RMF Bankruptcy Signals Systemic Risk in GNMA Market

December 2, 2022 | Premium Service | Reverse Mortgage Investment Trust and several affiliates filed bankruptcy in Delaware this week, beginning one of the more problematic events of default in the government loan market in many years, even decades. While a declaration has been filed by restructuring firm FTI, the debtor has obtained an extension of the deadline to file financial schedules until February 2023.

RMIT is sponsored by three-funds managed by Starwood (STWD) and represents about 40% of the $61 billion market for home equity conversion mortgages or HECMs, reverse mortgages that are guaranteed by the FHA. As of October 31, 2022, RMF managed reverse mortgage loans with an unpaid principal balance of approximately $25.57 billion. And this is not the only bad thing happening in mortgage land this week.

A tour through the bankruptcy filing is instructive. The majority owner is a group of three Starwood SPVs, which acquired Reverse Mortgage Funding in 2021. As in the case of First Guaranty Mortgage and PIMCO, there is no indication as yet that the sponsor intends to support the debtor or even bid for the assets. Why STDW made this purchase on behalf of its clients is something for the history books to ponder.

Nutter Financial closed down its reverse business earlier this year. The other public issuer of private reverse products, Finance of America (FOA), withdrew from forward lending to "focus on reverses." Like Reverse Mortgage Funding, FOA also issues private label reverse mortgage products that have become illiquid in the past several months. About 8% of RMIT's portfolio is private-label reverse mortgage loans.

The secured lenders include Credit Suisse (CS), Nomura Securities (NMR), Barclays Bank, Texas Capital Bank (TCBI), TIAA Bank. The table below outlines the capital structure of RMIT.

The largest creditor of RMIT is Compulink dba Celink, one of two subservicers in the HECM sector. Celink is said to be for sale, but that has been true to one degree or another for years. Celink is the monopoly subservicer in the reverse space and has a reputation for poor operational performance and controls. The fact that the claim filed by Celink is labelled as “contingent, disputed and unliquidated” is no surprise. We suspect that RMIT has not been paying Celink for some time.

The debtor stated in a press release:

“The Company is in ongoing, productive discussions with its Mortgage Servicing Rights (MSR) secured lender and other industry players, including Ginnie Mae, to achieve an agreement that ensures a smooth landing for the Company's servicing portfolio, as well as other obligations. In the meantime, RMIT has already begun work to transfer the remaining loans in its pipeline to other lenders in order to support seniors looking to unlock value in their homes.”

The first obvious reason for the bankruptcy of RMIT and its affiliates is the interest rate environment. The funding mismatch on HECMs is never good and in the current environment is horrendous. The owner of the reverse-MSR must advance cash to the elderly home owner and, at the end, buy out the loan from the pool prior to conveying the asset to HUD. It can take weeks or even months for HUD to process the reverse.

The second reason for the EOD appears to be the same reason for earlier defaults by independent mortgage banks (IMBs), namely non-agency exposures. Our colleagues at Ginnie Mae fret about the risk from servicing assets on government loans, but in fact it is the non-agency loan exposures that caused the implosion of First Guarantee Mortgage and now Reverse Mortgage Funding.

As the market for non-agency reverse products dried up over the past few months, firms like RMIT were essentially stuck with non-agency reverse products that the firm could neither fund now sell. Spreads widened and the execution on HECM residuals, when the loan is repurchased out of the GNMA pool, went from 104 a year ago to par today.

It is interesting to note that GNMA has been pondering making changes to the rules for HECMs that would allow issuers to securitize the residuals into GNMA securities. This would be a great help, but unless that change can become actualized by early next year it is unlikely to help issuers that are being crushed by bad execution for new loans and crazy funding costs for cash advances. We are concerned that FOA may meet the same fate as RMIT.

As investor appetite for first private label and then HECM residuals disappeared, RMIT was likely stuck with non-agency paper on warehouse lines, forcing a fire sale to come back into conformity with warehouse lending rules. Meanwhile, the poor execution for new HEMCs made continuing in business impossible. Thus, RMIT is selling reverse loans from its pipeline to other lenders but the fact of new ownership will not improve the painful secondary market execution.

The bigger story is layered risk that is not recognized. Relying on the securitization market for the take-out for the private reverse mortgage loans was a problem waiting to happen. But the more profound point about risk is that the government RMSR asset has negative value in current market conditions, thus it is difficult to envision who among the two remaining players in reverse mortgages will take possession of the RMIT book, even for nothing.

If there are no buyers or even takers for the RMIT business, then GNMA may be forced to ask the Financial Stability Oversight Counsel (FSOC) to create a conservatorship for the group. The likely scenario in that extreme event would be for the Treasury to invoke Dodd-Frank and hire the Federal Deposit Insurance Corp to manage the assets until RMIT and its affiliates are liquidated. But again, we do not think another servicer will take the RMIT portfolio unless they are compensated and indemnified.

In a market where funding is both increasingly expensive and declining in terms of availability, the assets of the RMIT estate are likely to have few buyers. More important, the two incumbent nonbank lenders, Nomura and Credit Suisse (CS), are unlikely to remain in the picture long term. Earlier reports that CS was going to sell its structured products group (SPG) to Apollo (APO) and PIMCO have apparently not been realized.

We hear that PIMCO has now backed away from the SPG opportunity, raising a question for the mortgage industry as to what is going to happen to the CS financing book. While APO was willing to buy the non-GNMA exposures from CS, the GNMA footings were apparently not acceptable and would remain with CS. The assets and liabilities of the CS SPG business have yet to find a home, including the potential contingent liability from the GNMA MSR securitizations led by CS over the past five years.

The uncertainty with respect to the eventual disposition of the CS MSR financing business and particularly the GNMA exposures is an open question looming over the US mortgage industry. Both with respect to specific obligors such as RMIT and the government market more generally, the unresolved fate of CS may ultimately discourage investors in these assets and reduce the liquidity in a government loan market that is already operating under stress.

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