Pricing for Home Equity Conversion Mortgage (HECM) loans has been fluctuating in recent days due to the effects of the COVID-19 coronavirus pandemic, with reverse mortgage brokers and originators reporting drops in both basis points and in investor activity related to the trading of bonds and other financial products.
Proprietary product pricing is also reportedly affected by the crisis according to multiple brokers and originators, which reduces the amount of revenue that goes to the lender and can ultimately change the amount of proceeds that can go to the borrower.
The frequency with which investor rate sheets are being updated has accelerated recently according to Tom O’Donoghue, principal at Reverse Loans Now in Granada Hills, Calif.
“What is showing on the investors’ rate sheets is changing every day now, as compared to a weekly [update],” O’Donoghue told RMD. “My clients are coached by me that the rates are not locked until final clear to close (CTC), and we are at the mercy of the market until then.”
In the greater financial market, a lack of bidding for different products such as treasury bills, mortgage-backed securities and bonds is happening, which is causing price volatility for originators. This is according to Malcolm Tennant, president and co-founder of Access Reverse Mortgage Corporation in Largo, Fla.
“This lack of demand by investors has suddenly driven pricing to almost zero on many products making it difficult to honor quotes we put out just a week ago,” Tennant tells RMD.
This has made it difficult to maintain previously-shared prices in recent days, and forthcoming government relief activity will likely help to stabilize the market, Tennant says.
“We are doing all we can to honor [our quotes], but we are in uncharted waters,” he says. “I do think things will normalize as the Fed steps up to purchase mortgage securitizations.”
HECM and proprietary effects
The pricing effects have not been limited to HECMs, either, according to an Arizona-area broker.
“There have been significant changes in the pricing on [proprietary] loans as well as the broker premium,” says Glen Smart, regional director of reverse mortgage and senior loan officer at Home Loans Bay Equity in Tucson, Ariz. “This not only reduces the revenue to a particular lender, but has the effect of changing the funds available to the consumer.”
Still, prices on HECM loans have also seen a significant change within the last couple of weeks, Smart says.
“With pricing on HECMs being off by close to 300 basis points in just the last 10 days, we are essentially seeing the same thing on the HECM products,” he says.
Other ramifications of these fluctuations have been seen in the traditional mortgage market, as investors try and find calmer waters to focus on while the markets are still turbulent, he says.
“There is significant flight to safety in the traditional mortgage markets for forward mortgages. We have seen a number of non-conforming lenders stop accepting new loans as their warehouse lines have pulled back,” Smart says. “Any money left is seeking comfort in the more traditional avenues. Hopefully things will settle very soon.”
Due to pricing fluctuations, Liberty Reverse Mortgage and Reverse Mortgage Funding (RMF) have suspended offering their proprietary reverse mortgage products, but both lenders have stated that these suspensions are temporary and that originations of the products – EquityIQ from Liberty and Equity Elite from RMF, respectively – will resume once financial markets stabilize.
Nothing ‘materially broken’ with reverse mortgage space
Pricing fluctuations can certainly cause problems for those working through the entire cycle of a loan, but those fluctuations don’t represent an existential problem with the reverse mortgage business model itself. This is according to Dan Ribler, founder and CEO of Baseline Reverse. While he has observed that pricing has shifted lower, there still appears to be liquidity for Home Equity Conversion Mortgage-backed Securities (HMBS).
“There’s nothing materially broken with the reverse space, it’s just pricing,” Ribler tells RMD. “So, you just reprice. If you’re an originator, you pay less for the loan, and you can offer fewer credits for the borrower. So, that’s unfortunate, as is paying a lower price through all of your broker partners if you’re thinking about the broker channel. But the business model itself, I don’t see any reason that HMBS should have a material problem with the asset class in particular.”
Pricing has declined, Ribler said, but HMBS issuers have been successfully selling both new production and participation pools.
“I feel that there’s nothing materially flawed with reverse,” he says. “There’s different potential recovery risk, but the credit risk hasn’t changed significantly.”