DBRS Morningstar Finalizes Provisional Ratings on Finance of America HECM Buyout 2022-HB1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Asset-Backed Notes issued by Finance of America HECM Buyout 2022-HB1:

-- $439.6 million Class A at AAA (sf)
-- $59.0 million Class M1 at AA (low) (sf)
-- $41.9 million Class M2 at A (low) (sf)
-- $34.3 million Class M3 at BBB (low) (sf)
-- $30.7 million Class M4 at BB (low) (sf)
-- $20.5 million Class M5 at B (sf)

The AAA (sf) rating reflects 31.3% of credit enhancement. The AA (low) (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (sf) ratings reflect 22.1%, 15.5%, 10.2%, 5.4%, and 2.2% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar did not rate any other classes in this transaction.

Lenders typically offer reverse mortgage loans to people who are at least 62 years old. Through reverse mortgage loans, borrowers have access to home equity through a lump sum amount or a stream of payments without periodically repaying principal or interest, allowing the loan balance to accumulate over a period of time until a maturity event occurs. Loan repayment is required (1) if the borrower dies, (2) if the borrower sells the related residence, (3) if the borrower no longer occupies the related residence for a period (usually a year), (4) if it is no longer the borrower’s primary residence, (5) if a tax or insurance default occurs, or (6) if the borrower fails to properly maintain the related residence. In addition, borrowers must be current on any homeowners association dues if applicable. Reverse mortgages are typically nonrecourse; borrowers do not have to provide additional assets in cases where the outstanding loan amount exceeds the property’s value (the crossover point). As a result, liquidation proceeds will fall below the loan amount in cases where the outstanding balance reaches the crossover point, contributing to higher loss severities for these loans.

As of the November 30, 2021, Statistical Cut-Off Date, the collateral had approximately $667.4 million in unpaid principal balance (UPB) from 2,892 performing and nonperforming home equity conversion mortgage reverse mortgage loans secured by first liens typically on single-family residential properties, condominiums, multifamily (two- to four-family) properties, manufactured homes, and planned unit developments. Of the total loans, 1,576 have fixed-rate interest (58.8% of the balance) with a weighted-average coupon (WAC) of 5.03%. The remaining 1,316 loans have floating-rate interest (41.2% of the balance) with a WAC of 2.75%, bringing the entire collateral pool to a WAC of 4.09%.

As of the Statistical Cut-Off Date, the loans in this transaction are both performing and nonperforming (i.e., inactive). There are 618 performing loans comprising 24.7% of the total UPB. As for the 2,274 nonperforming loans, 1,378 loans are referred for foreclosure (47.4% of the balance), 83 are in bankruptcy status (2.9%), 269 are called due following recent maturity (9.1%), 142 are real estate owned (4.3%), one is referred (<0.1%), and the remaining 401 are in default (11.6%). However, all these loans are insured by the United States Department of Housing and Urban Development (HUD), which mitigates losses vis-à-vis uninsured loans. Because the insurance supplements the home value, the industry metric for this collateral is not the loan-to-value ratio (LTV) but rather the WA effective LTV adjusted for HUD insurance, which is 54.04% for the loans in this pool. To calculate the WA LTV, DBRS Morningstar divides the UPB by the maximum claim amount and the asset value.

The transaction uses a sequential structure. No subordinate note shall receive any principal payments until the senior notes (Class A Notes) have been reduced to zero. This structure provides credit enhancement in the form of subordinate classes and reduces the effect of realized losses. These features increase the likelihood that holders of the most senior class of notes will receive regular distributions of interest and/or principal. All note classes have available funds caps.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is U.S. Reverse Mortgage Securitization Ratings Methodology (May 8, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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