Speed of change is scaring investors in reverse mortgage bonds

Uncertainty surrounding the HMBS (HECM MBS) securitization program, sponsored by Ginnie Mae, has left investors feeling skittish, according to players up and down the line who participate in the process of pooling reverse mortgages for sale into the secondary market. A panel on the subject, at the NRMLA Road Show last month in Philadelphia – and another one at the MBA Government Housing conference in New York this month – reflects continuing concern.

Speaking at the Philadelphia event, David Fontanilla, director at Knight Fixed Income in New York, referred to the “speed of change” in the HMBS program, warning that it is “scaring investors,” specifically those purchasing the bonds funding sale and purchase of reverse mortgage-backed securities.

Despite a growing list of institutional investors, which includes insurance companies, banks and asset managers, Fontanilla admitted it’s still a very fragile market. Only in the last six months has investor demand really picked up and if the industry can put out the same product for a year, he is confident the investor base will continue to grow. But, he noted, it can change in a heartbeat.

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Fontanilla cited elimination of the servicing fee set-aside as one example of this unsettling change. “When you go to a zero servicing fee, it changes the coupon on the bond. Will this create an adverse effect to the kind of borrower that I will get?” Fontanilla asks rhetorically.

Ginnie’s parent FHA also has revised upward net worth and liquid asset requirements for all its approved lenders, including those who originate HECMs.

“Participation accounting is key,” says Robert Yeary, chairman and CEO, RMS Inc., a Ginnie Mae issuer and participant in both conference panels. Under Ginnie Mae guidelines, its HMBS issuers must perform the “monitoring and accounting of pooled participations designated in a Schedule of Pooled Participations and Mortgages, (form HUD-11706H) for each issue of Ginnie Mae-guaranteed mortgage-backed securities (HMBS).”

“The risk in issuing Ginnies,” Yeary notes, “is different from the forward world. You have to be in the REO business” with the former, he says, adding: “The risks are complex [and] people need to understand” that. Yeary joins Regina Lowrie, president and CEO, Vision Mortgage Capital; Joe Kelly, partner, New View Advisors; Stephen L. Ledbetter, senior vice-president, Ginnie Mae; and Christopher Witeck, partner, BuckleySandler, on the MBA panel in New York on May 24.

Written by Neil Morse

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  • While the change has been generally good for consumers, its potential harm is also clear. While consumer acceptance is important, investor acceptance is even more critical. By being too flexible, we just may kill the goose….

    • In some instances the interest rate has been increased. This would result in no loss to the investor. The increase in rate would yield more return.

      • Mr. Genovese,

        The current trend in interest rates on fixed rate HECMs has been to go down. I was not aware that any significant number of adjustable rate HECMs have been sold through Ginnie Mae. I guess I do not understand what it is you are speaking of. Please clarify.

  • It didn't take a genius to see this coming. Eliminating fees and all the platitudes about being good for consumers sounded so nice and virtuous but ungrounded in reality. I wish rain water was beer – but its not.

    • lpassman,

      All things being equal, incurring fewer upfront costs is good for seniors. Even if the APR were equal based on termination at normal life expectancy, a consumer could easily prefer a lower upfront cost HECM with a higher fixed interest rate over higher upfront costs and a lower fixed interest rate. The reason is risk.

      The risk of a HECM terminating before normal life expectancy is attained is greater than vice versa. So why not take the lower upfront costs? It even results in more proceeds.

      So I do not agree that the virtues of eliminating fees upfront are “ungrounded in reality” and simply “platitudes.” I guess the real question is, in comparison to what?

      Water to beer, horsefeathers!!! Imagine all the foam it would create in the California aqueduct, at Yosemite Falls, or for skiing in Mammoth Mountain. Heavens to Betsy, let's not even go there. Just the thought and that smell….

  • As a result of the recent availability of low-cost (or “no-cost”) fixed-rate HECMs, prospective borrowers and counselors have developed an expectation that this is a permanent change to HECMs and that it will continue to be available indefinitely. They (and we originators) are in for a rude awakening when the party is over, and it will indeed be over one day. It is important that we educate consumers and counselors as to the fungible nature of the current pricing environment.

    Our shrunken industry has adapted to many challenges over the past three years, and the fixed-rate option we now have couldn't have come at a better time. The response of prospective customers to the low-cost option is indicative of the potential of the reverse mortgage market if we can find a way to overcome the objection over high up-front costs.

    • HECM_Vet,

      It is my hope and belief that we will see two distinct lines of traditional HECM fixed rate products in the industry. One with few upfront costs at a slightly higher interest rate and one with all fees but at a lower rate. The one item that may have to survive in both products is the dreaded servicing fee set aside.

      Beyond that I am still looking forward to a HECM II (or Mini) with lower principal limit factors and thus lower FHA mandated MIP and lower interest rates (or lower other upfront costs).

      It seems you have concluded otherwise. It would be interesting to read your view.

      • One of the reasons the low-cost (or no-cost) product works right now is currently low interest rates. We can maximize the net principal limit because we have penetrated the 5.5 percent floor, with premium to spare.

        When interest rates rise in the future (as we all know they will), a fixed-rate HECM will have to be priced either to 1) minimize the borrower's up-front cost, or 2) maximize the principal limit factor (or something in between). Right now, we enjoy the best of both worlds.

        Another product idea others and I have discussed is a hybrid program for younger HECM-eligible borrowers whose existing mortgage payments are burdensome, but the mortgage cannot be repaid in full under the current HECM program. It provide such homeowners with a larger principal limit, but require that they pay a portion of the interest that accrues each month. Such a loan would require credit and income qualifying.

        Finally, FHA could help reduce up-front costs tremendously by reducing or eliminating the up-front MIP, increasing the periodic MIP in a revenue-neutral manner.

      • HECM Vet,

        As to the 5.56% floor, you state the obvious. The question is why can’t the industry have two distinct types of traditional fixed (or adjustable) rate HECMs, one with lower upfront costs but slightly higher interest rates and the other with higher upfront costs but slightly lower interest rates — no matter which way the expected rate turns? You seem to believe that if the expected rate on the fixed rate product exceeds 5.56% we can only have higher upfront costs. What is the basis of your determination, history?

        Your hybrid product idea is nothing more than a minimum option payment, negatively amortizing, highly leveraged mortgage — with government insurance — masked as a HECM. Of all the ideas that have been promoted on this website, I find this the most deplorable and distinctly irresponsible. It morphs the HECM program into the subprime category Senator McCaskill denounces all reverse mortgages to be. The likelihood of foreclosure would rise substantially and the resulting negative publicity would be abhorrent. What investor would want to buy a U.S. government insured “subprime” loan at a premium? If we have problems with Congress now, even suggesting such an alternative will make it worse.

        This idea of reducing upfront MIP and increasing the ongoing MIP, while not as obnoxious as your last idea, is hardly new; however, it should be discredited and tossed. You are asking an insurer to take on more risk at the same compensation. That is ridiculous. By the way, what did your analysis show the principal limit factors would have to be reduced by? The annual rate charged for ongoing MIP and the expected interest rate are combined in determining principal limit factors. That is why in this current budget request, besides an increase to the annual rate for the ongoing MIP, there is also a further reduction to the principal limit factors.

        I look forward to hearing your ideas on why two distinct fixed rate traditional HECMs cannot exist at any reasonable interest range (say 4% to 11%). There are many who promote the reduced upfront MIP and higher ongoing MIP including the leadership of NRMLA; so if you want to engage on that subject, that is OK. BUT as to your idea of a new hybrid HECM, I hope I never hear or read about that being discussed or promoted again.

  • Critic,

    It appears you replied to my post without first reading it.

    In response to: “When interest rates rise in the future (as we all know they will), a fixed-rate HECM will have to be priced either to 1) minimize the borrower's up-front cost, or 2) maximize the principal limit factor (or something in between),” you said, “You seem to believe that if the expected rate on the fixed rate product exceeds 5.56% we can only have higher upfront costs.” Although I mentioned two, numbered options, you could count only one?

    In response to my mention of the hybrid reverse mortgage idea (for which I do not take credit), you wrote,”Of all the ideas that have been promoted on this website, I find this the most deplorable and distinctly irresponsible. It morphs the HECM program into the subprime category Senator McCaskill denounces all reverse mortgages to be.” Another sentence in my post you apparently ignored was “Such a loan would require credit and income qualifying.”

    Senior homeowners will need more options, not fewer, for dealing with their future financial needs. We need more, not less, innovation in the development of financial products for seniors. To summarily dismiss an idea with which you disagree before it has been fully modeled and developed is “…most deplorable and distinctly irresponsible,” in my opinion.

    I don't get my opinions from the NRMLA leadership. In fact, I disagree with them (in a more respectful manner than you) on some issues.

    One of the reasons I hear most often from seniors who have decided against a reverse mortgage is the high up-front cost. Addressing this issue dovetails well with MIP reform. The risk associated with insuring a HECM actually is later in the loan term — not at the beginning. A higher periodic premium rate actually would bring in more revenue from those loans with the highest risk — those with the highest balances.

    • HECM Vet,

      It seems you did not reply in the thread but made a new comment so as to avoid notification of a reply. That tactic leads to some interesting conclusions.

      It is odd you bring up your disagreement with NMRLA leadership. I specifically pointed out mine but only in the context of this discussion because it is rare that I disagree. Personally I obtained many of my opinions about reverse mortgages directly from NRMLA leadership. Yet for no reason you declare you disagree with them too but you declare that you are somehow more respectful. Is your form of disagreement some kind of badge of honor? I hope you are not saying that.

      Imprecision undoes many presentations. Yours is no different. For example, right now, some fixed rate HECMs are below 5%. So if their expected interest rates must be raised 25 bps, please explain how your numbered options work any different than they do now?

      HECMs have credit qualifications, just no minimum FICO score requirements. Despite having no formal income requirements, we advise candidates who have insufficient income to meet real estate tax and homeowner insurance obligations and need all their available net principal limit to pay off existing liens and mortgages — to carefully consider other options even at times questioning the advisability of a HECM. Even subprime SISA mortgages had their minimum “credit and income qualifications.” So unless you are more specific, I have no idea what your idea of qualification is.

      While I am not against offering seniors as many options as possible, I find the idea of corrupting the HECM product into a minimum payment, negatively amortizing, highly leveraged, and government guaranteed mortgage a totally irresponsible and deplorable idea. If it is a worthy venture, then it should be presented as such in a separate program. For you to claim you are discussing it with others but then upon finding out others think the idea deplorable and irresponsible, you disclaim any credit for it — speaks reams.

      The last paragraph of your current comment is full of imprecision. For example, when home appreciation is growing faster than the rate of growth in the loan, the greatest risk is at the beginning of the loan. With the HECMs endorsed in 2006 and 2007, the greatest risk is hoped to be in the earlier years and will diminish in later years due to a hoped for turn around in home appreciation rates. Models are models. Facts and events can turn models on their head.

      But probably your worst prediction is that higher ongoing MIP and lower upfront MIP will bring in more revenue. To get there, one has to load up on assumptions that may or may not pan out to be true. For example, if the HECM has a $12,000 upfront fee, how large will the annual rate on the ongoing MIP have to be to bring the upfront fees to $0 or some other amount? How long will borrowers on average have to keep the HECM to make it work? FHA is much more secure if the total MIP is collected upfront rather than as the loan grows. Modeling is an art, not a science. It must be tweaked to take into consideration more and less objectable behavior.

      You talk about higher balances but you have not defined what you mean, absolute higher balances, higher balances in comparison to MCAs, or something else again? To me a higher balance due HECM could have little risk due to the fact that its appraised value greatly exceeds the lending limit and the security is located in an area of the country that rarely sees home appreciation rates below 4%. On the other hand, a much lower balance due HECM in an area of the country where appreciation rarely goes reaches 3% and the percentage of its balance due to its MCA at funding is relatively high — presents a much higher risk. Based on their imprecision, I find it hard to agree with your generalizations.

      Remember not all of us need to agree with your conclusions. But if you believe they are defensible then you should be prepared to defend them. This is an interesting exercise in tolerance and freedom of expression. By reducing attacks to a personal level, you draw attention away from the matters at hand and focus attention on the person you attack.

  • This posting was indeed a reply. Apparently, the system allows a limited number of postings in one thread.

    You seem to have made a full-time job of commenting on RMD. I don't have any more time for this foolishness; I'm going to let you have the last word.

    • HECM Vet,

      Neither of your last two comments in this thread were posted as replies. If you look at the thread — your comment immediately above should have been if you used the reply button when you typed in your response. I have never encountered the problem you describe. You should let Admin know about it.

      I appreciate your view that I am full-time on this website. I wish I had that kind of time available.

      For you to conclude that the comments and replies above are nothing more than foolishness speaks for itself.

      Have a productive day!!!

  • This posting was indeed a reply. Apparently, the system allows a limited number of postings in one thread.nnYou seem to have made a full-time job of commenting on RMD. I don’t have any more time for this foolishness; I’m going to let you have the last word.

  • HECM Vet,rnrnNeither of your last two comments in this thread were posted as replies. If you look at the thread — your comment immediately above should have been if you used the reply button when you typed in your response. I have never encountered the problem you describe. You should let Admin know about it.rnrnI appreciate your view that I am full-time on this website. I wish I had that kind of time available.rnrnFor you to conclude that the comments and replies above are nothing more than foolishness speaks for itself. rnrnHave a productive day!!!

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