Home Equity Conversion Mortgages (HECMs) and private reverse mortgages gave birth to a new asset class, but the sharp financial minds on Wall Street missed this seminal event for almost a decade. Then in 1998, Lehman Brothers tapped a young investment banker to start its reverse mortgage business, the first on Wall Street.
To understand the new industry and to plant Lehman’s flag in it, the banker ventured into reverse country. First, he identified the industry’s key players and assessed their needs: They needed capital to grow. Second, he initiated Lehman’s acquisition of some jumbo proprietary reverse loans from Transamerica HomeFirst (THF), a reverse mortgage pioneer which was exiting the business. The THF loans became the collateral for the first reverse mortgage securitization in the U.S. engineered by Lehman Brothers in 1999.
Third, calling on other talents at Lehman and using cash from the THF-LB assets (jumbo reverse loans) sale, the banker helped Financial Freedom Senior Funding Corporation (FFSFC … then a unit of Union Labor Life Insurance Company [ULLICO]) to buy the origination and servicing assets of THF, a transaction which propelled Financial Freedom into the front ranks of reverse mortgage lenders and servicers in the U.S.
Then, the banker envisioned and initiated Lehman’s investment in FFSFC, Unity Mortgage, and other reverse mortgage lenders, giving Lehman a strategic position in the emerging industry, as well as access to loans for jumbo reverse mortgage-backed securities. Craig Corn, head of MetLife Home Loans’ reverse mortgage division, is the investment-banker-turned-industry executive who brought the U.S. reverse mortgage industry to Wall Street and vice-versa, a reverse quarterback of sort.
Following his stint at Lehman, Corn joined Financial Freedom as executive vice president with responsibility for wholesale/correspondent, capital markets and secondary marketing. Twelve months later, he left Financial Freedom to care for an ailing parent. Corn resurfaced as part of the transition management team at BNY Mortgage. When EverBank took over BNY Mortgage and created EverBank Reverse Mortgage, Corn became a co-president of the company. In 2008, Metlife Bank bought EverBank Reverse Mortgage, and Corn was named vice president and head of its reverse mortgage business.
A 1987 accounting graduate of Muhlenberg College, Craig and his wife, Laura, have four children. The following are his reflections on the industry he has helped to shape.
At Lehman Brothers in 1999, you were part of the team that pioneered the securitization of reverse mortgages in the U.S. secondary market. What attracted you to reverse mortgages as an asset class, and why did you commit to them?
I had been involved in reverse mortgage-type products before joining Lehman Brothers in 1998. In the United Kingdom, I helped develop the market for shared appreciation mortgages, a type of equity-release mortgage product, similar to reverse mortgages. So I was already familiar with the reverse mortgage product when I returned to the U.S.
What attracted me to the reverse mortgage was its newness. It was different from anything I had seen before, and it had potential for growth along with America’s older population. Moreover, once we understood the favorable traits of reverse mortgages (for example, that pre-payment was linked not to interest rates, but to mortality), we felt they would be attractive to investors once we overcome their inherent lack of periodic cash flow.
How was the experience of creating the first reverse mortgage securitization for your investors, for Lehman Brothers, and for you?
The experience of creating the first reverse mortgage securitization was very exciting. The team at Lehman Brothers knew that we were breaking new ground, and although the process of working with lawyers, accountants, rating agencies, investors, etc. was long and involved many late nights, there was a tremendous amount of pride in being involved in such a ground-breaking transaction. In addition, this securitization led to Lehman Brothers’ investments in the business by buying several reverse mortgage companies, including Financial Freedom.
Without a model, what were some structural challenges you faced? And how did you overcome them?
The great challenge in any securitization of a new asset class, especially one as fundamentally different as reverse mortgages, is that there is no blueprint on how to do it. As a result, the team had to develop its own model, which was vetted by senior management, rating agencies, lawyers, accountants and investors. The most significant challenge was developing the rating agency criteria for this asset class. Literally, we had to work with the rating agencies for several months in developing criteria for ratings, from Triple AAA right through to Triple BBB. Since there was no historical experience to draw upon, the criteria were developed while we were figuring out the structure, modeling the transaction, and convincing investors of the product’s merits.
How informed were investors about reverse mortgages as an asset class when you began? How educated are they today?
Investors knew very little about reverse mortgages when we started speaking with them about this new asset class. As a result, we not only had to educate investors about the investment structure and the nuances of the product, but we also had to explain to them the origination process, how the loans were serviced, what happens when a maturity event [borrower moves, sells, or dies] occurs.
It was an education of the entire business. Today, investors are more educated about the product. We have had many securitizations since 1999, both of HECM and non-HECM reverse mortgages, worth billions of dollars. Some investors understand it, but many potential investors have yet to purchase a reverse mortgage-backed security, so there is much education ahead.
How has the secondary market for reverse mortgages evolved since your pioneering work? Where is it headed?
For the first six to seven years after the first securitization, only a handful of reverse mortgage securitizations were issued, and only with non-HECM proprietary product. Two significant changes have happened since then: The securitization of HECM in 2006 and the development of Ginnie Mae’s HMBS program for HECM securitization, beginning in 2007. These events have changed the reverse mortgage securitization market by making HECMs the underlying collateral.
From investors and rating agencies standpoint, the significance of the 2006 HECM securitization and the 2007 Ginnie Mae HMBS stems from the elimination of crossover risk (thanks to Federal Housing Administration [FHA] insurance) and the certainty of pre-payment when loan balance approaches 98 percent of FHA’s maximum claim amount (MCA).
Because HECM products dominate reverse mortgage origination, their increased use as collateral for Ginnie Mae’s securitizations gives investors the confidence to consider reverse mortgage-backed securities as a viable asset class, knowing that securitizations will be regular.
What are some lessons you have learned about reverse mortgage-backed securities (RMBS) and investors’ attitude toward them?
The greatest lesson I have learned is that when dealing with investors, it is useful to discuss the importance of reverse mortgages in the lives thousands of older Americans. Put differently, the human element should be a critical part of the investment discussion, but not necessarily the investment decision.
Obviously, investors control billions of dollars and they are looking for asset classes and investment structures that provide them with the appropriate risk/reward characteristics. However, these investors also have parents and grandparents, and they appreciate the role the reverse mortgages can play in helping people live more comfortable and dignified lives in retirement.
In addition, they want to understand issues like fraud, cross-selling and counseling. Over the years, it has become clear to me that when dealing with investors, the discussion about the non-investment side of the reverse mortgage business can be just as important as the discussion of the investment in the product itself.
What prospects and challenges do you see for RMBS after the Great Recession of 2008-2009?
The prospects are very encouraging. Ginnie Mae’s HMBS program has made a significant difference in changing investors’ attitude toward the reverse mortgages. Given the massive flight to quality we have seen over the past few years, any product with government guarantee is going to be seen as attractive to many investors. As a result, investors are much more open to discussing the product with us.
When you factor in the zero risk [really?] weighting of a Ginnie Mae HMBS with the favorable pre-payment characteristics of HECMs and HMBS structure, it is not surprising that interest in reverse mortgages as a new asset class has grown significantly in the past twelve months.
What is your favorite reverse mortgage story?
I have heard and have been involved in many feel-good stories about how reverse mortgages have made a difference in people’s lives. But I have to say that during 1998-1999, when my colleagues and I at Lehman Brothers were working on the first securitization and getting to understand the product, the market and its growth potential, is was one of my favorite times in the reverse mortgage business. We knew we were not simply working on a transaction, but rather, building a business and that securitization is vital to the growth of the industry.
Author and columnist, Atare E. Agbamu, CRMS is director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC. A member of the BusinessWeek Market Advisory Board, Agbamu is author of Think Reverse! and more than 130 articles on reverse mortgages. Through his advisory firm, ThinkReverse LLC, Agbamu advises financial professionals, institutions and regulators across the country. In a 2007 national report on reverse mortgages, the AARP cited Agbamu’s work. He can be reached by phone at (612) 436-3711 or (612) 203-9434.