Market Volatility Impacts Reverse Mortgage Borrowers and Lenders

Despite additional investors moving into reverse mortgages, the secondary market remains volatile and lenders are feeling the pinch on margins as rates start to rise.

“When rates go up, prices that you used to receive go down,” said Keith Hopkins, vice president of MBS trader at Wells Fargo Home Mortgage during a panel at the National Reverse Mortgage Lenders Association conference last month.

After Fannie Mae exited the business and as the industry made the transition to Ginnie Mae, borrowers and lenders “enjoyed a very good ride,” said Hopkins. With lower rates, borrowers received more money and lenders saw better execution, especially in the 3rd and 4th quarter of last year.  However, as lenders started to eliminate servicing fees and the recent volatility in mortgage rates, “premiums will decline as margins get thinner,” he said.

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For reverse mortgage borrowers, rates are extremely important since they impact the amount of proceeds they receive from the loan.  If rates rise, the amount of money available decreases and over the last few months that’s exactly what has happened.  But lenders are cautious not to raise rates too quickly, since the volatility could end up backfiring on investors.  “I think the 5.56% is potentially a dangerous product,” said David Fontanilla, head HMBS trader at Knight Capital Group.  If the volatility in the markets continues and rates fall back to 5.09%, borrowers with a 5.56% rate are a bigger threat of quickly refinancing and in the end could hurt the marketplace if prepayment speeds increase significantly.

Its not just lenders and borrowers who have been hit by the ups and downs in the market, HMBS issuers have also taken it on the chin.  “We’ve seen a drop of 5 to 6 points, particularly for issuers, you have to give yourself more ability to manage the volatility,” he said.

Still, even with all the product changes over the last year and volatility in the bond market, new investors continue to move into the market as they look for consistent prepayment speeds.  Once the industry was carried by very large investors, maybe a group of 10, but now there are closer to 30 investors buying HMBS product, some making buys as low as $5 million said Fontanilla.

Bank of America’s decision to exit the market was a surprise to most in the industry and Fontanilla said he thought it would have “a tremendous impact” on the investor base but it hasn’t been the case.  “The investors have come to understand, it just centered around Bank of America assessing its situation, not a comment on the overall market,” he said.

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  • The statement on Bank of America above is at odds with the recent statement of Jeff Lewis on exactly the same subject. It is odd how people read the same facts and reach such opposite conclusions.

    But of course that is not that odd. While HUD was stating to Congress in last October, endorsements for this fiscal year would be 75,000, one industry leader was at the NRMLA convention one month later declaring that endorsement volume would be over 100,000. Sometimes you have to wonder.

  • I am not so certain a drop in fixed interest rates of one-half percent will drive that many HECM borrowers to refinance. If home values were increasing, my conclusion would be much different.

    There is little question that in a volatile interest rate market of wide spread increases and decreases, going both ways, we will see far more refinancing due to the addition of fixed rate products than the era before 2007.

    In years prior to 2007, the principal reason for refinancing was increases in home values and increased lending limits. But interest rates was rarely a reason since margins and types of indices rarely changed.

    News from the conference was the first time I had heard the concern regarding the potential instability of fixed rate HECMs discussed. While this may be much ado about nothing, it is still worthwhile noting and following up on.

    Great report, John.

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