Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

CHAPTER 7

Risk Mitigation

Available Hedges and Products in Development for Risk Transfer

Chris DeSilva

Managing Partner, Risk Capital Partners, LLC

 

 

 

 

Securitization is a standard exit strategy in the industry for the liquidity it provides originators as well as the ample demand from end investors. As with many existing mortgage products, the timing of cash flows for reverse mortgages can be better managed by pooling and structuring all the underlying collateral. A tighter payment window provides transparency for assessing risk-adjusted returns. Despite the benefits of securitization, reverse mortgage deals have been limited since the first deal in 1999, SASCO 99-RM1.

• There is no existing software (e.g., INTEX) that can easily model reverse mortgage cash flows.

• There are no early-period cash flows or early current interest from the collateral.

• Given the early product stage of reverses, deal processing is slow relative to traditional loan and deal processing.

The issue with securitized product is that it is an end product, meaning that investors in reverse mortgages must have the collateral securitized and then repurchase the exact tranche that fits their risk profile (as shown in Figure 7.1). This is somewhat backward thinking: Those looking to securitize may actually be seeking ways to mitigate crossover risk prior to putting the collateral in a deal structure. Furthermore, many investors may want to hold reverse mortgages on their balance sheets without indirectly paying ...