5. Reverse Mortgage Interests, Net

Reverse mortgage interests, net consists of the following:



Reverse Mortgage Interests, Net	March 31, 2020			December 31, 2019
Participating interests in HECM mortgage-backed securities (“HMBS”), net of $16 and $10 purchase discount and premium, respectively	$	4,027		$	4,292
Other interests securitized, net of $44 and $56 purchase discount, respectively	851			938
Unsecuritized interests, net of $69 and $68 purchase discount, respectively	1,080			1,052
Reserves	(3		)	(3		)
Total reverse mortgage interests, net	$	5,955		$	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 three months ended March 31, 2020 and 2019, a total of $52 and $82 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 three months ended March 31, 2019. There was no such activity during the three months ended March 31, 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 three months ended March 31, 2020 and 2019. The Company sold $20 UPB of Trust 2018-3 during the three months ended March 31, 2019. Refer to Other Nonrecourse Debt in Note 10, Indebtedness, for additional information.

Unsecuritized Interests

Unsecuritized interests in reverse mortgages consist of the following:



Unsecuritized interests	March 31, 2020			December 31, 2019
Repurchased HECM loans (exceeds 98% MCA)	$	782		$	789
HECM related receivables⁽¹⁾	257			250
Funded borrower draws not yet securitized	64			67
Real estate owned (“REO”) related receivables	46			14
Purchase discount, net	(69		)	(68		)
Total unsecuritized interests	$	1,080		$	1,052


⁽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 $383 and $740 of HECM loans out of GNMA HMBS securitizations during the three months ended March 31, 2020 and 2019, respectively, of which $103 and $188 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 $266 and $514 of HECM loans to HUD during the three months ended March 31, 2020 and 2019, respectively.

Reserves for Reverse Mortgage Interests

The Company records reserves related to reverse mortgage interests based on potential unrecoverable costs and loss exposures expected to be realized. Recoverability is primarily determined based on the Company’s ability to meet HUD servicing guidelines and is assessed with respect to both financial and operational exposures.

The following table sets forth the activities of the servicing reserves for reverse mortgage interests:



Reserves for reverse mortgage interests	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Balance - beginning of period	$	3	$	13
Provision (release), net	—		—
Write-offs	—		(5		)
Balance - end of period	$	3	$	8

Purchase Discount 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 purchase premium of $42 for participating interests in HMBS, and a purchase discount of $298 for Other Interest Securitized and Unsecuritized Interests due to the higher exposure to financial and operational losses of 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.

The following table sets forth the activities of the purchase premiums and discounts for reverse mortgage interests:



	Three Months Ended March 31, 2020
Purchase premiums and discounts for reverse mortgage interests	Net Discount for Participating Interests in HMBS⁽¹⁾			Net Discount for Other Interest Securitized⁽¹⁾			Net Discount for Unsecuritized Interests⁽¹⁾
Balance - beginning of period	$	10		$	(56	)	$	(68	)
Utilization of purchase discounts⁽²⁾	—			5			5
(Amortization)/Accretion	(44		)	17			2
Transfers⁽³⁾	18			(10		)	(8		)
Balance - end of period	$	(16	)	$	(44	)	$	(69	)



	Three Months Ended March 31, 2019
Purchase premiums and discounts for reverse mortgage interests	Net Premium for Participating Interests in HMBS⁽¹⁾			Net Discount for Other Interest Securitized⁽¹⁾			Net Discount for Unsecuritized Interests⁽¹⁾
Balance - beginning of period	$	58		$	(100	)	$	(122	)
Adjustments⁽⁴⁾	(16		)	(2		)	(6		)
Utilization of purchase discounts⁽²⁾	—			6			22
(Amortization)/Accretion	(14		)	(15		)	18
Transfers⁽³⁾	8			(1		)	(7		)
Balance - end of period	$	36		$	(112	)	$	(95	)


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


⁽²⁾	Utilization of purchase discounts on liquidated loans, for which the remaining receivable was written-off.


⁽³⁾	Transfer of premium/(discount) based on the transfer of associated loans between categories consistent with the underlying loan characteristics.


⁽⁴⁾	Adjustments to premium/(discount) due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger during the measurement period.

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 March 31, 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 $62 and $82 for the three months ended March 31, 2020 and 2019, respectively.