Despite Record Low Interest Rates, Data Shows Reverse Mortgage Prepayments Falling

New data published by the Department of Housing and Urban Development shows that despite record low interest rates, reverse mortgage prepayments are falling according to a report from New View Advisors.

Hardly in line with conventional mortgage prepayment behavior − which typically rise when interest rates fall because borrowers refinance − the HECM product and borrower provide investors with a unique opportunity.

Because the HECM product combines mortgage and actuarial-based finance to provide liquidity to the senior homeowner, New View says the loans provide investors with considerably less market-driven prepayment risk, governed by predictable actuarial factors, capable of sustaining premium value over a sustained period.

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Comparing HECM loans from 1999 and 2006-2007, New View found the first two years of both sets of loans show very low prepayments.

“In fact, they both pay at 2.79% CPR (Constant Prepayment Rate), within the first three months after their origination period” says the report.  However, after the first two years, the two sets of loans go on different paths.

Aided by rising home values and presumably much higher homeowner mobility, the 1999 vintage climbs to a double-digit CPR in a little over two years, meaning the loans begin to prepay at a faster rate.

Whereas, the 2006-2007 group of loans have yet to reach double digit CPR and failed to crack 5% CPR over a 12 month period.

By breaking down the loans by borrower age, New View found prepayment rates rising from 3.5% for 62 year olds, 6.9% for 77 year olds, and 26.1% for borrowers 90 and older.

“HECM prepayment rates have fallen dramatically as the economy has decimated mobility and refinancing opportunities,” says the report. “Also, the FHA assignment feature significantly protects investors against extension risk, and prepayments for a given cohort will still tend to rise over time, however slowly.”

Once home values trend back towards historical normal values, New View says that prepayment speeds should begin to increase. Nonetheless, the loans continue to provide investors with a unique opportunity.

For a copy of the report, see here.

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  • Investors are well aware of this. That’s why pricing is through the roof. The question is, “How long will it last?”. Creativity in the products now available and competition for those “too few” valuable loans should keep things interesting. Let’s see how things change after October 4th.

  • Where is the “missing link”? It seems some swallow a Darwinian u201cmissing linku201d theory (very lite) of reverse mortgages hook, line, and sinker. Taking reasonably accurate historical data which applies primarily to adjustable rate HECMs and making definitive statements about expected trends in HMBSs shows the wisdom of Darwin theorists, not Solomon. rnrnDarwin observed facts and analyzed them. That work was reasonable and for the science of the day fairly sound. Then he tried to link two periods of the history of the earth to claim that one was directly connected to the other. His theory of the u201cmissing linku201d requires the same blind faith as that needed to believe the theological theories underpinning the writings of Homer. rnrnThe u201cmissing linku201d theory lite which New View wants us to accept is taking factual phenomena which clearly applies to adjustable rate HECMs (both annual and monthly) originated primarily over 7 years ago and then make the leap of faith that it applies to HMBSs which are primarily fixed rate HECMs, many of which have double and even triple the Maximum Claim Amounts (u201cMCAsu201d) of HECMs originated just 3 years ago in the same counties. There is simply insufficient data on the characteristics of a HECM fixed rate borrower when it comes to HECMs to make the leap of faith that these borrowers will show the same debt holding characteristics of adjustable rate HECM borrowers who originated their loans over 7 years ago. Besides MCAs, such demographic characteristics as the age of the youngest borrower and the high percentage of single women obtaining HECMs have changed dramatically in that period of time. rnrnThis is not to say New View has not provided valuable information and analysis. Investors are betting on the future results of HMBS pools which are available now, so they need to make such u201cleaps of faith.u201d Like Darwinian theorists, New View may waste its time trying to stretch credibility in attempting to explain away the problem of the u201cmissing linku201d but nonetheless a waste of time it is.rnrnWhat New View has done is provided a source of justification for why the rational used by investors in acquiring HMBSs have roots in historical borrower conduct. While only time will tell if the borrower habits of primarily pre-baby boomer seniors will end up being reasonably close to those of primarily baby boomers, one cannot reach dogmatic principles TODAY based on the data New View used. It could be that studies in 2017 and beyond will bear out the claims New View makes and then againu2026. rnrnUnlike Darwin, the statements currently written by New View will only be remembered by a handful in 2017 and beyond. And yes, those written by me by fewer still.rn

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