Pandemic Reverse Mortgage Draws on Par with Previous Economic Shocks

In spite of the prevailing perception that Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) issuers feared big draws on HECM lines of credit in March in the immediate aftermath of the COVID-19 coronavirus emergency in the United States, data released by the Government National Mortgage Association (GNMA, or “Ginnie Mae”) does not reflect that as having occurred. This is according to publicly-available GNMA data and private sources compiled by New View Advisors.

“HMBS investors and issuers feared big draws in March,” writes New View in its latest commentary accompanying the data. “They worried that the widening crisis would panic reverse mortgage borrowers into a ‘run on the bank’ mentality resulting in large draws on HECM lines of credit. This would increase the capital demands on HMBS issuers at a time when their own financing liquidity was decreasing.”

Instead, the new GNMA data indicates that draw rates for March 2020 stayed “well within historical averages,” New View observes, as they did during the 2008-2009 financial crisis.

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For annual adjustable HMBS loans in March, unseasoned loans saw a monthly draw rate of 1.97%, while seasoned loans saw a monthly draw rate of 1.62%. Compared with monthly draw data from January 2019 – the last time that New View published a draw index – the rate is actually lower, with the January 2019 monthly draw rate sitting at 1.68%.

For monthly adjustable HMBS loans in March, the unseasoned monthly draw rate was 2.22% while the seasoned monthly draw rate was 0.94%, for a total monthly draw rate of 0.95%.

“The index applies only to loans with a line of credit feature,” New View says. “Unseasoned loans are defined as loans originated no more than 2 years ago, and seasoned loans as loans originated more than 2 years ago. Draws tend to be higher in the early years of a loan, then decline to a stable plateau as the loan matures.”

In March, Celink CEO Robert Sivori spoke in a NRMLA Town Hall event about observing an increase in draw activity of over 50%. That increase in draw activity absolutely took place, but there’s a little more to it based on the new data, according to New View Advisors partner Michael McCully.

“There was a surge of borrower draw activity mid-March as the COVID-19 crisis took hold in the U.S.,” McCully tells RMD. “However, based on our experience monitoring HECM draw behavior during the 2008-2009 financial crisis, where dollar draw amounts initially spiked but then reverted to the mean, it did not surprise us to see similar behavior with the pandemic.”

In terms of whether or not there could be a more substantial material increase in borrower draws for April’s data, New View doesn’t appear to be convinced.

“We do not expect to see material borrower draw amounts increase in April,” McCully said.

Read the full commentary at New View Advisors.

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  • I expect draws to increase as parents are called on to help out their newly unemployed children. The line of credit HECMs should see the first draw increases since these are easy to access. Not sure how long it takes to restructure a term or tenure plan to increase the draw and could be a lagging indicator.

    Many of the folks I encounter took the full draw upfront or have exhausted the credit line and are locked out of additional draws. These borrowers are going to be in further trouble if home prices drop and wipe out what little equity they have left.

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