As rates continue to rise along with home prices, the first indications of the rate environment’s potential effects on the reverse mortgage business are starting to come into clearer view with a slight drop in monthly volume. However, the drop comes nowhere near eclipsing the historic rise observed in March.
Home Equity Conversion Mortgage (HECM) endorsements fell slightly in April 2022 by 3.8% to 6,265 loans, a drop which pales in comparison to the over 26% volume increase recorded the prior month. This is according to data compiled by Reverse Market Insight (RMI). April is now the second consecutive month with production of over 6,000 loans, a threshold that would’ve seemed highly unlikely just a couple of years ago.
The production of new HECM-backed securities (HMBS) reached another record, in April coming in at over $1.6 billion in HMBS issuance in the 14th month of the period after the London Interbank Offered Rate (LIBOR) “era.” As previously stated, a total of $13.2 billion in HMBS issued in 2021 easily overtook the previous industry record of $10.8 billion set in 2010, according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.
Reverse mortgage volume still at historic levels despite slight dip
While the level of volume in April remained historically high, the possibility of this smaller dip leading to a larger drop in the months ahead is still very present considering the rate environment according to John Lunde, president of RMI.
“[The April drop] very well could be [an indication of higher rate impacts], but we will have to wait for more months of data to see more of a trend and how higher rates are impacting HECM volume, and particularly HECM-to-HECM (H2H) refis,” he says.
The impact of two consecutive months with loan volume of over 6,000 units is not lost on Lunde, especially considering a lot of the impacts that other events have had on the industry over the past five years, he explains.
“[Volume like this] is great to see,” he says. “I have been in the industry long enough to remember the years with greater than 100,000 loans per year and 50% growth annually. To see things bouncing back in such a significant way, even if it’s not at the same level yet, is very exciting.”
Much of this speaks to the ways the industry has aimed to position the product to prospective borrowers, as well as changes that have been made to the program, he says.
“It speaks to a lot of the hard work done in the past 20+ years by so many people to educate people about the product’s benefits and at the same time work to improve the product and all the processes around it,” he says.
Still, RMI does point out that there is likely to be “turbulence” in the months ahead particularly due to rates. How much is anyone’s guess, and it will likely take additional time to gauge the full impact of a rising rate environment on volume.
“I believe the impact of rate increases we’ve seen already this year will continue to play out over the next few months of HECM endorsements, to say nothing of where rates go from here,” he says. “This drop should be looked at as the first step in a longer trendline rather than a resting place based on current rates.”
In terms of whether or not the reverse mortgage industry is prepared to absorb the changes that could come from higher rates, Lunde is optimistic.
“I think the industry is well-prepared from the standpoint of home prices still rising strongly, rates being low historically, and so much education work invested over many years,” he says. “All of that will bear fruit, but some lenders will always be better prepared and positioned for the environment less dominated by H2H than others so I do expect separation in performance at the company level.”
In terms of what he feels reverse mortgage professionals should keep in mind about business trends, a diverse product mix could make a difference, he says.
“It’s never too late to make sure your business mix is diversified,” he says. “H2H is still part of the opportunity, but it’s not the only opportunity. Have a plan and spend some time and resources on generating purchase volume and new reverses even if you continue to harvest refinance activity while it’s working.”
HMBS issuance in the current environment
April’s HMBS issuance recorded another record in April, according to New View, however, the data is not yet reflective of the current realities of the rate environment, according to a commentary the company published alongside the data.
“Given the lag between HECM loan origination and HMBS issuance, the new HECMs backing April’s HMBS pools do not fully reflect the rapid rise in interest rates over the past two months,” the commentary reads. “The numbers for May and June issuance will test the resilience of this refinancing wave, which began with lower interest rates but continued its momentum from strong home price appreciation and higher FHA lending limits.”
When asked about what comes to mind when seeing such data, New View Partner Michael McCully explains feelings of positivity and caution because of realities and likely emerging trends.
“[I am] simultaneously pleased to see sustained meaningful volume and concerned about the refinance wave that will not stop,” he says. “We may see the impact of rising rates on volume and refinance activity as soon as May or June data is released.”
When issuance does ultimately catch up to rising rates, it will likely be materially impacted in a few key ways, he explains. In terms of establishing a trend for the full year, it’s simply too soon to make any determinations.
“Higher rates will translate into lower principal limit factors (PLFs), resulting in fewer borrowers able to pay off existing debt without bringing cash to the closing,” McCully says. “It is too soon to project 2022 full-year volume.”
When asked about what reverse mortgage professionals should most keep in mind about the current environment and some likely turbulence ahead, McCully encourages industry players to continue finding ways to reach new borrowers.
“April’s original (first participation) production smashed previous monthly volume records, with $1.4 billion in new issuance,” New View said in its commentary accompanying the April data. “This easily exceeded March’s production of original new loan pools totaling $1.13 billion, February’s $1.12 billion and January’s previous record of $1.18 billion.”