Secondary Market Continues to Sag Amid Industry-Wide HECM Slump

Plummeting reverse mortgage origination numbers are a sign of the times in the post-October 2 industry, and a similar trend is brewing on the secondary market.

Home Equity Conversion Mortgage-backed securities issuance dipped to $579 million in May, its lowest mark since September 2014, according to the most recent analysis from New View Advisors. That level of issuance, the New York City-based firm said, is now the “new normal” for the HMBS space as the industry adapts to the lower principal limit factors introduced last fall.

“Rising interest rates will not help either, as they generally require lower PLFs, although so far, many HECM lenders have reduced interest rates and margins to maintain PLFs,” New View observed.

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May’s total of $579 million included $367 million in new loan pools — a significant drop from the same time last year, when issuers generated $768 million. Furthermore, “tail” issuance — new HMBS created by portions of already-securitized loans — totaled $213 million, a drop but still in line with recent months, New View pointed out.

A panel of experts, moderated by New View’s Joe Kelly, expanded on these trends at the National Reverse Mortgage Lenders Association’s eastern meeting in New York City last month. Michelle Williamson, vice president at HREMIC issuer Nomura Securities, said the declining monthly volumes could turn off new investment in the space.

“We’re getting to a point where it is a little more challenging,” Williamson said, placing most of the blame for the recent decline on the October 2 principal limit factor reductions. “It’s also challenging to pitch the product to new investors, because there’s a big size constraint. Some of the bigger people that play in this market don’t want to invest in this market if it’s only $400, $500 million a month. They’re willing to invest if it’s $700 to $800 million, but it’s getting dicey at $400 [million].”

Fellow panelist Vanessa Warren, managing director at Brean Capital, predicted a decrease in HECM-to-HECM refinances as rising interest rates gradually erase borrowers’ incentive to refinance their loans. That’s a good thing for investors, Warren said, but will also lead to short-term pain for originators.

In addition, Warren pointed to data showing that margins have indeed declined since the introduction of the new rules last fall, as lenders attempt to maximize proceeds for borrowers while also avoiding hits to their bottom lines. But that compression has a limit, Warren warned.

“How much lower can margins go?” she asked. “How much less are the originators willing to make in premium? And that’s going to be a big question, and we’re all waiting to see how that plays out over the next few months.”

Written by Alex Spanko