Home Equity Conversion Mortgage (HECM) endorsements jumped sharply again in October 2021 by 16.3% to 5,029 loans, breaking the 5,000 loan threshold for the first time since industry volume began its COVID-19 spike in May 2020. This is according to data compiled by Reverse Market Insight (RMI).
While July may have marked the end of a streak of monthly volume above a threshold of at least 4,000 units that the industry had seen since late 2020, September’s volume spike managed to overcome the shortfall observed in August completely. October’s succeeding volume levels have put the industry back into a solid position, but it remains to be seen how much of the October volume has been bolstered by HECM-to-HECM refinance transactions which analysts have previously warned is a diminishing resource.
Once more, the production of new Home Equity Conversion Mortgage (HECM)-backed securities (HMBS) recorded a record $1.2 billion in HMBS issuance in the eighth month of the period after the London Interbank Offered Rate (LIBOR) “era.” Prior year records are expected to imminently fall in November since a total of $10.5 billion in HMBS was issued in the year’s first ten months, according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.
All told, 2020 saw $10.6 billion in total HMBS issuance, eclipsing a recent industry high of $10.5 billion of issuance in 2017. As of this month, issuance totals in 2021 match the 2017 figure on their own.
HECM endorsements at highest level since May 2020
The last time that reverse mortgage volume passed a monthly threshold of 5,000 loans was in May of 2020, a strong showing that came off of the prior month’s plummeted volume levels which stemmed from the uncertainty of the COVID-19 coronavirus pandemic’s initial onset. Similarly to that period of time, this month’s heightened volume may be in response to another recent month of unusually low volume compared with recent trends. This is according to John Lunde, president of RMI.
“[This volume spike is] most likely the result of the weak August, where there may have been other issues at play like everyone catching up on vacation at both lenders and HUD, etc.,” Lunde told RMD.
For context, volume levels in August fell 14.3% compared with July, settling at 3,679 loans and breaking the trend of 2021 remaining above 4,000 loans per month. In spite of the singular result this month’s volume may have produced, it nonetheless helps to form a perspective on the industry’s performance for 2021, Lunde explains.
“It offsets the weak August figure to lend a more consistent >4,000 loans per month perspective with the potential for continued growth from there,” he said. “As we see what November and December hold in store for what is typically weaker volume months due to the holidays, it should give us more perspective for next year. Anything closer to 5,000 is probably over expectations and anything under 4,000 may cast a bit of doubt.”
While the data for November and December is anyone’s guess at this point, it is likely that the tabulation of the top 10 reverse mortgage lenders for 2021 has settled so long as some totally unpredictable factor does not influence totals in the final 60 days of the year, Lunde said.
“There might be some small changes in the order of top 10, but for the most part there isn’t an obvious place so far where a new company could jump into the top 10,” he said. “A few of the top 10 by volume this year aren’t even FHA-approved lenders for HECM, so the list does look a bit different from our HECM Lenders report when compared to our HECM Originators report which will follow later this month.”
HMBS record will be imminently broken, refi spectre remains
In its commentary accompanying October’s HMBS issuance data, New View Advisors asked a rhetorical question concerning whether or not refinances will come back to “haunt” HMBS. When asked to clarify the meaning behind that question, New View Advisors Partner Michael McCully described the scenario in which refi volume could have an impact on HMBS and, by extension, loan volume.
“High refinancing volume increases prepayment speeds,” he explained. “Faster speeds cause investors to pay less for HMBS, and falling HMBS pricing lowers proceeds to borrowers and profitability for lenders, possibly decreasing origination volume.”
While HMBS issuance remains strong, there are at least a few realities of 2021 that the reverse mortgage industry should not necessarily count on being present as we prepare to welcome the new year, McCully says.
“Despite the pace of origination growth since 2020, HMBS float continues to stay in a narrow, ~$2 billion band,” he says. “Home price appreciation is likely driving refinance volume; be prepared for home prices to moderate in 2022.”
McCully has long expressed that HMBS issuance volume is a better barometer of industry health than endorsement volume. When asked what the industry may commonly miss about properly appraising HMBS issuance as a helpful tool to measure industry health, looking at the ways other industries measure health is a good place to start, he explained.
“HMBS issuance dollar volume is a much better indicator of industry health than endorsement count. Plus, no other mortgage or asset-backed lending industry uses unit count as a metric,” he said. If we want to be a mainstream industry we need to think and act like a mainstream industry. [This could be avoided by] incorporating dollar volume into [the industry] vernacular.”
All told, the reverse mortgage industry is experiencing a very strong status quo, but loan and dollar volumes are still falling far short of their potential, McCully says. Even with positive trends observed in the October data, the reverse mortgage industry and its participants should keep these facts in mind, he explained.
“Historically low interest rates, historically high home values, and improved MMI Fund performance [combine to] create a perfect storm to originate HECMs,” he said. “It’s disappointing that origination volume isn’t significantly higher than where it is today.”