Reverse Mortgage Volume, Securities Issuance Dips as Originators Prepare for CMT Shift

Home Equity Conversion Mortgage (HECM) endorsements recorded a slight drop in October of 2020, sliding back 5.1% to 3,737 loans. This marks the second time since May that HECM volume fell below 4,000 loans, but still remains above numbers observed between February and April of this year according to data compiled by Reverse Market Insight (RMI).

Additionally, the production of new Home Equity Conversion Mortgage (HECM)-backed securities (HMBS) recorded another “banner month” in October, recording $879 million in HMBS issuance, a very slight decrease from the $883 million HMBS issuance figure recorded in September, according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.

Meanwhile, as the reverse mortgage industry prepares to shift from the London Interbank Offered Rate (LIBOR) index to the Constant Maturity Treasury (CMT) index, originators are making preparations that could impact how they do business.

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HECM endorsements tick down, but not enough to derail 2020

The decrease in endorsements observed in October outpaces the smaller decrease which was seen from August to September, but HECM endorsements for 2020 overall are still on track to lead to higher full-year totals when compared to 2019. Comparing the endorsement volume figure of October 2019 to the one in October 2020, the more recent figure is nearly 700 loans higher than the one observed at the same time one year ago, and the 3,937 figure is still notably larger than the endorsement figures recorded for the full period between March of 2019 and April of 2020.

While volume is slightly reduced, 2020 is too far gone now for previous endorsement predictions to be thrown out according to John Lunde, president of RMI. Still, if reductions continue then it may be worth speculating about the long-term viability of a business “bump” attributable to the COVID-19 pandemic.

“We’re late enough in the year that I still think we end up roughly the same level I was thinking previously,” Lunde tells RMD. “It’s always interesting to see the endorsements stats dip month to month, and if we see another month falling below 4,000 then I’d say it’s reasonable to wonder if volume is slowing down after the levels in early months of the COVID era.”

Less encouraging from a high-level industry perspective is the performance of the top 10 lenders, of which only 2 posted endorsement gains in October compared with their September figures, according to RMI. Mutual of Omaha Mortgage saw an endorsement increase of 7.7% to settle at 239 loans, while Reverse Mortgage Funding (RMF) posted a 7.5% increase to hit 331 loans for the month. This isn’t particularly concerning to Lunde.

“Most of the major lender declines month over month are usually due to timing issues more than big trends since there’s more noise the lower we go with endorsement data,” he says. “Not too concerned there, similar to industry overall above and looking at a longer trend perspective here.”

It’s worth noting that the current “top 10” only features nine active lenders, since One Reverse Mortgage’s early year HECM endorsement performance has technically kept it in the top 10 lenders even after the company exited the reverse mortgage industry in February of this year. According to the data from RMI, One Reverse has not posted any endorsements since the month of June, where it recorded only one.

However, when looking at the full list of the top 100 HECM lenders, only 23 of them are recording decreases in volume when compared to their performances at the same point in 2019. This leaves details to be encouraged about, Lunde says.

“I’d go even further and note that just 7 of the top 50 lenders on this report are showing declines from last year to date,” Lunde says. “It shows that competitors in the industry are broadly growing as the industry overall is having a strong year with the turbulent stock market and COVID-era process modifications successfully facilitating broader access to the product. We’re excited to see many companies doubling and tripling volume as they adapt to changes in the consumer experience and perception.”

HMBS issuance: yet another ‘banner month,’ 2019 outpaced

While the $879 million of new HMBS issuance signifies another robust month of new production even if it’s slightly less than last month, the news about the impending end of the LIBOR index’s use for adjustable-rate HECMs nonetheless continues to cast a bit of a shadow onto the secondary market, according to New View Advisors.

“[October issuance totals are] overshadowed by the pending demise of LIBOR as an HMBS index,” New View writes in its commentary accompanying the issuance data. “December 2020 will be the last month in which Ginnie Mae allows pooling of new HMBS pools backed by first participations of LIBOR-based HECMs. 86 pools were issued in October.”

In terms of outpacing 2019’s totals, the actual, logged numbers for 2020 have already outperformed last year’s figures, New View says.

“$8.5 billion in HMBS has been issued in 2020 through October, already beating last year’s total of $8.3 billion,” New View writes in its commentary. “HMBS Issuers are on track to exceed 2018’s $9.6 billion total, as a mad rush ensues to issue LIBOR HMBS before the clock runs out. 2017’s total issuance of $10.5 billion may be out of reach, but not by much.”

When asked if the slight reduction in this month’s figures have changed anything about the HMBS outlook for the full year, New View Advisors partner Michael McCully did not indicate any shift whatsoever in the organization’s position.

“We are not changing any estimates,” McCully told RMD.

When asked about what other industry participants should take away from totals being observed in the secondary markets for 2020, the changeover from LIBOR to CMT will likely be a factor but there will be other elements that will demonstrably affect industry health in 2021, McCully says.

“HMBS issuance volume in 2021 will depend largely on pricing and refinance activity,” McCully explains. “It is too early to know the impact of pricing for CMT based HECMs. Refinancings may ebb which would offset some new issuance volume.”

Tail pool issuance came out to $205 million in October, at the lower end of recent performance but not to the point of concern according to McCully.

“No, this is not a concern,” McCully explained. “Tail issuance is largely a function of what was originated a year ago, so 2021 will likely see higher tail issuance.”

Originators prepare for rate index shift

For reverse mortgage originators, the shift from LIBOR to CMT could prove to be disruptive to different elements of business. While some originators do not appear to expect much of a disruption, there are others who are seeing some trends that could prove troublesome.

One originator not expecting an abundance of disruption to her business is Brandi Braley, originator with Neighborhood Mortgage in Bellingham, Wash.

“My lenders are switching everything over, and I just started doing some new quotes this week,” Braley tells RMD in a phone call. “I don’t anticipate there being a big change. My lenders went over what the changes will look like, and rates appear to be about the same as they were [under the LIBOR index]. So, I don’t anticipate a lot of change there.”

More troubling for others could be some of the details which accompany the change-over, according to Rich Pinnell, branch manager at Primary Residential Mortgage, Inc. (PRMI) in Redding, Calif.

“I’m very concerned about where we are with CMT, and the abruptness of the change,” Pinnell tells RMD. “The biggest disruption I’m seeing is at the comp level. [I’m seeing] that comp is about 3-4 points off of where LIBOR is, and was told by a lender that this was because nobody sold mortgage-backed securities (MBS) with that product, so they don’t know where to price it.”

The first day that Pinnell saw rate sheets indexed with CMT, he noted that compensation was about 5 points off while more recently, that has decreased to between 2-3 points, he says.

“The general feeling with the people I talk to in my company is that they’re going to be protecting the ability to sell those mortgages into the secondary market,” Pinnell says. “But for the ones we’ve already quoted, I have to go back and recalculate the numbers based on the new index, and I have to work through that process. In some cases, it’s affecting the customer’s cash out.”

Read the HECM Lenders report at RMI and the HMBS Issuance report at New View Advisors.

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  • There are some interesting comments in this article worth exploring:

    The first is: “…HECM endorsements for 2020 overall are still on track to lead to higher full-year totals when compared to 2019.” This is nonsense since by October 1, 2020, the nine month total HECM endorsements for calendar 2020 were 33,266 (per RMI in HECM World’s Top 100 Report) when the total endorsements for all of calendar year 0f 2019 were just 32,482 per the RMI Lender’s Report for December 2019 on RMI. The quotation would have made sense if it had said that while HECM endorsements for calendar year 2020 are likely to be less than earlier optimistic projections, they will still substantially exceed the total experienced in calendar year 2019.

    If the world had ended on 10/1/2020 at 12:01 AM (EDT), total HECM endorsements for the partial calendar year 2020 exceeded the total HECM endorsements for all twelve months of calendar year 2019 by 784 HECM endorsements. So why is RMD saying that we are still on track to exceed the total HECM endorsements for calendar 2019 when that total was exceeded over 35 days ago? This is why it is important to pay attention to the numbers.

    Second is the following: “‘…Still, if reductions continue then it may be worth speculating about the long-term viability of a business ‘bump’ attributable to the COVID-19 pandemic.'” So by May 2020, were seniors not as desperate as they were in April 2020 since the first downturn was the total endorsements was that for the total endorsements for the month of August 2020 and it is generally believed that the peak time for HECM endorsements is about three months following closing.? Or was the “optimism” about seniors reaching out to the industry due to COVID-19 financial fears simply exaggerated for the last six months?

    If the downturn is due to the lessened impact of COVID-19 on the HECM decision, we could soon be hit by three events resulting in lower HECM endorsement counts. First is the least impact seems to be from the loss of the LIBOR index. Second, there is the reduced impact of the fear of COVID-19 on the HECM decision, and finally, a turn in the rise of HECM Refis as will eventually come. So reading between the lines, the industry is facing at least stagnation in calendar year 2022, if not earlier, perhaps even fiscal year 2021.

    The third is: “Tail pool issuance came out to $205 million in October, at the lower end of recent performance but not to the point of concern….
    ‘Tail issuance is largely a function of what was originated a year ago, so 2021 will likely see higher tail issuance.’” This quotation is very interesting since tails include lump sums, tenure, monthly, and line of credit payouts from all outstanding HECMs including both active and assigned HECMs from initial HECM closings in 1990 until now. The payouts from pre October 1, 2008 endorsed HECMs should be low and those from fiscal 2019 should be high, there are tails even in 2020 from HECMs that closed earlier this year. Yet we are in the midst of COVID-19 so it would seem that even HECMs that were endorsed before 10/1/2018 should have higher draws than normal due to the alleged impact that COVID-19 has had on HECM closings in the last six months or so. If we are not seeing the impact of COVID-19 in the tails for last month, is there not cause for concern for even lower endorsements than have been projected during the last six months?

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