Lehman Readies Reverse Mortgage Deal For July


Securitization markets are readying to go forward on the first reverse mortgage deal likely by the end of next month.

While the newborn deal hasn't yet been named, the prospective parents, Financial Freedom Senior Funding Corp. and Lehman Brothers, are reportedly planning on a July delivery.

"Lehman Brothers has determined the reverse-mortgage market to be an area of potential growth in the MBS arena," said Craig Corn, a Lehman Brothers senior vice president.

The Lehman and Financial Freedom matchup was actually made possible by the earlier marriage of Transamerica HomeFirst Inc. to Financial Freedom in a $200 million linkup financed by Lehman.

Lehman said it was premature to discuss specifics of the issuance, as the terms and structure of the deal are still being worked out. However, according to sources close to the transaction, the deal is expected to include at least $200 million in jumbo reverse mortgages.

Standard & Poor's is expected to rate the proposed offering, but could not comment on the issue since it has not been given any particulars on the structure. However, Joseph Hu, S&P's director of structured mortgages, recently released the initial analysis of the reverse mortgage class of securities and outlined some of the rating criteria it will employ for these securitizations.

The reverse mortgage loan has several variations, but the basic concept is that a senior citizen with a fully paid home uses this equity as collateral for a loan, either lump sum or in an annuity format. When the borrower dies or moves, the home is sold and the proceeds are used to repay the loan. Any excess value in the residence becomes part of the individual's estate.

S&P says the reverse mortgage has been gaining in popularity over the last couple of years. With the entry of the Federal Housing Authority and Fannie Mae into this market, it has been accorded greater credibility. An aging population willing to utilize its home equity as a means for achieving greater financial independence abets this trend.

Market players said the critical mass of outstanding reverse mortgages has now reached levels where a secondary market is developing and where securitizations are possible.

S&P analyst Susan Barnes said that these securities require a totally different analytical process than conventional mortgages or loans. Since the homes are fully paid for, there is no need to look at the credit aspect of the security. Rather the key determinants will be those factors influencing cash flow for the transactions. The three key elements to be analyzed are mortality rates, move rates and house price appreciation rates.

While analysts acknowledge that a securitization of reverse mortgage debt could be structured as a zero-coupon type instrument, sources close to this initial offering believe there is ample cash flow in the Financial Freedom portfolio to allow for a current-pay ABS. However, since they are based on mortgage product, the debt will be self-liquidating and subject to as yet undetermined prepayment risk.

James R. Mahoney, senior vice president of Financial Freedom, said the Transamerica acquisition is seen "as an opportunity to become a national company." The transaction included Transamerica's mortgage servicing operations and gives Financial Freedom a presence in 35 states.

- David Feldheim/ES