Standard & Poor's Ratings Services has revised its U.S. residential mortgage-backed securities (RMBS) home equity conversion mortgage (HECM) reverse mortgage cash flow assumptions.
In doing so, we have updated repayment speeds, revised home value appreciation/depreciation assumptions, technical defaults, and refined foreclosure and property liquidation assumptions that are used when modeling HECM reverse mortgage cash flows. Specifically, we revised repayment speeds with the inclusion of curves for couples, as well as fast and slow repayment curves to be used when modeling cash flows for males, females, and couples. For additional information about our assumptions for analyzing HECM reverse mortgages, please see "U.S. RMBS HECM Reverse Mortgage Cash Flow Assumptions," published April 16, 2007.
This article addresses the "Payment Structure And Cash Flow Mechanics" principle discussed in "Principles-Based Rating Methodology For Global Structured Finance Securities," published May 29, 2007. Standard & Poor's analyzes the flow of funds in and out of a reverse mortgage transaction to determine how the transaction structure performs under certain assumptions. The assumptions outlined in this article apply to the cash flows generated by the reverse mortgage collateral pool.
Standard & Poor's uses repayment curves in our cash flow analysis to estimate when reverse mortgage loans will generate funds necessary to provide payments to the rated securities in a transaction. These repayment assumptions differ based on borrower age and gender, and whether the borrower is a male, female, or couple. In order to stress property values in reverse mortgage transactions, we assume a three-year decline in the market value of each property based on property type and geographic location. After assuming a three-year decline, we further assume a modest property value appreciation over the remaining life of the loan. Property value changes can affect the amount of recoveries received on a given loan. Furthermore, Standard & Poor's identifies as technical defaults scenarios in which borrowers may fail to maintain the mortgaged property in a suitable condition or pay applicable real estate taxes and homeowners' insurance (T&I). Technical defaults are included in the cash flow analysis to incorporate advances by the applicable servicer to cover items such as T&I, which generally increase the balance of the applicable loan. To account for accrued interest and T&I that may be added to a loan's balance due to time delays associated with the settlement of a loan, we include foreclosure and REO timeline assumptions in our cash flow analysis. Furthermore, we include additional items such as legal and preservation costs associated with a foreclosure scenario in our analysis when we model reverse mortgage cash flows.
Repayment Assumptions
The entire unpaid principal balance of a nonconforming reverse mortgage loan is due upon the occurrence of either:
Refinancing and/or voluntary prepayment events in which a borrower chooses to refinance or pay off the loan; or
Maturity events, which include mortality (death of the last surviving borrower) and mobility (sale of the home, transfer of the title, or the failure of the surviving borrower to live in the securing home for a minimum of 12 consecutive months).
Table 1 shows our 'AAA' HECM male-, female-, and couple-specific repayment assumptions. The repayment assumptions are stated as annual constant prepayment rates (CPR) and should be converted to single monthly mortality (SMM) rates when modeling cash flows. Cash flows are tested under two repayment curves: fast and slow. The fast curve is designed to stress the excess spread in the transaction, while the slow curve is designed to stress the cross-over risk inherent in reverse mortgage transactions. Cross-over risk is defined as the risk of diminished returns that occurs when the outstanding principal amount of a loan, together with the accrued interest, exceeds a home's value. These assumptions are based on empirical data from existing nonconforming reverse mortgages, as well as mortality statistics of segments of the U.S. population from the Society of Actuaries' RP-2000 Mortality Tables.
When modeling repayments associated with couples, Standard & Poor's assumes the couple-specific CPR curve based on the youngest borrower's age. Additionally, for male-, female-, and couple-specific repayment assumptions, we assume a linear ramp-up factor for male-, female-, and couple-specific repayment assumptions that varies between zero and 1 for the first 36 months from the origination date of the loan. The ramp-up factor is then applied to the steady-state repayment curves shown in table 1, based on the borrower's age at that point in time.
For example, a male borrower with a loan age of 18 months would have a ramp-up factor of 0.5000 (18 months/36 months). Assuming we are modeling slow CPRs for a 70-year-old male (annual CPR of 5.2100% converted to an SMM of 0.4449%), we would multiply the 0.4449% SMM value with the 0.5000 factor to determine the repayment during that particular period.
Market Value Assumption
We assume that the market value of a property collateralizing a HECM reverse mortgage declines for the first 36 months of the transaction and then appreciates for the remaining term of the loan. Furthermore, based on home price volatility, the market value decline assumptions may be additionally adjusted during these first 36 months. Table 2 shows our 'AAA' market value assumptions.
Table 2
'AAA' Market Value Assumptions
Market value decline first three years (%)
Annual appreciation rate (%)
Single-family residence, PUD
Two-family, condominium
Three/four-family, cooperative
All property types
34.50
36.50
38.50
3.23
Note: Rates should be converted to monthly values. PUD—Planned unit development.
Technical Defaults
According to industry practice, reverse mortgagors must maintain their properties and pay T&I. Failure to do so generally constitutes a technical default according to the loan provisions and may trigger the lender's right to foreclose on the property. If the borrowers fail to pay either taxes or insurance and they have sufficient lines of credit, the servicer will often pay these amounts on the borrowers' behalf and reimburse itself by drawing from the borrowers' lines of credit. If the borrowers do not have sufficient lines of credit, the servicer will typically advance T&I, add these amounts to the loan balances, and reimburse itself from the top of the transaction waterfall.
As a result, we assume that 50% of those meeting the following conditions will fail to pay T&I:
Borrowers whose loans fail to assign and have loan balances exceeding the maximum claim amount, and
Borrowers who have loan-to-value ratios greater than or equal to 95%.
For such loans, the servicer will typically advance the applicable T&I and add the amount to the borrowers' loan balances. (For more information regarding loans that fail to assign, see the section titled "Modeling HECM Assignments" in "U.S. RMBS HECM Reverse Mortgage Cash Flow Assumptions," published April 16, 2007.)
Liquidation Assumptions
Under both the foreclosure and nonforeclosure scenarios, the loan balance continues to grow by the amounts of accrued interest at the mortgage note rate, applicable servicing fees, and applicable mortgage insurance premiums. In foreclosure cases, any T&I due and all foreclosure costs are also capitalized onto the loan balance in the scenario. Additionally, we assume that any sale proceeds in a foreclosure scenario will be decreased by 6.00% due to realtor/brokerage fees. Table 3 provides the state-specific annual insurance premiums, taxes (as a percentage of the initial appraised value), and foreclosure and REO timelines and expenses.
Table 3
HECM 'AAA' Foreclosure And REO Timeline And Expense Assumptions
Foreclosure and REO timelines (mos.)
Fees/expenses
State
Single-family residence/PUD
Two-, three-, or four-family
Condo/coop
Legal ($)
Other ($)
Annual insurance premium ($)
Annual tax rate (% of initial appraised value)
AL
17
19
20
1,125.00
4,455.00
684.00
1.35
AK
18
20
21
2,125.00
5,105.00
684.00
1.35
AZ
18
20
21
2,060.00
4,455.00
684.00
1.35
AR
19
21
22
1,900.00
4,505.00
684.00
1.35
CA
19
21
22
2,150.00
4,405.00
684.00
1.35
CO
19
21
22
1,412.50
4,630.00
684.00
1.35
CT
20
22
23
3,012.50
4,455.00
648.00
4.05
DC
20
22
23
3,375.00
4,455.00
648.00
2.70
DE
21
23
24
1,012.50
4,305.00
648.00
2.70
FL
20
22
23
2,125.00
4,405.00
684.00
1.35
GA
17
19
20
1,125.00
4,355.00
684.00
1.35
GU
25
27
28
4,375.00
4,455.00
684.00
1.35
HI
21
23
24
2,525.00
4,855.00
684.00
1.35
ID
20
22
23
1,075.00
4,330.00
540.00
2.10
IL
24
26
27
1,975.00
4,630.00
540.00
2.10
IN
21
23
24
1,650.00
4,530.00
540.00
2.10
IA
20
22
23
1,325.00
4,530.00
540.00
2.10
KS
20
22
23
1,300.00
4,655.00
540.00
2.10
KY
19
21
22
2,700.00
4,455.00
684.00
1.35
LA
22
24
25
4,150.00
4,355.00
684.00
1.35
ME
25
27
28
2,600.00
4,505.00
648.00
2.70
MD
18
20
21
2,375.00
4,405.00
648.00
2.70
MA
20
22
23
4,625.00
4,455.00
648.00
2.70
MI
17
19
20
1,250.00
4,605.00
540.00
2.10
MN
18
20
21
1,300.00
4,655.00
540.00
2.10
MS
17
19
20
975.00
4,455.00
540.00
2.10
MO
17
19
20
1,725.00
4,455.00
540.00
2.10
MT
19
21
22
1,175.00
4,755.00
540.00
2.10
NE
19
21
22
1,075.00
4,305.00
540.00
2.10
NV
19
20
21
2,025.00
4,455.00
684.00
1.35
NH
17
19
20
2,850.00
4,405.00
648.00
2.70
NJ
24
26
27
2,162.50
4,455.00
648.00
4.05
NM
21
23
24
1,712.50
4,505.00
684.00
1.35
ND
19
21
22
1,112.50
4,405.00
540.00
2.10
NY
25
27
28
2,950.00
4,405.00
648.00
4.05
NC
18
20
21
1,375.00
4,655.00
684.00
1.35
OH
22
24
25
1,700.00
4,405.00
540.00
2.10
OK
21
23
24
1,862.50
4,505.00
540.00
2.10
OR
19
21
22
2,150.00
4,780.00
684.00
1.35
PA
23
25
26
2,212.50
4,355.00
648.00
2.70
PR
24
26
27
3,687.50
4,355.00
648.00
2.70
RI
17
19
20
2,650.00
4,455.00
648.00
2.70
SC
21
23
24
1,325.00
4,355.00
684.00
1.35
SD
19
21
22
1,275.00
4,455.00
540.00
2.10
TN
17
19
20
1,125.00
4,455.00
684.00
1.35
TX
16
18
19
900.00
4,405.00
540.00
2.10
UT
19
21
22
1,425.00
4,505.00
540.00
2.10
VT
24
26
27
1,312.50
4,405.00
648.00
2.70
VI
24
26
27
3,687.50
4,455.00
648.00
2.70
VA
17
19
20
1,850.00
4,405.00
648.00
2.70
WA
20
22
23
1,625.00
4,655.00
684.00
1.35
WV
18
20
21
1,125.00
4,405.00
648.00
2.70
WI
24
26
27
1,625.00
4,555.00
540.00
2.10
WY
17
19
20
1,475.00
4,455.00
540.00
2.10
REO—Real estate-owned. PUD—Planned unit development.
Additionally, in a nonforeclosure scenario, we assume that 12 months will elapse before the property is sold and the loan is settled. When a loan goes through foreclosure, in addition to the 12-month extension granted by the U.S. Department of Housing and Urban Development, we assume that it will take an additional three months for the servicer to work through the complications associated with foreclosing on an estate asset; we have included these three months in the foreclosure and REO timeline assumptions listed in table 3. Thus, we assume that it will take a total of 12 months plus state-specific and property type-specific foreclosure time periods listed in table 3 before any money will be repaid to the bondholders. For example, in the 'AAA' rating scenario for a single-family home in Alabama that goes through the foreclosure process, 12 months will elapse before the servicer initiates foreclosure; then, an additional 17 months will be required to complete the foreclosure and liquidation of the property.
Submitting HECM Reverse Mortgage Collateral And Structural Data
Standard & Poor's requests that HECM reverse mortgage collateral and structural information be populated in the HECM reverse mortgage template and submitted to our U.S. RMBS group at residentialpools@standardandpoors.com. For a copy of the template, please contact any of the analysts listed
