Pre-payment data grows more important to reverse mortgages

All manner of financial investors “roll the dice” when they agree to advance money, expecting a return of some appreciated value (house, aggregate payments, interest). These “bets” are based for the most part on actuarial calculations that determine (or insure) desired returns. In the mortgage business, such calculations rest largely on “pre-payment” expectations, which attempt to determine when a borrower will retire an existing mortgage balance through payoff (maturation, sale or refinance).

In the reverse mortgage sector, mortality is an added pay-off – or pre-payment – factor in the lifecycle calculations, which are vital in determining ultimate revenue production. No wonder, then, that such data typically remain proprietary.

“What’s interesting for our industry [today],” says John K. Lunde, president of Reverse Market Insight, “are [how] factors driving pre-payments are changing.” HECM pre-payments “are linked to a mix of causes,” notes Lunde, who says his firm is creating an industry data repository of such performance information. “We work with lenders directly. They place portfolio and origination data with us and we aggregate it to create a set of information for the industry,” says Lunde, adding that first they “scrub out all the confidential stuff.

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The biggest factor in a pre-payment index, according to Lunde, is home price appreciation, but he points out that “speed of termination and interest rates are important” too. On a macro level, he says a pre-payment index is affected by “the industry shift to fixed rate products, because a full-draw upfront combined with the accrual rate is substantially higher than the monthly accrual, with low short-term rates.” Upwards of 70 percent of all reverse mortgages written today are of the fixed rate variety. “That dramatically changes HUD’s risk,” says Lunde, because “its riskier for them when loans hit 98 percent of LTV quicker – then HUD owns the risk.”

The “real interesting key,” according to Lunde, “is how much [pre-payment] information is going to get put out there and in what form.”

Most interesting in all this, he says, “is how lenders/issuers/investors/HUD deal with these risks and projection factors in making asset valuation and risk management decisions in an industry that is maturing much faster from a secondary market perspective than just a few years ago.”

Written by Neil Morse

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  • Although I believe the general discussion presented by Mr. Lunde is extremely valuable, there are very significant factors that this discussion does not address. What I fully agree with is that the impact of the percentage growth in fixed rate HECMs is being substantially glossed over in the reverse mortgage literature particularily when it comes to needed cash flow from FHA at the point of cross over both now and in the future. While this situation is not as critical as it may sound, it could be intentionally misunderstood and misrepresented by those who oppose this program.

    For an industry that prides itself on providing education in its marketing, far too much information is withheld and/or misunderstood about program operations and projections. Things are improving slightly but much more needs to be done. I personally find the decision of NRMLA to provide annual policy meetings in DC to be a critical factor in changing this siutation. However, such actions will only take root if members and industry leaders step up to the plate and attend such meetings.

  • I always appreciate your comments Jim. You are entirely correct in noting that this article is not comprehensive in discussion of prepayment and risks on HECM assets, which is probably appropriate given the communication medium of an industry blog.

    Hopefully the short piece here is encouraging a broader thought process and advancing the discussion. It's always a struggle to balance brevity with clarity, so please let Neil or I know if you spot anything that isn't up to standards.

    • Mr. Lunde,

      You are a bright spot in the industry. Your analysis is quite helpful and very much appreciated. Please keep up your high standards; it is needed.

  • Whart,

    Keep your childish comments to yourself and deal with personal matters on a personal level, not on an industry website.

    Unbelievable how unprofessional some people are!!

  • Hey Wart, James Veale is one of the classiest guys in the industry and your disparaging remarks are way out of line.

    This site is meant for intelligent discussions and disagreements, but it is not meant for idiots like you to make such defamatory and potentially libelous comments.

  • Always great to hear Jim Veale's comments, he has a level of expertise that is invaluable in our understanding of the way the financial components of our industry work. Our criticisms of FHA guidelines and subsequent changes are toothless if we don't have a sense of the economic foundation upon which they are based.
    Great article Neil, and thanks for giving it some air time. Thanks also to Mr. Klunde for his comments.

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