Home Equity Conversion Mortgage (HECM) endorsements increased in May, rising 3.9% to 4,350 loans. It is yet another month recording over 4,000 loans, marking a notable rise over the very slight reduction in volume recorded in April. 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 just over $1 billion in HMBS issuance in the third 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.
Both metrics continue to show steady streams of general industry health, however the industry’s general bolstering by refinance volume remains a concern for the growth of the reverse mortgage business sector according to analysts reached for comment on the new data by RMD.
HECM endorsement volume: territories rise, major lenders fall and refis continue
Of the 10 national regions tracked by RMI based on data from public sources and its own internal analysis and measurement tools, six of them recorded higher volume in the month of May while those six have also become the top 6 of 7 regions for the year so far. Leading the gains in terms of raw percentage increases were the Mid-Atlantic region (rising 24.5% to 239 loans); followed by the Northwest/Alaska region (rising 16.7% to 496 loans) and the Southwest (rising 15.5% to 394 loans), which itself saw a 12-month high according to RMI.
However, the performance of the major lenders was far more mixed for the month, with only three of the top 10 posting gains on their April totals. American Advisors Group (AAG), the industry leader, held a commanding lead with a rise of 32.4% to 1,650 loans, a new 12-month high for the lender and more than four times the volume of their closest competitor, RMI noted.
HighTechLending, meanwhile, jumped 16.2% to 86 loans, while Advisors Mortgage Group rose 10.5% to 63 loans. Every other top 10 lender saw reductions for the month, albeit relatively minor ones.
While refinance volume totals for the month of May aren’t yet clear, there’s little reason to think that the previously-seen figures of refi volume constituting as much as 40% of endorsement volume has changed in the last month according to John Lunde, president of RMI.
“It’s fair to say that refinances are driving volume lately, with both March and April over 40% in [HECM-to-HECM] refis,” he told RMD in an email. “We don’t have that detailed data on May yet but I don’t see a reason why it would have changed.”
Lunde guessed that the regional volume increases are commensurately being fueled by refi volume, as the largest pools of available loans to refinance are present in the biggest volume markets. It’s simply no mystery where much of the industry’s additional volume is coming from at the moment, he explained.
“This is the most refinance-driven year for reverse mortgages ever,” he said. “It seems we’re on a path to find the limits of that niche in a way we never have before. Will we run out of loans to refinance before the seasoning restrictions expire? Will investors stop paying premiums for loans that have so much higher prepayment expectations than a few months or a year ago? Will regulators decide more restrictions are necessary? Will interest rates and home prices stop energizing the fundamental forces behind the refinances?”
Those accompanying rhetorical questions for the so-called “refi boom” are likely to persist barring some other development involving an influx of new borrowers.
However, in New View Advisors’ HECM Endorsement Analytics report, it is noted that a six-month period of monthly volume over 4,000 units is something that has not been seen in the industry since the publication of Mortgagee Letter (ML) 2017-12 published at the end of August 2017, and which announced disruptive changes including the reduction of principal limit factors (PLFs).
HMBS issuance: ‘May flowers’ in another strong issuance month
The production of new HMBS continues to remain strong in the now-third month of the “era” after the reverse mortgage industry has moved on from the London Interbank Offered Rate (LIBOR) index, and is currently still using the Constant Maturity Treasury (CMT) index while a more permanent solution – likely the Secured Overnight Financing Rate (SOFR) – is codified.
In May, 105 pools were issued including 45 first-participation CMT pools. Production of new, original loan pools totaled $862 million for the month,
While acknowledging the presence of refinance volume, the strength of HMBS issuance remains strong and a good overall sign for the industry according to Michael McCully, partner at New View Advisors.
“HMBS issuance remains an excellent metric for industry health as it incorporates new, seasoned, and ongoing tail issuance, and demonstrates strong liquidity,” McCully told RMD in an email. “Despite 40% of new issuance being H2H refis, overall HMBS volume figures remain encouraging.”
May’s production of new, original loan pools is slightly lower than figures observed in April, but still remains higher than every other month of the year besides April. It’s too early to indicate a trend on that side of things, McCully said, and it’s also hard to predict whether or not an impending transition to SOFR is having any impact on investor confidence.
“HMBS volume is bound to fluctuate month-to-month,” McCully said. “The steady increase in volume since interest rates fell in 2020 is the trend to follow. […] There are too many variables to predict market behavior in advance of SOFR’s launch.”
In the end, though, the lending environment is conducive to a productive period for the reverse mortgage industry, McCully said.
“We are in an optimal lending environment,” McCully said. “Defaults are way down (thanks largely to financial assessment and other program improvements at HUD), interest rates remain near all-time lows, and home price appreciation is soaring. The harder question to answer is, ‘why is origination volume not materially higher?’”
Read the HECM Lenders report at RMI, and the HECM Endorsement Analytics report and HMBS Issuance report (h/t for “May flowers”) at New View Advisors. You can also listen to the most recent episode of The RMD Podcast which featured John Lunde of RMI as the special guest for additional context on current refinance volume levels.