SASCO 2002-RM1: Thanks for the Memories, and the Performance

An important development quietly took place recently amidst widespread industry discussion of proprietary or “jumbo” reverse mortgages, as Structured Asset Securities Corporation Reverse Mortgage Loan Trust Series 2002-RM1 (“SASCO 2002-RM1”) became the first securitization trust of such loans to pay off completely. The remaining A, B, and C class bondholders received their final payments on January 27, 2014; all bondholders received their principal and interest payments in full. The trust closed in November 2002, and was the second reverse mortgage securitization in U.S. history. (The first was SASCO 1999-RM1, which has barely $6 million of its original $317 million bonds outstanding. It will probably also payoff completely in the first half of 2014.)

SASCO 2002-RM1 issued 5 bond classes: Class A, M1, M2, B, and C, in order of seniority. These bonds, totaling approximately $291 million, were secured by 903 proprietary reverse mortgage loans. These loans included newly originated Financial Freedom “Cash Account” loans, but also some very seasoned collateral, originated by pioneering reverse mortgage lenders American Homestead and Providential Home Income Plan, Inc. The borrowers were even more seasoned: some were born in the 19th century. This “barbell” of old and new collateral rewarded bondholders as the older loans provided cash flow in the near term and the newer loans provided excess spread for the long term.

The possible revival of the proprietary or “jumbo” reverse mortgage origination market is a hot topic in the industry as 2014 unfolds, born of opportunity and necessity. Reverse mortgage lenders need new products, as the FHA continues to turn the screws on the HECM program. Meanwhile, mortgage investors are seeking supply and yield as refinancing burns out as low interest rates tick upward. Proprietary loan origination peaked in 2007, with production approaching $100 million per month, but 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.

SASCO 2002-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 credit story derives mainly from the very low original Loan-to-Value (“LTV”) ratios of these loans, combined with very conservative rating agency criteria. Give them credit: the rating agencies (in this case, S&P and Fitch) were right to insist that the triple-AAA Class A bonds be protected against a 30%+ decline in home prices — which was exactly the stress the trust successfully endured. The deal’s successful payoff continues a winning streak of nearly 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 11 year life. The predicted weighted average life for the Class A was 3.9 years at 100% of the Base Case Prepayment Curve (“100% PPC”), and 5.1 years at 75% PPC. The actual result: 4.9. Class M1 paid to its schedule, paying off in 2006 exactly at its predicted 3.6 year weighted average life. Class M2 was predicted to have a 3.6 year weighted average life, it clocked in at 3.5 years. 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 11.2 year weighted average life, compared to the 10.2 and 12.2 projected at origination for 100% and 75% PPC, respectively.

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