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.
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.