SASCO 2006-RM1: Proprietary Reverse Mortgage Goes Four-for-Four as Winning Streak Continues

Structured Asset Securities Corporation Reverse Mortgage Loan Trust Series 2006-RM1 (“SASCO 2006-RM1”) recently became the fourth SASCO securitization trust of proprietary reverse mortgages to pay off completely. The remaining bondholders received their final payments on February 25, 2019; all bondholders received their principal and interest payments in full. The trust was created in August 2006 and was the fourth reverse mortgage securitization in U.S. history. The first two securitizations, SASCO 1999-RM1 and SASCO 2002-RM1, both paid off successfully in 2014. SASCO 2005-RM1 paid off in 2016. SASCO 2007-RM1 is the sole remaining transaction from Lehman Brothers’ SASCO “RM” securitization program.

SASCO 2006-RM1 issued 4 bond classes: Class A1, A-IO, M1, and M2. These bonds, totaling $598 million, were secured by 1,558 adjustable rate Financial Freedom “Cash Account” loans.

When SASCO 2005-RM1 paid off in 2016, we noted “Beginning in 2014, reverse mortgage lenders have revived proprietary reverse mortgages after a six year hiatus with very little new production.” Since then, production has ramped up as multiple lenders now originate proprietary reverse mortgages. New securitization programs have followed, supplied by both new and seasoned proprietary reverse mortgages.

Reverse mortgage lenders are fast approaching the record of pre-crisis proprietary loan origination. Production peaked in 2007 at about $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.

The SASCO-RM securitization history has helped 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 low original Loan-to-Value (“LTV”) ratios of these loans, combined with conservative rating agency criteria. As was the case with all of the SASCO proprietary reverse securitizations, the rating agencies (in this case, Moody’s, 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 during the financial crisis. The transaction’s successful payoff continues a winning streak of nearly 20 years, including the darkest years of the mortgage crisis, in which no proprietary reverse mortgage bond has suffered a principal loss or write-down.

As was the case with previous SASCO RM deals, the stability of the prepayments can be seen in many ways. For example, the paydown of the bonds validated the weighted average paydown speed predicted when the deal closed in 2006. For Class A1, the predicted weighted average life of 4.74 years at 100% of the Base Case Prepayment Curve (“100% PPC”) was spot on with the actual result. The Class A-IO paid all of its cash flow exactly to its schedule, tallying its projected weighted average life of 5.62 years. Class M1 was predicted to have a 3.71 year weighted average life; it clocked in at 3.79 years. Class M2 was predicted to have a 2.50 year weighted average life; it extended slightly to 3.66 years.

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