The demand and pricing for reverse mortgage securities among investors has fallen sharply, leading to a downward shift in broker pricing for individual loans in the market.
Leading up to news out of the Federal Reserve Bank that sent markets reeling, secondary market pricing declines for HECM Backed Mortgage Securities (HMBS) had already been under way, according to those who trade the securities. But the Fed stating it could begin to back away from downward pressure on interest rates further sent prices on a sharp decline.
“Long before the Fed news [last] week, it seemed that the HECM market, regardless of its growth is still dwarfed in investor sponsorship versus these other assets,” one Wall Street trader told RMD. “It has been basically supported by very few broker dealers.”
Brokers in the market for individual loans have also reported prices falling, with the most substantial downturn seen following the Fed announcement, which indicated the Fed will taper back its bond purchasing which has
“I think we are about to see a major repricing occur if things don’t turn quickly,” the trader said.
One effect of the higher rates is shorter repayment of the loans, relative to lower rates, which may lead to pricing shifts.
“If rates rise, HECMs supporting adjustable rate HMBS reach the 98% assignment to HUD faster, shortening average lives” says Michael McCully, partner with New View Advisors. “For fixed rate HMBS in a rising interest rate environment, the underlying HECMs will have less value, and HMBS prices will fall. Investors paying premiums will be concerned about this dynamic.”
Average rates for 30-year fixed rate mortgages rose 50 basis points to 4.38% week over week according to real estate hub Zillow, which released data Tuesday, with analysts foreseeing rate volatility in the short term.
The decline is not specific to HMBS, but spans fixed-income securities more generally relative to other products.
“It’s a roller-coaster ride,” Walter Schmidt, head of mortgage strategy at FTN Financial told the Wall Street Journal with respect to the impact on mortgage-backed securities. “We’re kind of getting a feeling of stability, but like a roller coaster it’s very tenuous because you know the next drop is coming.”
Written by Elizabeth Ecker
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We are in the process of seeing a potentially dramatic turn of events. The danger of a single major outlet for HECMs is now beginning to be felt. (This comment focuses solely on all HECMs but Savers.)
As to fixed rate HECMs, the anticipated date of assignment to HUD is readily determinable (unless a termination event occurs before assignment) but not as to adjustable rate HECMs. While there is an inherent problem with adjustable rate HECMs and rising interest rates when it comes to HUD assignment being required earlier than expected (because of the 98% maximum claim amount rule based on balances due), the expected date of assignment computation generally assumes balances due are at or near current principal limits which may or may not be the case. As to market valuation and pricing, the facts are not necessarily a criterion but rather investor market anticipation and perception of how adjustable rate HECMs work and the anticipated future in the change of interest rate indexes.
Since the initial HECM principal limit is based on the expected interest rate (or if higher, the interest rate floor, currently at 5.0625%) for that HECM and that rate has been higher than the average effective interest rate accruing on most existing adjustable rate HECMs for some time, the time to assignment is longer than when the average effective note interest rate accruing on the balance due exceeds the expected interest rate (or the floor if higher) for that loan.
So if HECM HMBS demand in the investor community continues to decline, will processing times to closing be pushed back because of an excess of HECMs waiting for securitization? It would seem pricing on both adjustable and fixed rate products will decline as well. A gradual increase in interest rates would not be as detrimental as a more volatile rise and fall in interest rates or sudden jolts in the rise of interest rates. So let us hope for the former if interest rate indexes rise near term.
Our future is now more closely tied to market “whims” than at any time before late 2008. How originators and lenders will fare will provide an interesting study on the complexities of the HECM adjustable rate products and that influence on market thinking.Truly when it comes to possible assignment outcomes, adjustable rate HECMs present their own unique difficulties in market anticipation and perception as reflected in both pricing and later valuation following securitization.