Over the last few months, the two largest providers of reverse mortgages suddenly announced they would no longer originate the product. Interestingly enough, investor reaction to each exit has been very different, and that difference may suggest the staying power of reverse mortgages.
While the departure of Wells Fargo initially rattled those in the industry and beyond, it appears the investor community for Ginnie Mae’s HMBS program has responded to the exit without incident—and the response may even been “encouraging.”
“The market feel is actually much better in this short time frame versus when Bank of America stepped out,” says Jeff Traister, managing director and head of agency and non-agency reverse mortgage trading for Cantor Fitzgerald. “Large originator trades widened out initially, then started coming back in again…and we expect spreads to tighten,” he says.
Across the market, the sentiment is generally positive, with relief that the market today does not resemble the market turbulance in February.
“It has been interesting to watch the market since the Wells Fargo announcement,” says Mike Kent, senior vice president of Reverse Mortgage Solutions (RMS), who handles HMBS trading for the company. “There was not the dramatic reaction in the capital markets that there was when Bank of America stepped away,” he says.
While the investor reaction has been positive, brokers have noted a marked decrease in pricing in recent days, a change which could be attributed to caution from wholesalers in response to Wells Fargo’s departure or perhaps as well changes in Ginnie Mae’s servicing fee structure.
“When Wells Fargo made the announcement, all lenders immediately reduced rebates on fixed rates (effectively raising rates), and eliminated the lower margin ARM rates and reduced their rebates,” says Lance Jackson, president and CEO of Castle One Reverse. “This was out of concern that the financial markets might lose their appetite for HECMs, at least temporarily, with Wells Fargo’s announcement. Pricing has come back a little, but is still not where it was prior to the announcement.”
The earlier reaction to Bank of America’s decision and the market’s subsequent rebound may also be the reason for less reaction this time around.
After Bank of America’s exit, Kent says, investors were reassured that the industry didn’t retreat and fall into a hole. Instead, they saw it was still a very good investment. “It was very encouraging,” Kent says of the difference in response following Wells Fargo’s departure.
While others say it is not clear whether the Bank of America exit coincided with or caused a decline in secondary market pricing in February, HMBS pricing at the time took a downward turn and had finally showed signs of improvement in May, due in part to the entry of new investors into the market.
“At the same time [as Bank of America’s exit], there were fewer dealers, so it didn’t take many players pulling back to move prices downward,” says Traister. “Also, in February, there were many investors who were planning on getting the asset approved for purchase but still hadn’t by early 2011 or had just begun to really look at HECMs. There just wasn’t the liquidity there is today.”
Now six months later, the market is a different place.
“When done correctly, HECMS are a very good product from public policy standpoint for the government and can be profitable investments for the private sector. Liquidity has vastly improved over past 6-plus months as the number of dealers and investors has multiplied tremendously,” Traister says. “At the end of the day, HECM markets will still be around.”
Written by Elizabeth Ecker