Home Equity Conversion Mortgage (HECM) endorsements ticked downward in March, falling 0.8% to 4,187 loans. It is yet another month recording over 4,000 loans, marking a very slight reduction in volume when compared to the last recorded drop earlier this year. HECM volume previously had been on a downward trend in the final months of 2020 prior to December according to data compiled by Reverse Market Insight (RMI).
Additionally, the production of new Home Equity Conversion Mortgage (HECM)-backed securities (HMBS) recorded nearly $1.1 billion in HMBS issuance in the second month of the era after the London Interbank Offered Rate (LIBOR) “era.” 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.
When reached for comment, analysts looking at the metrics of both endorsement volume and HMBS issuance relate confidence in the way that reverse mortgage business has progressed in 2021, signifying a perception of continued industry strength as the nation continues to recover from the economic and health crisis caused by the COVID-19 coronavirus pandemic.
HECM endorsements, ‘more optimistic than any year’ since 2017
Considering the way that reverse mortgage volume has performed in 2021 thus far now that we have cleared the fourth month of the year, this data could signify a signpost of strength when looking at how the business has performed since the last major disruption in the form of product changes handed down by the Federal Housing Administration (FHA) over three years ago. This is according to John Lunde, president of RMI.
“At the bottom of page four [of RMI’s latest HECM Lenders report], we can see that endorsement volume is 43.9% ahead of 2020 at this point in the year,” Lunde explains. “I’d say volume performance year-to-date is more optimistic than any year since the October 2017 product changes [handed down by FHA].”
However, the dramatic pause which took place in April 2020 endorsement activity at the very beginning of the COVID-19 pandemic may make the year-over-year comparison appear better than it actually is, Lunde adds.
Four of the top 10 reverse mortgage lenders managed to gain on endorsement volume in April, with Liberty Reverse Mortgage rising 18% to 314 loans leading the pack for the major lenders. Not too far behind in terms of their overall growth is Open Mortgage with a 16.4% increase to 234 loans, and Longbridge Financial with a jump of 14.3% to 208 loans. Mutual of Omaha Mortgage endorsed 9 additional HECMs compared with last month’s figures, bringing its monthly total to 256 loans.
In terms of the regional data, the Southwest saw a major increase in endorsements with a 53.6% spike to 341 loans for April, marking a “full recovery” from significantly depressed volume in March. Seeing these kinds of regional swings without commensurate volume changes at the national level is a bit unusual, but also makes for an interesting case, Lunde says.
“With a pretty small national change from last month, it’s somewhat surprising for the regions to have much larger moves, but I never get too excited up or down about single month changes,” Lunde explains. “For the Southwest, it still looks more negative than positive as the last two months averaged are well below the prior trend. Diving into more detail with field offices on page 4, it looks like Louisiana and Oklahoma are the culprits, and further than that a big drop in active lenders suggests the industry has pulled resources from those areas.”
Meanwhile, Texas has so far seen a business boom in 2021, so it’s possible that attention is simply shifting, Lunde says.
In terms of other regional rises in endorsement volume, New York/New Jersey saw a 16.1% increase to 187 loans, while the Great Plains region rose 13.4% to 76 loans.
HMBS issuance: ‘very strong’ April, but watch out for refis
April’s issuance of HMBS was “very strong” in April, totalling over $1 billion in this new era after which the LIBOR index cannot be applied to adjustable-rate HECM reverse mortgage loans. In terms of how HMBS translates into a metric for industry health based on this data, these are very encouraging signs according to Michael McCully, partner at New View Advisors.
“We’re glad record origination volume is occurring post-LIBOR,” McCully tells RMD in an email. “Exact pricing and execution levels for CMT-indexed HECMs was an unknown [factor] until just a few months ago. As with others in the industry, New View Advisors is pleased to see investors’ acceptance of CMT-indexed HMBS and HREMICs.”
However, something that shouldn’t be overlooked in this equation is the environment the mortgage business is operating in, regardless of which direction the mortgage operates in for the borrower, McCully says.
“While the HECM program has been very stable, it’s important to acknowledge that mortgage originators – forward and reverse – also continue to enjoy near perfect lending conditions, I.E. historically low interest rates, and steadily rising home values,” McCully says.
With the reverse mortgage industry now having shifted back to the Constant Maturity Treasury (CMT) index as the only applicable metric for adjustable-rate HECM loans, April continued with HMBS backed by loans indexed to CMT. 104 pools were issued in April, including 47 first-participation CMT pools. No new first-participation pools backed by CMT had been issued for several years prior to January 2021.
While business does appear to be strong on the front of the data, it’s no industry secret that the favorable interest rate environment has led to a plethora of lenders jumping on business centered on HECM-to-HECM refinance transactions. Looking at the strong data without keeping in mind the level of refi activity could paint an incomplete picture, McCully says, and industry participants should understand what a lot of refi activity on new HECMs can do to the metrics.
“All else equal, current volume trends bode well for the future of our industry,” McCully says. “But we must remain vigilant against churning/refinancing of newly-originated HECMs. Excessive refinancing hurts investors and distorts true new origination volume figures.”