While reverse mortgage origination volume has slowed down over the last few months, changing population trends and increased borrower awareness of the product suggest origination levels are likely to increase sharply over the coming years according to a new report released by Barclays Capital.
From the demand side, Barclays said demographics remain very favorable and is one of the reasons it expects to see strong growth in the product. The US population is aging rapidly and the number of eligible borrowers is set to increase sharply as the baby boomers retire and life expectancy continues to increase. Data from the US Census Bureau estimates there will be 85 million seniors above the age of 62 by 2025 and 112 million by 2050.
While the demand looks to be there, the supply picture is more uncertain since the market is almost exclusively dominated by government-backed issuance. “Absence of widespread information on this product has led to a limited, albeit dedicated investor base. However, that picture is likely to change as this is a very stable and attractive product. With significant growth opportunities, it is likely that this sector will continue to see greater investor interest.”
An industry reliant on Fannie Mae as its sole investor over the years, interest from institutional investors is starting to grow through Ginnie Mae’s HMBS product. While Fannie Mae’s market share dropped to approximately 5% during the 4Q of 2009, issuance of the HMBS product grew to $8.538 billion during 2009, an increase of over 500% from 2008.
Industry leaders expect HMBS growth to continue as investor appetite has increased dramatically over the last 6 months, leading to better execution for issuers and lower costs for consumers. “At the moment, there isn’t enough supply to satisfy the amount of investor demand,” said Joe Demarkey, Assistant Vice President of Strategic Business Development for MetLife during a panel at the Mortgage Bankers Association Conference last week.
Additionally, in terms of cash flows relative to traditional mortgages, Barclays said HMBS provide unique and extremely stable cash flows to investors. They expect prepayment trends to remain stable and is unlikely they will change to much in the future due to the fact that prepayments have historically been mostly a function of mortality.
“Given the rapid increase in HECM loan endorsements, it is likely that issuance will increase in the future,” notes Barclays Capital ABS analysts in the report. “Over the past 10 years, this product has gained a foothold with seniors across the country. It looks to expand further as population demographics continue to shift.”