Home Equity Conversion Mortgage (HECM) conditional prepayment (CPR) speeds surged in June, as borrowers take greater advantage of the interest rate environment that has resulted from the unfreezing of the 10-year LIBOR SWAP rate, while the lowest prepay speeds indicate one top lender is faring best among its competitors. This is according to data compiled by SitusAMC and shared with RMD.
The HECM business recorded full prepayments of $576 million in the month of June, representing 12.47% CPR. This is the fastest prepayment speed by a wide margin of 1.7% compared with the previous 12 months, with the next fastest speed being the 10.8% figure recorded in September of 2019, according to SitusAMC director Dan Ribler.
“Buy side accounts watch prepayment speeds very closely, as faster speeds generally impact their returns quite materially,” Ribler tells RMD in an email. “Those investors will be most interested in examining performance by loan attributes and by loan age, but the headline speed print will certainly raise eyebrows.”
Best performer among top lenders
Speaking generally, the lower the prepayment speed the better that buy side accounts and lenders will perform, since those lower speeds correspond directly to the accrual of interest. By this metric, there was a clear indication as to which of the country’s top reverse mortgage lenders performed best in terms of having lower prepayment speeds in comparison with its top-tier competitors.
“Over the top five reverse mortgage lenders in the country, Longbridge performs the best by a pretty sizable margin,” Ribler tells RMD. “In the affected period, Longbridge had the slowest prepay speeds and thus performed the best among major lenders.”
For Longbridge, the low prepayment speed is shaped by the company’s proactive approach in determining the overall value of the loans in its portfolio, according to Tim Wilkinson, VP of Capital Markets at Longbridge.
“Longbridge employs a data-driven approach to many aspects of its business, from lead acquisition to partner selection and pricing,” Wilkinson told RMD in an email. “This focus has helped ensure that Longbridge’s portfolio of loans is of high quality, and accordingly has performed well over time.”
Employing proprietary tools developed at Baseline Reverse, Ribler determines that most of the prepayment increase applies to loans that are aged between 16 and 36 months old. That detail supports the conclusion that the prepayment spike was driven by the lower 10-year SWAP rate, especially as loans which are older than three years have generally less incentive to be refinanced, Ribler says.
What originators should know
When it comes to the impact that this has on reverse mortgage loan originators, it’s mostly focused on the expected rates that LOs are selling with their loans, Ribler says.
“Because on the Wall Street side, the buy-side accounts are going to be looking more closely at the expected rates that they’re buying,” Ribler says. “So, you might end up seeing loans [in which] the premium might start to disappear faster as you move up in coupon above the expected rate floor.”
There comes a point where a loan might be so prone to being refinanced that it may not be attractive on the buy side, Ribler says.
“‘Above par compression’ is a term that people will throw around there. You might start seeing that happen as the buy-side gets a little bit more in tune with this,” he says. “But, [this certainly doesn’t mean that] the industry is broken or anything.”
Effects of lower SWAP rate
Prior to mid-May 2020, the Intercontinental Exchange (ICE) Benchmark Administration had not published a new 10-year LIBOR SWAP rate in 12 weeks, resulting in rates remaining flat. Then on May 19, ICE published a rate which resulted in a 45% drop from the previously-published rate, leading to new potential benefits for reverse mortgage borrowers in the form of higher loan proceeds.
Shortly after the new rate’s publication, reverse mortgage lenders indicated that they were ramping up their communications departments in an effort to relay to existing and potential borrowers some of the benefits that are unique to the low interest rate environment.
“The last few months have shown how quickly retirements can be jeopardized by market volatility, which has led to a wave of interest in non-traditional retirement solutions such as reverse mortgages,” a spokesperson for American Advisors Group (AAG) told RMD in late May. “We see that trend continuing, especially as seniors are looking at HECM line of credit options as a safeguard for their future.”