Reverse Mortgage Securities: High Prepayments Outpace Issuance Growth

Even with continued strength in the reverse mortgage backed securities market, stubbornly high levels of prepayments have driven the overall market to shrink, according to two new reports from New View Advisors.

The New York City-based financial services firm cited data showing that the Home Equity Conversion Mortgage-Backed Securities (HMBS) market is on track to match last year’s total of about $9.2 billion, with $2.3 billion in issuance during the first quarter of 2017.

“Despite the much-reported slowdown in HECM endorsements, HMBS issuance remains robust, aided by growth in tail issuance and without highly seasoned pools,” New View noted in its analysis. “Tail issuance” refers to HMBS pools created from the uncertificated portions of HECMs that have already been issued.

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Still, in a separate report, New View covered persistently high HMBS payoffs, which exceeded new issuance for the seventh month in a row in March — $966 million in payoffs against $727 million in new securities. Based on New View’s estimates, the overall outstanding HMBS market contracted by $62 million from February.

As New View partner Michael McCully told RMD back in February, the spike in prepayments has come as a significant quantity of fixed-rate loans from 2009 to 2011 have matured and seen reassignment to HUD, likening the effect to a snake eating a rabbit — with the caution that the payoffs will likely “normalize” after more loans from this period reach 98% of their value.

Industry giant American Advisors Group topped New View’s list of top HMBS issuers during the first quarter of 2017, with a total of 57 pools valued at $538 million — good for a market share of 23.3%. Finance of America Reverse took a distant second with $388 million in issuance, followed by Reverse Mortgage Funding, Ocwen Loan Servicing, and Nationstar Mortgage. 

These top five HMBS issuers represented 79.6% of the total market, according to New View, with no new players entering the market since last quarter.

Written by Alex Spanko

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  • This pattern of assignments, foreclosures (and its cousins, including sort sales and short pays), and payoffs exceeding new originations will eventually have a further erosion in the confidence of HMBS investors in the HECM market. What is interesting is that this decline in active HECMs was quite easily calculated and predictable due to the fixed rate Standard. While there has been much wishing and hoping about higher endorsements to cover up the mess that fixed rate Standards created, those hopes have not been realized.

    The short-term impact of these rather bizarre mortgages was higher income to lenders and most originators but their long-term impact has been very negative to all MMI Fund programs through transfers of funds out of other programs to the HECM portion of the MMI Fund and the inability of the HECM industry to currently match the endorsement production during the early years of this product.

    With the end of HECM Standards came the HECM industry’s media campaigns to uplift the overhauled HECM, all of which began in late 2013 and hit a sheer wall of reality a little over six months later. With the end of Standards came the start of stagnation which still echoes through the hallways of the industry until now.

    September 30, 2017 should mark the four year anniversary of the start of the overhauled HECM and its rise to prominence. September 30 is also the tenth anniversary of the first fiscal year in which the industry achieved over 100,000 endorsements. Fiscal 2007 is also the first of three consecutive fiscal years that endorsements for a fiscal year exceeded 10% of all endorsements ever generated by the industry to date. The likelihood of such celebrations are unfortunately not high.

    Based on endorsement and case number assignment patterns, there is little expectation that we will see a major breakthrough out of current stagnation until sometime into the next decade. In recent years we have heard false claims of signs of recovery but those claims have proven to be nothing more than the propaganda of industry leaders expressed by a hired gun.

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