Home Equity Conversion Mortgage (HECM) endorsements in December recorded an increase at the end of the year, rising 15.1% to 4,097 loans. This marks a reversal of recent courses, as HECM volume previously had been on a recent downward trend, but overall the year finished on a strong note by rising 27.3% to 44,661 loans for the full 2020 calendar 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 strong month in December, reaching $1.2 billion in HMBS issuance. All told, 2020 saw $10.6 billion in total HMBS issuance, eclipsing a recent industry high of $10.5 billion of issuance in 2017 according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.
All told, the 2020 performance of both HECM endorsements and HMBS issuance has led to a demonstrably high level of activity across both metrics of industry health, according to industry analysts who shared their perspectives with RMD.
HECM endorsements: December jump, 2020 highlights
When examining the state of the reverse mortgage industry and HECM endorsements throughout 2020, a few key points emerge based on observations by RMI. First, December’s endorsement volume showed a change of less than 5% when compared to figures recorded in January, though year-over-year volume showed a clear increase.
The initial impact of the COVID-19 pandemic on reverse mortgage operations was most highly felt in a negative way in April, which recorded a significant drop in endorsement levels (with some caveats) that then sharply caught up in the explosive endorsement month that was May 2020. That month saw HECM endorsements spike by 215%, leading to the best single-month endorsement tally in over two years at that point. A later analysis by RMI indicated that this spike in endorsements was led by the retail segment of the business.
However, the rest of the year saw endorsement levels slowly creep downward, a trend disrupted by the December totals. This isn’t all that surprising considering the notable increase recorded in May, according to RMI President John Lunde. While optimistic for business in 2021, some of that is tempered by the regulatory activity governing interest rate indices, he says.
“The downward coast strikes me as the natural followup to the huge volume spike in May, which was driven by a double whammy of catching up from April endorsement delays due to the pandemic and the start of additional consumer demand from volatility in the financial markets,” Lunde tells RMD. “I am optimistic about 2021 given low 10-year rates, rising home prices and continued consumer interest. The worries would be the CMT/LIBOR transition turbulence leading to lower revenue and/or any change to lending limits or refinance rules as potential headwinds.”
Outside of one major lender exit at the beginning of the year, the top 10 reverse mortgage lenders remained relatively stable in 2020 albeit with shifts in the rankings of specific lenders. That said, many of the major lenders saw their fortunes rise at the end of the year, Lunde says.
“Several of the top 10 ended the last few months of 2020 much stronger than the beginning: FAR, RMF, Mutual of Omaha, Open Mortgage, Longbridge and High Tech,” Lunde observes. “I’d say the success this year rewards many years of hard work before 2020 to be ready for the industry tailwinds we saw play out.”
A ‘positive external shock’
One of the more surprising occurrences about the full year was the fact that a broad-based external event — which can lead to negative effects on the reverse mortgage industry — appeared to have the opposite effect this time, Lunde explains.
“Our industry being adaptable wasn’t surprising, but I’d say the most surprising thing is that the industry finally had a positive external shock in the form of volatility in the financial markets to drive a resurgence in consumer interest,” he says. Volume trends have long demonstrated an underlying consumer appetite to me for the product in spite of product changes and other challenges, but it has been quite some time since there was an abrupt shock in the positive direction for the industry.”
As for 2021, the generally high lender performance of the final months of 2020 could be a good sign for the months ahead, though it’s difficult to say that any trends have been established as of yet, Lunde adds.
“I remain optimistic about 2021 given we ended the year with a series of much stronger months of endorsement volume than we started,” he says. That kind of momentum is always good to carry into a new year!”
HMBS issuance nears pre-refinement record
On the HMBS issuance side, 2020’s performance managed to best the 2017 total of $10.5 billion, and came rather close to meeting the 2010 record of $10.8 billion, which remains the record high. Considering that the 2020 business environment also features product changes implemented well after the early 2010s and 2017, that helps to put the business performance from the past year into greater context. This is according to Michael McCully, partner at New View Advisors.
“2020 has proven to be one of the industry’s best years, despite a global pandemic,” he tells RMD. “Low interest rates, increasing home values, and minimal defaults from the effects of Financial Assessment and other HUD-implemented product enhancements created ideal lending conditions last year, especially for HECM.”
December production of original loan pools hit a record of $878 million, breaking the previous record of $834 million set in April of 2013. A key driver for this is one of the recurring reverse mortgage themes of 2020 as it relates to interest rates.
“Low interest rates are always the driving factor for increased mortgage origination volume, forward and reverse,” McCully says.
Not faring as well this year, however, was the production of non-agency, proprietary reverse mortgages according to New View’s commentary on the HMBS data.
“Private production fell off in 2020, due mostly to lower interest rates for HECMs,” the commentary reads. “Now, private product must also compete with an even higher Maximum Claim Amount of $822,375, in effect starting January 1.”
The difference between HECM and proprietary production also centered on interest rates, according to McCully.
“Private product lost ground to HECM primarily due to lagging interest rates,” he says. “Once the industry solves for that shortcoming, volume will return.”
All told, HMBS production for early 2021 should continue to see high levels of activity, particularly due to the recent delay of a restriction deadline on London Interbank Offered Rate (LIBOR)-indexed loans, McCully says.
“Expect a continued rush of LIBOR-based HMBS until the March 1 deadline, then a slowdown as the industry and secondary markets adapt to [the] Constant Maturity Treasury (CMT) [index],” he says.