Major investors are here, reverse mortgage customers are coming

Passing some time reading on a flight from New York to Orlando, where he was to speak at the American Securitization Forum earlier this month, David Fontanilla, director, Knight Capital Markets, noticed an interesting item in the news. It seems private label commercial mortgage-backed securitizations had registered $10.9 billion in issuances last year, a figure about equal to the $10.7 billion in HECM MBS during 2010.

“It gives you an idea of the growth in our market,” Fontanilla told an audience attending a discussion of the reverse mortgage secondary market at the ASF. “There’s a lot of [HMBS] paper out there.” He put the aggregate at “about $20 billion, with another $10 billion worth of outstanding private labels.”

Citing for emphasis the relatively short time in which that HECM growth has occurred, Fontanilla noted that, “We went from a $1 billion market [six years ago] to $9 billion in 2009. Investors,” he stated, “are really starting to get involved. PIMCO and Fidelity are now in the product; major insurance companies, home loan banks,” too, have joined the buying.


“Everyone is starting to get involved. It seems like insurance companies have been active” raising the current yield, which he put at 4 percent. Lately, according to Fontanilla, the market is seeing about three times the normal amount of volume.  “We bought two mortgage originators and got into reverse mortgages for the ‘demographic play’,” he reported.

“There are going to be customers in this market, drawn in for many reasons like a Medicaid gap for a couple – of about $320,000 total – to rising lifespan expectations. These are just the facts,” he declared. “This product is going to be a huge part of it.”

Written by Neil Morse

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  • This is a great picture of a bright and glowing future which will no doubt come true but not in the next eighteen or more months. Will there be enough product to significantly expand the investor trend in that time? It is very doubtful.

    In October 2010, HUD announced that it only projects 75,000 HECM endorsements for all of this year. Now we have a budget with HUD saying once again that all we will have to look forward to for next fiscal year is another 75,000 endorsements. The only good news in that message is that HUD does not expect the volume to drop despite the expectation that the lending limit will get a one-third haircut. Here is where the term haircut is spot on.

    Yes, yes, a popular industry leader declared at the NRMLA Convention three months ago that there would be 100,000 endorsements this fiscal year. He is not by himself. Some fairly well known prognosticators are doing and have done the same. At least one has clamored that the growth in the next fiscal year will be triple what HUD predicts. Those Pollyanna voices certainly have their agendas as they did in 2006 and 2007.

    We keep hearing the silly talk of loans per lender. With Bank of America no longer in the mix, will the sudden drop in their endorsements show that the trend has turned for the worse and the industry is heading down the road for certain doom and destruction? Whoever started focusing on the loans per lender did the industry no service. It is a next to useless measure that sounds great when it is going up but has absolutely no real world meaning. It is fodder for the talk at the receptions at the NRMLA Conventions once the majority of the alcohol is consumed.

    It is the long-term picture which buoys all of us. The short-term is ugly. Not even the demand for $70 billion more in HMBS this year means much if there is no supply of HECMs to meet it. We are not in the Titanic but we are in the kind of storm that will sink ships and has already. Rising interest rates, lower PLFs than we have ever experienced, a falling lending limit, more regulation, more restricted compensation, more uncovering of the contingent liabilities which come with securitization, and much, much more make these the times that try our resolve. BUT it is the future which drives us on.

    • I agree; this is a very forward-looking statement. I personally am in this for the long-haul, so while this analysis is not new, it is always heartening to read news that supports what is obvious: seniors will be outliving their resources and HECMs will continue to make even more sense for borrowers and investors.

    • BTW- Where are we exactly on the lending limit being reduced from $625,500 anyway? What is the real chance of this happening and if so do you think it will stay in places like California??

      • Eric,

        If you go to the 2/14/2011 RMD article on the budget at, you will find that subject was just discussed. You will find “2545” had the same question and I answer that question in detail referencing Section 144 of PL 111-242, Mortgagee Letter 2010-40, and a recent NRMLA newsletter discussing the GSE report.

        The simplest answer is that on 10/1/2011 the lending limit is scheduled to return to $417,000 except in high cost areas. I am not aware of anywhere in the continential US where the lending limit would be above $417,000 as of 10/1/2011 unless Congress acts to extend or modify the existing lending limit.

  • I agree that the loans per lender is an odd perspective. The only reasoning I can come up with is that it may serve as a morale booster for those still standing after the mass exodus from RM space over the past two years for all the reasons you enumerated.

    With the revisions to the HECM program banking on boomers in the short term is futile. At the current PLF’s boomers won’t be in the hunt or have much impact until they are in their ’70’s, which is almost a decade away. Will private label fill the void? Remains to be seen, but with a shrinking market and a “ho-hum” secondary market, it’s going to take an aggressive step up product, ala, BofA’s old Independence Plan to really provide a viable alternative to HECM. Who is going to self-insure in this environment? The likely candidates are the insurance companies, who have deep pockets and diverse income streams, without the excessive oversight that the banks experience. They are the most likely to have the expertise to accurately assess the risk they face.

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