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Moody's Investors Service Inc.

Moody's Downgrades Rating of Mortgage Equity Conversion Asset Trust 2007-FF3

Strategic Insights

— 1 min read

The rating agency Moody's Investors Service has downgraded the rating of one bond from Mortgage Equity Conversion Asset Trust 2007-FF3, backed by Home Equity Conversion Mortgages (HECM). This decision was driven by a revised loss projection and the depletion of credit enhancement in the transaction. The collateral pool has seen a significant reduction since the previous review, with a 37% decline in the number of loans assigned to HUD, which have reached or exceeded 98% of their Maximum Claim Amount (MCA).

Key Takeaways:

  • Moody's downgraded the rating of the bond from Mortgage Equity Conversion Asset Trust 2007-FF3 to Caa1 (sf) due to the revised loss projection and depletion of credit enhancement.
  • The collateral pool has seen a 37% reduction since the previous review, with a significant number of loans assigned to HUD reaching or exceeding 98% of their Maximum Claim Amount (MCA).
  • The downgrade is driven by the potential for losses if the properties backing the HECMs are not liquidated within six months of entering real-estate-owned (REO) status.
  • The Federal Housing Administration (FHA) requires that the FHA guarantees deficiencies up to the appraisal value if the servicer does not sell the home within six months of it entering REO status.
  • The appraisal value is crucial in determining the FHA's guarantee, and a mismatch between the appraisal value and the actual sale price could result in losses.
  • The rating agency will continue to monitor the transaction's performance, considering factors such as credit protection, obligor defaults, and the US macro economy and housing market.
  • Poor servicing, error on the part of transaction parties, inadequate transaction governance, and fraud are potential factors that could negatively impact the transaction's performance.
  • The rating agency relies on accurate reporting formats and data availability provided by trustees to gain a better understanding of the performance metrics, such as collateral modifications.

Statistics:

  • 37% reduction in the collateral pool since the previous review
  • 98% of Maximum Claim Amount (MCA) reached by loans assigned to HUD
  • Six months for properties to be liquidated, after which the FHA requires an appraisal and guarantees deficiencies up to the appraisal value
  • Under-collateralization of the deal, with the ending balance of HECMs plus the funding account being less than the remaining balance of the certificates.

Sources:

  • Moody's Investor's Service, "Rating Action", https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL507121.
  • Moody's, "Reverse Mortgage Securitizations", May 2024, https://ratings.moodys.com/rmc-documents/421984.

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