Improved ‘HECM 3.0’ Reverse Mortgage Offers Attractive Value to Banks

Home Equity Conversion Mortgages (HECMs) have evolved over the years to become safer reverse mortgages for borrowers and investors. And the product’s most recent transformation offers a “very attractive” value to banks, according to Barclays (NYSE: BCS).

The HECM program has undergone a number of significant changes since its inception in the late 1980s, however, the most recent round of policy updates over the past few months have HECMs likely entering a new “steady period,” says a research note released last week by Sandeep Bordia, managing director and global head of securitized products strategy at Barclays.

Barclays views the HECM program evolving over the course of three phases from before the financial crisis, post-crisis and the “HECM 3.0” that stands today.

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“The new program is different from prior ones in many respects and fixes the weaknesses in the previous programs to make this a more stable product for investors, as well as a better financial risk for the FHA,” Barclays writes.

Prior to the crisis, Barclays notes that HECMs were mostly floating rate lines of credit.

“Prepayment rates were very stable, delinquencies were unheard of and large bank and insurance originators (such as Bank of America, Wells Fargo, MetLife, et.c) dominated the space,” Barclays writes. “Investors mostly bought the HECMs in pool rather than HMBS form.”

But as the product moved into the financial crisis territory and its aftermath, reverse mortgage underwriting, particularly the lack thereof, garnered a lot of attention in light of issues of default concerning the fixed-rate full-draw HECM product.

“Once granted Congressional authority to modify the program, HUD embarked on a relentless campaign to tighten up program criteria to cut down on loopholes, abuse and losses,” Barclays writes.

Also during this time, Barclays noted HMBS became the preferred route of issuing HECMs, and the investor base turned more diverse as some large pre-crisis investors faced portfolio caps and big banks exited the space, citing reputation risk as a key factor for their departure.

With the Financial Assessment and recent updates to the non-borrowing spouse policy, most of the adjustments to the HECM program have finally been implemented, leading to the creation of today’s product, which Barclays refers to as the HECM 3.0.

“After struggling through many years of tweaks and updates to the program, HUD has arrived at a point where the weaknesses of the old HECM program have been cleared out with HECM 3.0,” writes Barclays. “The HECM space has been a busy one in terms of policy change, with HUD almost completely retooling the program over the past three years. The PLF matrices alone have changed four times since 2009. However, the good news is that most of the changes are complete, and program parameters should be much more stable.”

Written by Jason Oliva

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