Could U.S. Debt Downgrade Be the Turning Point for HECM Investor Market?

The investor market for HECMs may be one of only a few markets to fare OK—or even better—in the short term wake of the Standard & Poor’s U.S. debt downgrade from AAA to AA+, announced Friday. Some say Ginnie Mae HECM securities may actually stand to gain some traction from the event, which has proven to be a widespread precipitator of panicked selloff across the globe this week and last.

“While I am highly concerned, I do not think GNMA HECMs take a hit due to [the] downgrade, but prices drop/spreads widen more in sympathy with other assets,” says Jeff Traister, managing director and head of agency and non-agency reverse mortgage trading for Cantor Fitzgerald.

“The beauty of our product is the cash flows are basically uncorrelated with everything else. I feel this moment in time will ultimately prove to be the moment in time when investors finally began to sit up and take notice,” he says.

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While not projecting a positive net outcome from the debt downgrade, Knight Capital, owner of reverse mortgage lender Urban Financial Group noted the lack of negative impact on HMBS that was seen across other markets.

“We haven’t seen a major negative impact on pricing or liquidity for HMBS, but it is too soon to know what the long-term impact may be,” says David Fontanilla, director for Knight Capital. “Investors appear to be very focused on the macro picture given all of the market news lately.”

The Dow Jones Industrial Average saw its greatest single-day loss since December 2008 on Monday, shedding 634.75 points, or 5.5%. Most markets saw an even greater, double-digit decline in total throughout the days leading up to the debt downgrade and immediately following, before the market rallied on Tuesday to regain some of the losses.

In addition to the U.S. credit downgrade, S&P also struck Fannie Mae and Freddie Mac on Monday when it reduced the government-sponsored enterprises’ ratings from AAA to AA+, based on their direct reliance on the U.S. government. While the drop in rating is not good news, it should have very little bearing on the HECM market, the analysts say.

As most markets continue to react to sustained uncertainty, however, the market for HMBS stands to fare well.

“As painful as this may be, it will prove to be the turning point,” Traister says.

Written by Elizabeth Ecker

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