to HREMIC. In fact, it is the essence of securitization, but the combination of premium pass-through coupons and prepayment performance make this simple strategy especially viable for HREMIC.
However, the underlying collateral does not lend itself well to sequential time tranching, another common REMIC structuring technique. Because HECM cash flows are so slow initially, and are then cut off by the 98% assignment to HUD, it is difficult to carve out sequential pay classes with materially different durations, unless one class is comparatively very small. This was done in a few transactions, but sequential classes comprised only about 5% of all principal and interest HREMIC classes in 2012.
