Reverse Mortgage Interests, Net

6 Months Ended

Jun. 30, 2020

Reverse Mortgage Interests [Abstract]

5. Reverse Mortgage Interests, Net

Reverse mortgage interests, net, consists of the following:


Reverse Mortgage Interests, Net	June 30, 2020		December 31, 2019
Participating interests in HECM mortgage-backed securities (“HMBS”)	$	3,873	$	4,282
Other interests securitized	825		994
Unsecuritized interests	1,138		1,117
Purchase discount, net	(127)		(114)
Total reverse mortgage interests, net	$	5,709	$	6,279

Participating Interests in HMBS

Participating interests in HMBS consist of the Company’s reverse mortgage interests in HECM loans which have been transferred to GNMA and subsequently securitized through the issuance of HMBS. The Company does not own these loans, but due to HMBS program buyout requirements, such interests are consolidated in Company’s consolidated balance sheets. The Company does not originate reverse mortgages, but during the six months ended June 30, 2020 and 2019, a total of $95 and $149 in UPB associated with new draws on existing loans was transferred to GNMA and securitized by the Company, respectively.

In March 2019, the Company entered into an agreement with Fannie Mae for the transfer of reverse mortgage loans. As a result, $61 was transferred from Fannie Mae and securitized into GNMA HMBS during the six months ended June 30, 2019. There was no such activity during the six months ended June 30, 2020.

Other Interests Securitized

Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria primarily because they have reached 98% of their Max Claim Amount (“MCA”), which is established at origination and in accordance with HMBS program guidelines, requiring a repurchase of loans from the respective HMBS trust. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. No such securitizations occurred during the six months ended June 30, 2020. During the six months ended June 30, 2019, the Company securitized a total of $398 UPB through Trust 2019-1 and a total of $249 UPB from Trust 2017-2 was called and the related debt was extinguished. The Company sold $20 UPB of Trust 2018-3 during the six months ended June 30, 2019. Refer to Other Nonrecourse Debt in Note 9, Indebtedness for additional information.

Unsecuritized Interests

Unsecuritized interests in reverse mortgages consist of the following:


Unsecuritized interests	June 30, 2020		December 31, 2019
Repurchased HECM loans (exceeds 98% MCA)	$	804	$	789
HECM related receivables⁽¹⁾	244		250
Funded borrower draws not yet securitized	53		64
Real estate owned (“REO”) related receivables	37		14
Total unsecuritized interests	$	1,138	$	1,117

⁽¹⁾HECM related receivables consist primarily of receivables from FNMA for corporate advances and service fees and claims receivables from the U.S. Department of Housing and Urban Development (“HUD”) on reverse mortgage interests.

Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the MCA established at origination and in accordance with HMBS program guidelines. These unsecuritized interests are primarily financed through available warehouse lines. The Company repurchased a total of $686 and $1,457 of HECM loans out of GNMA HMBS securitizations during the six months ended June 30, 2020 and 2019, respectively, of which $186 and $371 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage. The Company assigned a total of $461 and $983 of HECM loans to HUD during the six months ended June 30, 2020 and 2019, respectively.

Purchase Discount, net, for Reverse Mortgage Interests

In connection with the Merger, the Company recorded the acquired reverse mortgage interests at estimated fair value as of the acquisition date, which resulted in a net purchase discount of $256 associated with financial and operational losses on reverse mortgage interests associated with servicing the loans through foreclosure and collateral liquidation. The premium and discount are amortized and accreted, respectively, based on the effective yield method, whereby the Company updates its prepayment assumptions for actual prepayments on a quarterly basis. Consistent with the Company’s accounting policy, the Company calculates reserve requirements on the reverse mortgage interest portfolio each reporting period and compares such calculated reserve requirements against the remaining net purchase discount. If the calculated reserve requirements exceed the remaining net purchase discount, the Company will record an additional reserve and associated provision to general and administrative expense. No additional reserves were required to be recorded as of June 30, 2020.

The following table sets forth the activities of the purchase discounts, net, for reverse mortgage interests:


	Three Months Ended June 30,						Six Months Ended June 30,
Purchase discount, net, for reverse mortgage interests⁽¹⁾	2020		2019		2020		2019
Balance - beginning of period	$	(129)	$	(171)	$	(114)	$	(164)
Adjustments⁽²⁾	—		—		—		(24)
Utilization of purchase discounts⁽³⁾	9		12		19		40
Amortization, net of accretion	(7)		(4)		(32)		(15)
Balance - end of period	$	(127)	$	(163)	$	(127)	$	(163)

⁽¹⁾Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans.

⁽²⁾Adjustments during the six months ended June 30, 2019 due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger.

⁽³⁾Utilization of purchase discounts on liquidated loans, for which the remaining receivable was written-off.

Credit Loss for Reverse Mortgage Interests

As described in Note 1, Nature of Business and Basis of Presentation, reverse mortgage interests are within the scope of ASU 2016-13, requiring an assessment of reserves regarding credit-related losses in accordance with the CECL framework. Upon applying ASU 2016-13, the Company determined that credit-related losses are immaterial given the government insured nature of the HECM loan product. Any expected credit-related losses are contemplated in the Company’s existing reserve methodology due to the nature of this financial instrument. Accordingly, no cumulative effect adjustment was required upon adoption of ASU 2016-13 on January 1, 2020 and no additional CECL reserve was recorded as of June 30, 2020.

The credit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.

Reverse Mortgage Interest Income

The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans, in accordance with FHA guidelines. Total interest earned on the Company’s reverse mortgage interests was $55 and $85 for the three months ended June 30, 2020 and 2019, respectively, and $117 and $167 for the six months ended June 30, 2020 and 2019, respectively.