DBRS Morningstar Comments on Impact of RMF’s Bankruptcy on Rated Securitizations

DBRS, Inc. (DBRS Morningstar) notes that Reverse Mortgage Funding, LLC (RMF) filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware on November 30, 2022, one day after laying off more than 400 employees. The company retained certain core staff including the servicing oversight team. On December 5, 2022, RMF, along with its parent company, Reverse Mortgage Investment Trust (RMIT), obtained court approvals to borrow funds that will allow it to continue its servicing operations, including collecting servicing fees and making advances.

Headquartered in Bloomfield, New Jersey, RMF was founded in 2012 and was acquired by RMIT in 2014. Before pausing originations on November 21, 2022, the company originated and purchased both Federal Housing Administration (FHA) insured home equity conversion mortgages (HECM) and proprietary reverse mortgages.

DBRS Morningstar currently rates three HECM securitizations under the RMF Buyout Issuance Trust (RBIT) shelf and seven proprietary reverse mortgage securitizations under the RMF Proprietary Issuance Trust (RPIT) shelf. In the rated securitizations, RMF is the Seller, Sponsor, and Servicer. Compu-Link Corporation, doing business as Celink (Celink) is the Subservicer, and U.S. Bank Trust Company (U.S. Bank) acts as the Indenture Trustee.

DBRS Morningstar outlines below the potential challenges to its rated securitizations and possible mitigating factors of RMF’s bankruptcy filing.

POTENTIAL SERVICING TRANSFER
A bankruptcy of RMF is considered a Servicer Termination Event, which may cause servicing of the rated securitizations to be transferred to a successor servicer, if directed by a requisite percentage of the senior most noteholders. For the avoidance of doubt, a Servicer Termination Event is not an Event of Default under the Indenture and therefore will not result in an Acceleration Event.

Celink, the largest reverse mortgage subservicer in the U.S., is currently subservicing the rated securitizations in accordance with the transaction documents. DBRS Morningstar has conducted an operational risk review of Celink and considers it to be an acceptable servicer for reverse mortgages.

SERVICING FEES AND REIMBURSEMENTS OF SERVICER ADVANCES
If a servicing transfer occurs, a successor servicer may be paid additional servicing fees.

For the rated HECM/RBIT transactions, such appointment will also lead to payments of servicing fees and reimbursements of servicer advances being moved to the top of the waterfall, ahead of any payments to the notes.

For the rated RPIT transactions, reimbursements of servicer advances, since issuance, have always been allocated prior to the distributions to noteholders, thus the payment waterfall will not change as a result of a servicing transfer.

POTENTIAL FAILURE TO MAKE ADVANCES
As a result of a Servicer Termination Event, the HECM/RBIT transactions provide for an Interim Advancing Party (Celink), and an Interim Advancing Reserve Account will be funded by the available funds until (and if) a successor servicer is appointed. A majority of the loans in these transactions are nonperforming in nature, which warrant little borrower principal advances and modest other advances. For the remaining active (or still performing) HECM loans, the estimated potential outstanding principal and other advances are generally insignificant relative to available funds, hence the servicer’s overall obligations to advance in the HECM/RBIT transactions are relatively muted.

The RPIT transactions, in addition to available funds, also provide for various reserve accounts to fund principal advances (term payments or lines of credit) and other advances. Such reserve accounts are generally well funded at issuance. Similarly, the amount of periodic servicer advances in the RPIT securitizations are comparatively small compared with periodic available funds and reserve amounts.

POTENTIAL FAILURE TO CURE BREACHES OF REPRESENTATIONS AND WARRANTIES
As the Seller, RMF may be responsible for certain repurchase obligations upon the occurrence of material breaches of representations and warranties with respect to the mortgage loans.

As a mitigant, third-party review firms performed due diligence for both the HECM/RBIT and RPIT securitizations at issuance. Such reviews ranged from a sample (in the case of HECM/RBIT) to 100% of the pool (in RPIT) and may include, when applicable, data integrity, FHA insurance (if any), credit, property valuations, and title and lien searches. A comprehensive due-diligence review may mitigate against future breaches of representations and warranties, thus reducing repurchase obligations for the Seller.

SUMMARY
DBRS Morningstar recognizes the uncertainties surrounding RMF’s bankruptcy proceedings and the potential challenges it may have on the rated securitizations as described above. DBRS Morningstar will continue to monitor the ongoing developments in the bankruptcy proceedings and transaction performance, conduct pool-level credit analysis, and take appropriate rating actions as warranted.

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

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