Potential Debt Ceiling Disaster Has Less Impact on HECM Markets

The general market uncertainty surrounding the unresolved debt debate in Washington may not be the worst thing for the HECM investor market, for the moment.

With the markets responding to the nation’s debt ceiling problem through volatility, HECM market pricing has shown much less of an impact, namely because of its cash flow profile, says Jeff Traister, managing director and head of agency and non-agency reverse mortgage trading for Cantor Fitzgerald.

“The price action in HECMs has been much more subdued than other relative value markets,” Traister told RMD in an email, “likely due more to dealers’ overall lower volatility risk positions than any fundamental issue.”

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The uncertainty actually makes a better case for owning HECMs as their cash flow profile is almost entirely independent of what is going on in the outside markets, he says.

While the market isn’t exactly improving, per se, HECMs/HMBS is improving as a result of debt problems and having less volatility relative to other products, Traister noted. “I wouldn’t say the market is improving, but just not getting hit as much as other assets from the possible market volatility.”

In cases of extreme volatility, the HMBS market can be an even safer bet, he explained.

“I would think that any increase in market uncertainty would be a good thing for the HMBS market as the cash flow profile is very stable regardless of what else is occurring in the world,” he said. “Investors are drawn to the stability of the asset and have historically been much more receptive to assets that are uncorrelated with other portfolio holdings especially when there is extreme market volatility.”

Whether the U.S. defaults on its debt is a larger issue and remains to be seen, however. The outcome has been so widely discussed, Traister says, that “nothing much may happen at all.”

President Obama plans to address the nation at 9 p.m. Monday, with the debt topic being a point of discussion. The deadline for raising the debt ceiling is August 2.

Written by Elizabeth Ecker

 

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  • I feel what the Critic said is very appropriate. As far as if the HECM feeling less of an impact or effect by the debt ceiling disaster may be true to an extent?If we see a down grading of our credit and bond rating by the rating agencies, we will see an effect on the HECM. If a down grading become’s a reality, we will see interest rates spiraling, this in itself will have an adverse effect on the HECM.Because the HECM is based on actuary tables, the interest rate will have a major effect on what the borrower will qualify for. With values of homes continually decreasing in value along with a spike in interest rates, this could leave many senior home owners out in the cold and not in reach of a HECM.John A. Smaldone

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