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Reverse Mortgage Bankruptcy Festers; IRA Housing Outlook

Updated: Aug 20, 2023

August 15, 2023 | Premium Service | Almost nine months since the failure of Reverse Mortgage Investment Trust (RMIT) on November 30, 2022, and the seizure of the firm’s reverse mortgage servicing rights (RMSRs) several weeks later by Ginnie Mae, the bankruptcy continues to fester. The as yet undisclosed losses by several of RMIT's bank lenders could present a serious threat to the stability of individual issuers and the government loan market.

The RMIT reverse mortgage business was sold to Longbridge Financial for $1 several months ago, but the US Treasury still owns the RMSR and may never be able to sell it. Most or all of the lenders involved with RMIT apparently took total losses, but no disclosure has been made so far. Yet there are still some lenders that pretend to pursue repayment in the Delaware Bankruptcy Court action (Case 22-11225-MFW).

Akio Matsuda at the Wall Street Journal nicely summarized the events leading to the collapse of Reverse Mortgage:

“As rates rose, more of the RMIT’s older loans reached the 98% limit, requiring the company to take out more market-rate loans to meet the program’s obligations. Because RMIT had to buy out the loans at face value, it had to put up more of its own money for every buyout, until the obligations overwhelmed its capacity to borrow.”

The reckless actions of the FOMC regarding interest rates and the Fed portfolio are creating big losses for independent mortgage firms, losses that federal agencies may not be able to manage. Simply stated, RMIT is the first government servicing asset to be seized by Ginnie Mae since Taylor, Bean & Whitaker. The credit markets assume that the mortgage servicing right (MSR) of a failed mortgage lender will be acquired out of bankrutpcy, as in the case of Ditech (2019), but the change in interest rates over the past year makes this difficult if not impossible.

When insurance and finance conglomerate Conseco collapsed into bankruptcy in 2002, the mortgage servicing portfolio was upside down. Specifically, the MSR was at the very bottom of the credit waterfall and there were many parties above feeding on the servicing. In theory, the MSR for manufactured homes had a gross spread of 50bp on the unpaid principal balance, but all that was left was about 10bp to cover the cost of servicing and remidiation of a lot of delinquent loans. This rendered the Conseco portfolio of government and conventional loans unsalable.

Fortunately, the judge in the Conseco bankruptcy threw away the U.S. Bankruptcy Code and assumed the more traditional role of bankruptcy courts, namely social worker. He attacked the economic problem and restructured the Conseco mortgage trusts, moving the MSR to the top of the credit waterfall and thereby made the business more attractive for sale.

In the case of RMIT, however, the massive movement in interest rates rendered the RMSR completely unsalable. Unlike the FDIC, Ginnie Mae lacks the legal authority to restructure an MSR or make advances to potential buyers to help reduce the ultimate cost to the taxpayer. So unless the creditors of a failed mortgage bank are lucky enough to have a proactive Bankruptcy Court (and active stakeholders like Fannie Mae), the result is likely to be bad for the creditors and the taxpayer.

As a result, the auction of RMIT in December failed and the MSR was seized by the US government. The taxpayer and lenders on government assets now face the worst possible outcome. Texas Capital Bank (TCBI) took a $5 million reserve for the RMIT default in Q1, but the total amount of the loss on the bank’s financing of participations (aka "tails") on reverse mortgage loans appears to be $43 million, according to Bankruptcy Court records.

TCBI declined to comment when contacted by The IRA, but in private bankers complain that Ginnie Mae specifically asked them to continue funding RMIT after the bankruptcy filing. As investors and counterparties come to understand the full scope of the losses on RMIT, the willingness of banks to finance government assets is likely to ebb. A summary of the parties in the RMIT bankruptcy is below from the first day statement showing $1.4 billion in financing.

Source: US Bankruptcy Court

Barclays Bank (BCS) had over $200 million in warehouse lines secured by pledged collateral with RMIT. Indeed, all of the warehouse lines above are in theory money good because the lender controls the MBS collateral. But here’s the rub: The HECM collateral provided by RMIT may not be worth par. And there may be other issues with the collateral that can result in loss to the lender. When Ginnie Mae or the GSEs seize an MSR from a defaulted issuer, the "secured" lenders usually take a total loss.

With a government insured loan or Ginnie Mae MBS, the lender never really has a clean and perfected security interest in the asset. Unlike dealing with loans guaranteed by or securities issued by Fannie Mae and Freddie Mac, the legal rights of the loan guarantors like FHA, VA and USDA, and Ginnie Mae as the guarantor of the MBS, are unassailable. In other words, bank loans on government insured loans or Ginnie Mae securities are essentially unsecured.

Since lenders cannot bifurcate the government insured mortgage note from 1) financing for advances of principal, interest, taxes and insurance and/or 2) financing for MSRs, there is no practical and enforceable security for lenders. Because the mortgage note already is encumbered by the Ginnie Mae security, and the underlying guarantee of the loan, there is no collateral available for bank or nonbank lenders. The fact that RMIT's RMSR could not be sold in bankruptcy now exposes this ugly reality.

Credit Suisse, now a unit of the bad bank at UBS AG (UBS), had a warehouse facility of $114 million and a $40 million repo facility to RMIT at the end of November 2022, but the Swiss bank has said nothing about the loss. Likewise UBS has said nothing about the failed auction of Select Portfolio Services after UBS turned down bids on some of its private label servicing portfolio. If we take Credit Suisse as an example, all of the warehouse lenders may face significant losses.

TIAA Bank (f/k/a Everbank) had a $50 million warehouse facility to RMIT and has entered a claim for $34 million with the Bankruptcy Court. TCB had three facilities to RMIT totalling $335 million, including a $61 billion facility for financing participations on Home Equity Conversion Mortgage loans, or “HECM Loans”), which are typically pooled into Ginnie Mae securitizations.

HECM participations or "tails" fund cash payments to homeowners and are a key source of revenue for reverse issuers. Unfortunately the HECM participations have no claim on the mortgage note, suggesting that TCBI faces a total loss on the financing for the tails.

Nomura Securities (NMR) had a $260 million warehouse facility and a small repo facility to RMIT. But one of the largest losses was BNGL, an investment vehicle sponsored by Starwood Property Trust (STWD). BNGL had $160 million in equity financing for RMIT that was apparently wiped out. BNGL supported RMIT post-filing with additional cash to avoid the seizure of the RMSR.

None of the public companies listed above have bothered to disclose the losses on the RMIT bankruptcy. In the world of public company disclosure, this is called dragging your feet. The magnitude of the hidden losses and related regulatory forbearance would disturb even the cynics in the group. But the losses faced by these lenders may be the start of a larger problem.

Ginnie Mae President Alana McCargo, reportedly decided to participate in a conference call last December 2022 where more than 20 creditors of RMIT and their legal counsel were present. McCargo did not respond to a request for comment about the call.

Not only did McCargo reportedly participate in the conference call, a remarkable occurence in and of itself, but she actually decided to speak. She encouraged the RMIT lenders to continue to support the HECM market and specifically asked lenders to continue to advance funds to the bankrupt RMIT in order to protect consumers.

McCargo then reportedly offered hope to RMIT creditors that Ginnie Mae would do something to protect them from financial loss if they continued to lend to RMIT. Two weeks later, on December 20, 2023, Ginnie Mae siezed the MSR and effectively handed the lenders a total loss. As a result, some of RMIT's lenders are considering legal action against Ginnie Mae and the Treasury based upon McCargo’s statements.

It is interesting to note that even the Bankruptcy Court and the experts hired to manage the bankruptcy do not understand the tenuous nature of any “secured” claims against Ginnie Mae assets. When lenders to RMIT tried unsuccessfully to negotiate a debtor-in-possession (DIP) financing facility last December, for example, the Bankruptcy Court stated that “a substantial majority of the Debtors’ assets are encumbered by valid and perfected liens…”

Really? In the case of RMIT, the reality is that lenders may take a total loss on positions that these banks reported to regulators and investors as “secured." When Ginnie Mae seized the RMSR under its statutory authority, the banks have no recourse against the asset or Ginnie Mae. Despite statements attributed to President McCargo, Ginnie Mae has no obligation to RMIT's lenders.

For the record, we think trying to sue Ginnie Mae for McCargo's puffery is a waste of time and money. The bankers ought to know better.

When the servicing book of RMIT was seized by Ginnie Mae two weeks after the conference call in early December, the “secured” lenders were left with no recourse except to file a claim in the bankruptcy. The Treasury lost something like $2 billion on reverse loan buyout costs and other expenses over the next six months and now must pay to service the MSR and fund future buyouts until the portfolio is extinguished.

So when the lenders discussed above say they are pursuing repayment in the RMIT bankruptcy proceedings, we say what? The RMSR is gone and there are few substantial assets left in the bankruptcy estate and certainly nothing approaching the prospective losses outlined above. Of interest, if you search EDGAR for RMIT over the past year, this is what you find.

At the time of the bankruptcy, RMIT and its affiliates estimated that they collectively owed the lenders approximately $1.1 billion under the loan, tail, and buyout warehouse facilities. Between the filing on November 30 and the seizure by Ginnie Mae on December 20th, these figures may have increased. But the key factor for investors and risk managers looking at HECM exposures to consider is that the terms of the business are deteriorating. The operating cash flow of most HECM issuers -- indeed, most small and mid-sized government issuers -- is negative and that is not likely to change between now and the end of next year.

Former Ginnie Mae President Ted Tozer published a thoughtful comment for Urban Institute where he sets forth the pressing need for funding government-insured loans, both forwards and reverses. Tozer enumerates the mind-numbing buyout requirements facing Ginnie Mae issuers as interest rates rise. He suggests that Ginnie Mae guarantee advances on delinquent government loans, an evolution of Tozer's earlier idea to guarantee issuer debt.

Tozer's scheme is timely but is unworkable because the advances would be unsecured. The statute requires that Ginnie Mae only guarantee assets, not a derivative unconnected to the mortgage note like an advance or MSR financing. Since by law government insured loans cannot be separated from advances or financing for MSRs, any extension of credit by a bank or even Ginnie Mae would arguably be unsecured. Let's call them "government insured participations."

As interest rates have risen, the collateral value of existing HECM loans has fallen and the haircut required for warehouse financing has grown. HECM lenders historically obtained advances that are 89-98% of the full principal balance of the reverse mortgage, but recently some advance rates have fallen to or below 80%. We think that advance rates generally on government assets are going to decline, reversing a decade long liberalization of advance rates.

And as the likelihood of another event of default grows, lenders will back away further. Barring a drop in interest rates, we think further defaults by government lenders are inevitable. Unlike forward issuers that can leave delinquent loans loitering in Ginnie Mae MBS pools for months, HECM issuers must buy the loan out of the pool immediately at par. As HECM lenders are forced to finance buyouts and advances to clients at progressively higher interest rates and with bigger haircuts, the likelihood of another event of default soars.

Source: MBA, FDIC

Earlier this year, Ginnie Mae ended the special accommodations for government issuers implemented during COVID. Specifically, the waiver of the requirements of Chapter 18 of the Ginnie Mae Guide allowed issuers to borrow 100% of escrow funds, a change that helped issuers finance COVID loan forbearance. Now, however, Ginnie Mae issuers must limit borrowed escrows to 60% of total payoffs even as bank lenders decrease advance rates and increase haircuts on forward and reverse government assets.

As federal regulators battle with the banking industry over new Basel capital proposals, we would all do well to remember that it will take just one of the lenders mentioned above stepping back from financing government insured assets to force another Ginnie Mae issuer default – perhaps several at one time. Credit Suisse/UBS is already gone. The HECM sector is the most vulnerable to rising interest rates, but forward issuers are also under enormous pressure as we head to the end of 2023.

As we discuss in our latest Housing Finance Outlook, the mortgage finance complex continues to perform better in the equity markets than the fundamentals of the industry deserve. At the very least, we expect to see massive consolidation in government lenders over the next two years. Hopefully these combinations will occur in the normal course of business and without intervention from Ginnie Mae.

Given the anti-inflation agenda of the FOMC and the worsening inversion of the Treasury yield curve, we expect that President McCargo and her team will face multiple defaults by government issuers over the next year. Hopefully they will not also face an adversarial litigation by one or more government warehouse lenders ensnared in the RMIT bankruptcy. Hope is not a strategy. At present, the Biden Administration has no real strategy for addressing the growing stress in the market for government insured mortgage loans and securities.

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