In the final monthly data drop of the year, Home Equity Conversion Mortgage (HECM) endorsements in November recorded another slight drop, sliding back 4.7% to 3,561 loans. This marks the third 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 November, recording $956 million in HMBS issuance, a noticeable increase from the $879 million HMBS issuance figure recorded in October, according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.
This creates the perspective of a disconnect between declining HECM endorsement volume and rising HMBS issuance, though the comparison is difficult to make since both are measured differently according to analysts.
Lower HECM endorsements and LIBOR transition, ‘admirable’ performance for 2020
The slow, but observable decline in HECM endorsements for November may be at least partially attributed to the impending transition away from the London Interbank Offered Rate (LIBOR) index for adjustable-rate HECMs. This is according to John Lunde, president of RMI.
“I’ve heard from several lenders that the push to securitize LIBOR loans before that HMBS window closes has resulted in some shifting away from insuring/endorsement and toward the closing/securitization area,” Lunde tells RMD. “If that’s the reason for endorsement declines then we’d expect a catch-up in December and January as the LIBOR HMBS deadline is behind us.”
Still, as the last monthly tally released inside calendar 2020, the general performance of the reverse mortgage business for the year is positive considering all of the headwinds that have afflicted a majority of American businesses stemming from the COVID-19 coronavirus pandemic, Lunde says.
“I’d say HECM endorsements have shown the reverse mortgage business coming through admirably in 2020,” he explains. “Client demand is up as evidenced by endorsement growth from where we started the year, and continued strength in case numbers assigned and HMBS securitization activity. The industry’s participants, including FHA, lenders, brokers, and vendors have all adapted to suit the pandemic we’re working our way through and give financial options to borrowers who need flexibility in the strength of financial market volatility and turbulent employment conditions.”
Nevertheless, 2021 is likely to come with its own unique headwinds owing to the continuing pandemic, the LIBOR transition itself as well as the impending change in the leadership structure of the federal government, FHA and HUD due to the results of the November election. In terms of facing uncertainties, past is prologue for the reverse mortgage business, Lunde says.
“If there’s anything our industry has shown, it’s that we do adapt to changes and keep forging ahead,” Lunde says. “We’d all hope for some stability at some point but I don’t expect there’s anything we already know about coming up that will significantly trouble the industry compared to what we’ve already come through in the past few years.”
HMBS issuance rises, industry holds breath for LIBOR shift
Stronger levels of HMBS issuance for November draw an interesting comparison with lower origination figures, but comparing the two to determine the overall health of the reverse mortgage business is difficult due to minimal commonality between both metrics, though the LIBOR transition and re-activation of the Constant Maturity Treasury (CMT) index could account for some of this according to Michael McCully, partner at New View Advisors.
“Because endorsement figures can be managed, and fluctuate based on several factors apart from actual origination volume, it is difficult to compare the two,” McCully says. “CMT has not been used as an index for new HECMs in more than 10 years. As a result, the transition from LIBOR to CMT may cause backlogs in submitting and processing loans for endorsement.”
All in all, in terms of HMBS issuance it appears that the reverse mortgage industry is on track to come near its last record year of issuance, though one component of the conversation that should also be paid attention to is the issuance of highly-seasoned pools.
“The industry will come close to matching its record HMBS issuance from 2017,” McCully explains. “And, that’s with less issuance of highly seasoned pools in 2020 than in past years, including 2017.”
In terms of the other components at play for 2021 that could affect the industry, the major concern remains the LIBOR transition, which dwarfs most other issues including the change in leadership that is likely to happen in the government, while the recently-announced rise of the HECM lending limit to over $822,000 is likely to positively affect issuance, McCully says.
“All else equal, higher lending limits lead to higher HECM origination volume and HMBS issuance,” McCully explains. “The impact of new leadership at HUD will likely not occur until much later in 2021 if not 2022.”
Effects of the index change, other factors
In terms of other business elements that will affect the business in the new year, the transition away from LIBOR is likely to affect the business across the board.
“The LIBOR transition remains the single biggest concern for 2021, especially for issuers with existing books of LIBOR-based HECMs,” McCully says.
That point is echoed by Lunde, since the LIBOR transition’s effects will ripple out to multiple stakeholders in the reverse mortgage business, he says.
“Eventually the existing HECMs will have their index changed and the timing and effect of that implementation can have significant impacts on the industry’s investors, borrowers, lenders, etc.,” Lunde says. “Hopefully that is done in a measured way that is not rushed, and communicated well in advance with a chance for feedback to mitigate any unnecessary damage in the process.”
Tail issuance should also not be overlooked as we prepare to leave 2020, McCully says. It may have showed signs of decline recently, but next year may fashion a different story on that front, he explains.
“While tail issuance has declined modestly over the course of 2020, we expect it to pick up in 2021 when the 12-month utilization caps roll off the robust production from 2020,” McCully says.