More investors coming into reverse mortgage market, education needed

A stock tip that turns out to be right, is worth every penny. So, Jeffrey Traister’s prediction about the reverse mortgage investment sector may be worth considering. Traister, managing director and head of agency and non-agency reverse mortgage trading at Cantor Fitzgerald in New York, says he has “no doubt that…10 years from now, this will be a massive market that will trade like every other market.”

His vantage point puts Traister in a special position to assess where the reverse secondary market is – or isn’t – today and what may happen down the road. “Six months ago, there were many [firms] who never heard of it; now there are seven or eight large broker-dealers who participate in the market.” The smaller money managers, banks, hedge funds, regional money managers at banks, smaller investors – they’re all getting involved,” he notes, adding: “That creates momentum.”

Cantor is doing its part, trading both agency and non-agency pools – although Traister says, “non-agency is more ‘one-off’ and by appointment only.” There is a dedicated desk for trading Ginnie Mae securities and the firm will be in the market with a second deal this month, probably equivalent to its first, last November totaling $162 million, according to Traister, who reports that Cantor wants to do “a deal a month. We buy pools from originators hoping to do a deal,” he explains, “then with enough pools we structure these into a CMO (collateralized mortgage obligation) deal, stripping off an IO (interest-only) portion.”

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More generally, some market participants have the mistaken belief that there is a lack of liquidity, “that it’s a weird one-off market,” says Traister, who figures that driving these misunderstandings is human nature. “People don’t want to do something different. That’s a big part of attracting investors. It takes time to learn [the product].”

Is a lack of volume likely to turn off other, new entrants? Traister says not necessarily. “The ones who have been sniffing around market – the current volumes wouldn’t affect their need to buy. As to those who need volume to get involved, it’s too far off from what they need to make a difference right now.” The Cantor executive points out, Australia, Canada, Hong Kong all do or are considering reverse mortgages programs, as they also see the consumer and investor appetite for the product.

Written by Neil Morse

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  • To go from private industry to a CPA whose principal clients were multiemployer pension and employee benefit plans was an interesting experience. Attending their board meetings brought a new prospective about their asset needs versus those of business entities even of one whose 1982 billion dollar asset base was 25% cash.

    Among potential buyers of HMBSs or HCMOs, it would seem pension (and other employee benefit) plans and private and public foundations would be high on the list. These entities have the need for assets which not only generate cash earnings but long-term assets which may be less liquid but provide guaranteed earnings. HECMs should be an investment of choice in the latter situation. While a guaranteed fixed rate return may be preferable under a prudent business man standard, when interest rates are expected to rise, adjustable rate could easily be shown to be prudent.

    Most of the characteristics we observe on HECM endorsement cohorts older than 36 months are all adjustable rate HECM characteristics. There still appears to be a high percentage of HECMs in the older cohorts which are still outstanding and are not eligible for assignment to HUD due to low balances due. That percentage will drop with newer cohorts over time because of the large percentage of HECMs which are fixed rate within those cohorts. Fixed rate HECMs will generally become eligible for assignment much quicker and in a more predictable manner due to their closed end nature and their lower likelihood of prepayment. It will be interesting to watch what kind of effect Savers will have on the characteristics of the cohorts. If the volume on Savers are sufficient, the question will become, will the issuers create separate HMBSs of Savers alone.

    Some pension funds with projected payouts for decades should buy adjustable rate HECMs and hold them to maturity. While a pension plan with a six billion dollar asset base may only want a 20% investment in HECMs, such an investment should be deemed as prudent.

    It would seem that the appetite for HECMs would far exceed their availability and that situation could continue for years. Because of the recent volatility in home values it may be years before proprietary reverse mortgages will enjoy the same demand as HECMs even with their higher interest rates. As Shawna James wrote in an earlier RMD article, there is a need for private insurance entities to design policies which will make proprietary reverse mortgages more attractive to the investment community.

  • To go from private industry to a CPA whose principal clients were multiemployer pension and employee benefit plans was an interesting experience. Attending their board meetings brought a new prospective about their asset needs versus those of business entities even of one whose 1982 billion dollar asset base was 25% cash.

    Among potential buyers of HMBSs or HCMOs, it would seem pension (and other employee benefit) plans and private and public foundations would be high on the list. These entities have the need for assets which not only generate cash earnings but long-term assets which may be less liquid but provide guaranteed earnings. HECMs should be an investment of choice in the latter situation. While a guaranteed fixed rate return may be preferable under a prudent business man standard, when interest rates are expected to rise, adjustable rate could easily be shown to be prudent.

    Most of the characteristics we observe on HECM endorsement cohorts older than 36 months are all adjustable rate HECM characteristics. There still appears to be a high percentage of HECMs in the older cohorts which are still outstanding and are not eligible for assignment to HUD due to low balances due. That percentage will drop with newer cohorts over time because of the large percentage of HECMs which are fixed rate within those cohorts. Fixed rate HECMs will generally become eligible for assignment much quicker and in a more predictable manner due to their closed end nature and their lower likelihood of prepayment. It will be interesting to watch what kind of effect Savers will have on the characteristics of the cohorts. If the volume on Savers are sufficient, the question will become, will the issuers create separate HMBSs of Savers alone.

    Some pension funds with projected payouts for decades should buy adjustable rate HECMs and hold them to maturity. While a pension plan with a six billion dollar asset base may only want a 20% investment in HECMs, such an investment should be deemed as prudent.

    It would seem that the appetite for HECMs would far exceed their availability and that situation could continue for years. Because of the recent volatility in home values it may be years before proprietary reverse mortgages will enjoy the same demand as HECMs even with their higher interest rates. As Shawna James wrote in an earlier RMD article, there is a need for private insurance entities to design policies which will make proprietary reverse mortgages more attractive to the investment community.

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