When it comes to reverse mortgages, loan age isn’t as important as borrower age as far as being a strong driver of prepayment rates. As borrowers get older, the odds of the loan prepaying continues to increase.
According New View Advisors, data shows that for seasoned HECM loans, 64 year-old borrowers have prepaid at a rate of 4.3% per year, 74 year-olds at a rate of 6.7% per year, and 84 year-olds at 10.1%. If we look at the borrower age (or age of the youngest borrower, in the case of multiple borrowers), a strong correlation emerges.
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I can’t say without more research into the nature of the prepayments, but I would wonder if this data may mean that older borrowers are prepaying by refinancing their HECM loans moreso than by cashing in some other asset to obtain a free-and-clear property.
Bill,
It is very important to understand the meaning of words in any commentary. New View Advisors provided the meaning to the term “prepayments” quite competently and very carefully when it said: “Importantly, we define HECM prepayments from the investor’s perspective, which means the earlier of the loan prepayment or assignment to FHA.”
According to that statement, prepayment could occur as a result of death. The term is not focused on the word as used by lenders but rather the point at which the loan is paid off — before or after assignment to FHA; payment before assignment is prepayment from the perspective of the author(s) and an investor. To the investor, why the pay off was made is not nearly as important as when it is made. The investor is looking for an investment with returns based on actuarial assumptions. Why a prepayment may occur was not the focus of the article.
Many do not understand the issue in the secondary market. Investors really do not care if more Savers result in refinancing; that is an oversimplification and a terrible misunderstanding of the situation. Investors are concerned if refinancing of Savers will occur more frequently before FHA assignment than with the Traditional HECMs of the past. As long as the percentage of Savers which terminate before FHA assignment is not materially different than the Traditional HECMs of the past, investors really have no great concern about why they terminate – refinance, death, borrower pay off, etc.
Investors are concerned about the time of value of money and the durability of the return. New View Advisors has addressed that situation precisely as it should.
A limited vocabulary is the plague of our industry. For example, when speaking of cross over, economists are describing the actual point at which the balance due first exceeds the value of the security as of that moment in time while servicers are generally talking about the moment in time when the balance due exceeds 98% of the Maximum Claim Amount (the lower of the appraised value of the home immediately preceding closing or the FHA lending limit). As another example, when lenders talk about assignment generally they mean FHA case number assignment while servicers are generally referring to FHA paying the investor for the purchase of the loan. When it comes to precision in vocabulary, this industry is far too lackadaisical which results in too few words with too many conflicting meanings.