As reverse mortgage borrower demographics have changed and lenders have expanded their product offerings this past year, new research from the Kroll Bond Ratings Agency foresees rising investor interest in the proprietary market.
In anticipation of this interest, KBRA compiled a report — called “Five Things to Know About Reverse Mortgages” — for those new to the evolving world of reverse mortgages. Since lower volume followed last October’s Home Equity Conversion Mortgage program changes, a plethora of new proprietary products have entered the market. In addition, the “equity-rich, cash poor” senior population is growing.
“KBRA believes that these factors will give rise, after a period of absence following the financial crisis, to an increase in both private and public securitization of jumbo proprietary RMs,” according to the credit rating agency’s report.
Many former HECM-only originators added proprietary reverse mortgage products and forward loans to their arsenal of options for seniors in an attempt to counteract the decline in originations. KBRA categorized these moves as positive for the industry as a whole, as well as potential borrowers.
“This product-agnostic trend is a healthy development because the costs, proceeds levels, and total/fee interest costs of an RM may not be as favorable as a traditional forward mortgage or HELOC for some borrowers,” the research states.
As for when a surge in proprietary investments might begin, Dan Ribler, founder of analytics firm Baseline Reverse, said ideally in-depth historical data on how a product performs would be available for investors. Interestingly, he said, because so many different products have entered the space recently, performance history will be more “siloed,” with each product generating limited data for investors to analyze.
“It’s not a road block, just a challenge,” Ribler said. “For non-agency volume to really take off, ideally we’d see one consistent program with centralized performance data. The more robust the performance data, the lower the return requirement will be from end investors, which in turn, will drive lower product costs to borrowers.”
Aside from product diversification, the KBRA research also discussed the importance of borrower credit and capacity; nuances surrounding property value; and the potential upsides of negative amortization.
KBRA also had general praise for the way these new proprietary loans are structured, pointing to safeguards that mirror the better-known Department of Housing and Urban Development-backed HECMs.
“Proprietary originators are increasingly mirroring HUD’s third-party financial counseling requirements to ensure the borrower understands the product, and disclosures have been improved,” the agency observed. “KBRA believes that these enhancements may result in better suitability for some borrowers, which should ultimately translate to fewer defaults and/or early voluntary repayments.”
The research stresses that reverse mortgages need to be analyzed differently than forward mortgages, both for individual loan risk and “in the context of a securitization.” For example, the research advises investors new to the space not to look at negative amortization through a forward mortgage lens.
“… a decreasing [reverse mortgage] equity position does not increase the borrower’s propensity to default because no regular payments are due. In fact, the higher the interest accrual amount, the more income ultimately passes to the trust — provided, critically, that the crossover point is not reached,” according to the research.
Lastly, the paper point outs that prepayments are generally rare and are not interest-rate sensitive. For loans that closed in a typical manner, such as the death of the borrower, these repayments also are also generally not dependent on interest rate, but rather borrower age and probability.
“Therefore, an important consideration for the future cashflow of an RM portfolio depends on the investors’ expectations for changes to life expectancy over time,” the research states.
Written by Maggie Callahan