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.
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