Karl Schwab, CFA  
Managing Director  
Financial Services Group  
901-347-1899  
D E B T  
C A P I T A L  
M A R K E T S  
Tuesday, April 19, 2011  
Floating-rate Reverse Mortgage Pools  
Depository investors remain locked in a seemingly endless battle between earnings  
and duration. As a result, cash balances remain very high relative to historical  
measures and margin pressures continue to build.  
While floating-rate securities provide the short duration most balance sheet  
managers require, characteristics such as interim caps or cash flow variability often  
lead investors in another direction. One sector of the short duration space that  
depository investors should consider closely is floating-rate reverse mortgage pools.  
GNMA reverse mortgage pools are backed by Home Equity Conversion Mortgages  
(HECM), loans that allow borrowers to tap equity that, in many cases, is inaccessible  
without selling their property –borrowers who are “house-rich”, but “cash-poor”.  
The characteristics of these borrowers, and the resulting pools, provide good  
diversification within the mortgage space along with reset properties that are  
beneficial from an asset/liability perspective.  
Consider G2 894145 (Cusip 3620E0KQ8), a new issue pool that resets monthly at  
Libor +174.6bp. Unlike many ARM pools, there are no interim caps and the life cap  
is a very high 12.179%. The current coupon of 2.007% is significantly above cash  
yields, and importantly, it will adjust monthly.  
Table 1 – G2 894145 – Floating-rate Reverse Mortgage Pool  
1
Karl Schwab, CFA  
Managing Director  
Financial Services Group  
901-347-1899  
D E B T  
C A P I T A L  
M A R K E T S  
Tuesday, April 19, 2011  
Now, this is not a typical GNMA mortgage pool. As mentioned, the collateral  
underlying this security has characteristics that differ from generic loans. This  
difference is a good thing.  
Consider the following:  
1. In order to be eligible for the loan, a borrower must be at least 62 years of age,  
must occupy the home as a primary residence and must own the home outright,  
2. The maximum amount that a borrower can obtain is formulaic is determined  
based on borrower age, an accrual rate and available equity,  
3. A reverse mortgage does not have to be repaid until the borrower no longer  
occupies the house and it is sold.  
This last point is key. As a result of point 3, the loan balance grows over time with  
the accretion of interest, service charges, fees and draws. When the property is  
sold, the proceeds are used to pay off the accreted loan balance. In today’s  
environment, when calls and prepayments compound the liquidity problem for  
balance sheet managers, this accretion characteristic is important – there is little  
cash flow produced by these assets on a month-to-month basis. This serves to  
reduce monthly reinvestment risk.  
One concern that this characteristic raises is the potential for cash flow extension  
risk. Frankly, this risk should be mollified by the fact that the average borrower age  
on the loans underlying this pool is about 77 years. For investors in this pool, the  
age of these borrowers will serve to likely limit potential extension on this pool. This  
demographic is captured in a different prepayment assumption than the one used  
to evaluate a generic mortgage asset.  
The yield table above uses a HECM prepayment curve assumption to produce the  
yield and average life. This curve is described below:  
2
Karl Schwab, CFA  
Managing Director  
Financial Services Group  
901-347-1899  
D E B T  
C A P I T A L  
M A R K E T S  
Tuesday, April 19, 2011  
Table 2 – HECM Prepayment curve  
Source: Bloomberg  
This curve assumption directly addresses the turnover characteristics of these assets  
– because of the borrower ages, prepayments will increase over time. This attribute,  
in addition to the floating rate coupon and very high life cap, makes clear that  
investors in G2 894145 should be less concerned about longer cash flows than  
investors in new issue, generic mortgage assets.  
Finally, Table 3 below shows the impact of the forward curve on the potential return  
on this security. As fixed income investors know, an upward sloping yield curve  
implies that short rates will increase over time. Today’s current very steep curve is  
“pricing-in” increases in the 1-month Libor rate of about 175bp over the next two  
years, and another 100bp the following year.  
3
Karl Schwab, CFA  
Managing Director  
Financial Services Group  
901-347-1899  
D E B T  
C A P I T A L  
M A R K E T S  
Tuesday, April 19, 2011  
Table 3 – Yield Table Incorporating Forward Curve  
Source: Bloomberg  
This floating rate reverse mortgage pool will provide investors with the full benefit  
of increasing short rates (no periodic caps), will reduce portfolio reinvestment risk  
(balance accrual) and will provide capital benefits as a 0% risk-weighted asset.  
Demand for reverse mortgage pools has increased significantly in recent  
months as depository investors have recognized the benefits of owning these  
assets. Balance sheet managers will find that it is well worth their time to  
understand these assets and how they can add value to a portfolio  
Karl Schwab, CFA  
Managing Director  
4
K
a
r
Karl Schwab, CFA  
Managing Director  
Financial Services Group  
901-347-1899  
D E B T  
C A P I T A L  
M A R K E T S  
l
S
c
h
w
Tuesday, April 19, 2011  
Disclosures  
The information contained herein is based on sources that we believe to be reliable, but Cantor Fitzgerald & Co. and its  
affiliate companies (collectively “Cantor Fitzgerald”) do not warrant its completeness or accuracy. It is not to be  
considered as an offer to sell or solicitation of an offer to buy the securities or other products discussed herein. Any  
commentary contained herein was prepared by trading desk personnel. Trading desk personnel responsible for this  
information receive compensation based upon, among other things, the overall profitability of Cantor Fitzgerald, including  
profits derived from proprietary trading activities. This is not a research report and the commentary contained herein  
should not be considered to be research. The views of trading desk personnel may differ from the view of research  
personnel. All prices, yields and opinions expressed are subject to change without notice. Cantor Fitzgerald may have a  
position in the securities or other products discussed herein (or options with respect thereto), and may sell to and/or  
purchase from customers on a principal basis or as agent for another person. In addition, Cantor Fitzgerald may have  
acted as an underwriter of such securities or other products, and may currently be providing investment banking services  
to the issuers of such securities or products.  
The information herein may contain general, summary discussions of certain business, tax, regulatory, accounting and/or  
legal issues. Any such discussion is necessarily generic and may not be applicable to, or complete for, any particular  
recipient’s specific facts and circumstances. Cantor Fitzgerald is not offering and does not purport to offer business, tax,  
regulatory, accounting or legal advice and this information should not be relied upon as such. Prior to entering any  
proposed transaction, recipients should determine, in consultation with their own business, legal, tax, regulatory and  
accounting advisors, the economic risks and merits, as well as the business, legal, tax, regulatory and accounting  
characteristics and consequences, of the transaction.  
Cantor Fitzgerald disclaims any and all liability relating to this information.  
5
K
a
r
Karl Schwab, CFA  
Managing Director  
Financial Services Group  
901-347-1899  
D E B T  
C A P I T A L  
M A R K E T S  
l
S
c
h
w
Tuesday, April 19, 2011  
Cantor Fitzgerald L.P., Global Headquarters  
499 Park Avenue New York, New York 10022  
212-938-5000, www.cantor.com  
Cantor Debt Capital Markets  
110 East 59th Street, New York, New York 10022  
877-cantor-4 (877-226-8674), 212-829-5282  
Fixed Income Sales and Trading  
Asset Management  
Atlanta, GA  
Los Angeles, CA  
404-201-2400  
310-282-6665  
Boca Raton, FL  
Memphis, TN  
800-699-0904  
888-326-8990  
Bohemia, NY  
Naples, FL  
877-736-9894  
866-592-9075  
Boston, MA  
Philadelphia, PA  
857-413-2020  
610-941-2978  
Charlotte, NC  
Ponte Vedra Beach, FL  
704-374-0570  
866-209-7140  
Chicago, IL  
San Francisco, CA  
312-469-7435  
888-326-7871  
Dallas, TX  
Seattle, WA  
214-866-0410  
866-667-2341  
Darien, CT  
Shrewsbury, NJ  
203-662-3661  
732-380-3800  
Houston, TX  
Summit, NJ  
713-783-1312  
908-517-5290  
6