Reverse Mortgage Capital Markets Show Strength During Pandemic Stress

The COVID-19 coronavirus pandemic had a pronounced effect on reverse mortgage capital markets shortly after the White House announced a national emergency related to the pandemic in March, but the markets have continued to recover. That’s not to say that the industry shouldn’t remain vigilant, however.

This is according to Dan Ribler, director at real estate finance technology company SitusAMC in an interview with RMD that is now available as the latest episode of The RMD Podcast.

While market activity in the early days of the pandemic played havoc with reverse mortgage pricing in March, the capital markets showed increasing signs of recovery and greater stability by mid-April. Still, what may constitute “scary times” for the product category never really materialized, according to Ribler.

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Reverse mortgage liquidity remained positive in spite of pricing difficulties

“The scary times are when you put out a bond for bid, and every broker dealer says [that they] can’t take this on right now,” Ribler explains. “And I don’t think we saw that happen at all. What we did see a few times is that bonds would get put out for bid, and dealers would come back with levels that looked really, really ugly compared to the day prior, and in several instances, we saw issuers say [that they were] going to wait and put [a bond] out for bid [later]. But, they never went away, at least that we saw. So that, to me, is monumentally positive and a testament to kind of the liquidity in the space.”

When capital market stress started to become apparent, it didn’t communicate anything fundamentally wrong with the reverse mortgage product category, since many of the people within the reverse mortgage demographic are not subject to the effects of some of the more volatile elements of the American economy during a crisis like this one, Ribler says.

“The seniors who are borrowing in these reverse mortgage scenarios often don’t have a job,” Ribler says. “So [a large unemployment rate] is a bummer, but to the consumer it’s not a huge deal. They’re also not making a payment, so there’s not a mortgage payment to default on, though they obviously have to keep their taxes and insurance current. And I’m certainly not pretending that a downswing for the economy has no impact whatsoever on delinquency rates. But it’s different from a true credit risk-type product.”

A natural reaction

Although Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) trading was still taking place, many in the industry reacted with surprise and caution about what these fluctuations could mean for the product category as a whole in the near future. While the initial reaction seemed strong, it also makes sense that the industry would approach any major disruption with an abundance of caution, Ribler says.

“It depends who you talk to, and how well-prepared they were,” Ribler says. “Certainly, things could have gone a lot worse. We could have found ourselves in a scenario where 20% of the country goes into forbearance, and could have found ourselves not seeing trillions of dollars poured into the economy in a couple of months. We absolutely could be in a much worse place today than where we are, so I don’t want to say the fears [of the industry] were unfounded.”

That being said, managing the loan pipeline adequately and pricing where appropriate based on the activity of the capital markets can help to manage the evolving scenario as much as possible, Ribler says.

“Generally, it’s the consumer who suffers when pricing gets worse,” Ribler says. “Because that means you’ve got fewer credits available for the consumer, and they have to pay more closing costs. So there certainly is a loser, but if you’re managing your pipeline and your pricing correctly, then outside of some noise, it can somewhat be business as usual.”

Proprietary products and market volatility

One of the higher-profile occurrences that emerged from the pricing volatility focused on proprietary reverse mortgage products, with two lenders suspending their products for the time being and additional lenders making a series of changes to their products to compensate for the activity of the markets. While difficult to predict when more normality can return to the private reverse mortgage market, it’s possible that proprietary products could return to previous structures as long as other elements like home price appreciation stay under control, Ribler says.

“Even in the forward space, generally non-agency products were halted or at least very heavily curtailed,” he says. “So, you’re not seeing a ton of bank statement programs and you’re not seeing a ton of non-agency jumbos. There’s still some, but certainly not at the level that they were before COVID. What we hear on that front, whether it’s forward or reverse, it’s driven by investor appetite.”

In general right after the onset of the pandemic and the national emergency declaration, the investor base on those loans scaled back its activity because of a major unknown like a global pandemic, which would be true of any substantive addition coming from an unknown scenario, he says.

“Nobody’s rushing to write big checks when you’ve got coronavirus out there, especially with all the ways that this could have gone down surrounding housing in particular,” he says. “So, I think generally, what would have to happen for those products to get turned back on in broad strokes is that any production that was on balance sheets needs to get securitized and needs to get sold. On a positive note, we’ve seen some private label deals trade here in the last month or so, and they traded well. Not necessarily specifically non-agency jumbo reverse, but private label reverse-backed deals have traded, and it looks like the investor base is back.”

Listen to the latest episode of The RMD Podcast for the full discussion.

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  • “”On a positive note, we’ve seen some private label deals trade here in the last month or so, and they traded well…. [I]t looks like the investor base is back.’” That is certainly encouraging news.

    “‘While difficult to predict when more normality can return to the private reverse mortgage market, it’s possible that proprietary products could return to previous structures as long as other elements like home price appreciation stay under control….'”

    Since there are no government guarantees as to the expected value of the note at termination, the value of proprietary reverse mortgage notes is found in the notion that the perceived sales price of the collateral following termination will exceed the unpaid principal balance plus all costs incurred in the termination, AND resale process. So if the values of the collateral of a significant portion of the performing proprietary reverse mortgages are PERCEIVED as unlikely to be sufficient to pay off the related unpaid principal balance plus all costs related to termination and resale, the market could once again die off for a decade or so, just as it did in mid 2008. Of course note terms could be adjusted on new proprietary reverse mortgages to make investors happy but will they be so repulsive to prospects so as to dry up demand?

    As to the mortgage market not somehow insured by the federal government, “‘[w]hat we hear on that front, whether it’s forward or reverse, it’s driven by investor appetite.'” In this case appetite is inversely related to perceived risk. That is, the greater the perceived risk, the lower the investor appetite for proprietary reverse mortgage notes. For existing notes, the risk perception is seen in the discounts the notes sell for in an open market relative to their current unpaid principal balances. After all the only value that the note has is in the perceived ability of the collateral to pay the current unpaid principal balance off in full at resale following termination after all termination related and resale costs have been paid.

    Unrelated to the equity and commodity markets, many questions remain as to whether the value of homes in the ranges that proprietary reverse mortgages are best suited will experience significant loss in the pandemic and post pandemic economic environments.

    Most industry participants are not aware that the industry was able to sustain high but low growing volumes of HECM endorsements during the last economic crisis only to see dramatic loss in those endorsements in the early recovery phase following the Great Recession (which Google currently cites as beginning in December 2007 and ending in June 2009). Yet the proprietary reverse mortgage market that bloomed in fiscal 2007, all but totally dried up by mid 2008. That same basic pattern (although much calmer) has been seen during this pandemic even as home values in much of the US are relatively calm at this time. Of course, HECM endorsement volume has been anything but high following the largely unexplained loss in HECM endorsements during fiscal 2019, which started one year after the 10/2/2017 changes that most industry observers blame for the loss in HECM endorsements in fiscal 2018.

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