Trends observed in the Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) space over the past year through the pandemic period appear to be favoring the reverse mortgage industry, considering the various headwinds and tailwinds faced as the result of policy changes and the impending rate index shift. This is according to Government National Mortgage Association (GNMA, or “Ginnie Mae”) SVP of Capital Markets John Getchis, who spoke at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Policy Conference.
While headwinds included the pandemic’s disruption of financial market liquidity; the Federal Reserve’s MBS market intervention and termination of HECM loans indexed to the London Interbank Offered Rate (LIBOR), tailwinds that have proved beneficial to the product category’s standing has included scaled and rapid government intervention where necessary during the pandemic; HECMs and HMBS comparing favorably relative to other single-family MBS; and the low interest rate environment coupled with an increased HECM lending limit.
New administration and termination of LIBOR-indexed HECMs disruptive, but not crippling
The termination of LIBOR-indexed HECMs certainly put stress on the reverse mortgage industry’s operational and market response capabilities, and interrupted loan production for a period of time, Getchis explains. However, HECM and HMBS are proving resilient in comparison to other categories, he says.
“HECM and HMBS are enjoying a tailwind because the performance and the security as fixed-income is actually favorable relative to the single-family mortgage-backed security,” he explains. “Because, even though there is a pickup in prepayment, volatility is not quite as large and it’s predictable. That’s the key. I think whether it’s buying the derivatives or the interest-bearing structures, both sides of the investor market still remain committed to the product.”
Some solid tailwinds are expected for the reverse mortgage product category, Getchis explains, because of the current rate environment and the recovery from the pandemic coming into clearer view.
“Going forward, we have a really good tailwind for this, and particularly your product,” he says to the reverse mortgage industry audience of the conference. “One is the low interest rate environment in which we operate, we can see the effect of that. But also, we can expect at least some of the current economic signals [to show] that the engine is starting to crank up quite a bit, and that’s already generating – for a lot of reasons – some very large gains in house price appreciation.”
Not only does that help the outlook at the Federal Housing Administration (FHA) for reverse mortgages, but it can also present the reverse mortgage industry with future opportunities to take the product going forward, Getchis says.
Bright spots to highlight
HREMICs, or the real estate mortgage investment conduits comprising reverse mortgage securities as well as HMBS spreads have tightened, Getchis explains, largely due to liquidity in the interest being present from the investor base. This is further exemplified by the other tailwinds facing the industry that have been cited previously.
“Production certainly rebounded quite well from your refinance activity, your increased loan limit, and certainly home appreciation has helped a lot, as well,” Getchis says. “I think in the latest outlook, certainly, we think that the growth in the second quarter will be quite large and continue through much of the summer, certainly pending the success of the vaccination rates, which we know can change rather abruptly.”
However, the appearance of a plan and general forward momentum from the American public in getting vaccinated against COVID-19 appears to be hastening the relaxing of certain pandemic restrictions, including on the ability for businesses to operate with a degree of normality not seen since the first couple of months in 2020, he says.
Capital also continues to be committed by HREMIC sponsors, Getchis says, and the dampening effect of the influential GNMA All Points Memorandum (APM) which announced new restrictions on the eligibility of HMBS for adjustable rate loans operating off of the LIBOR index appears to have subsided, he explains.
“HREMIC sponsors that transmit all the HMBS infrastructure to create the additional demand continue to commit capital, and most happily so,” he says. “So from that standpoint, that’s a very good sign. […] We also know that the damping effect of our APM 20-12, which ruined a lot of your guys’ winter months, and the adjustment of [APM] 20-19 is behind us now, and it looks as though, from what I can see, your origination volume, market pricing and the investor pricing is starting to respond quite well to that.”
APMs in the rearview mirror, the MMI Fund
APM 20-19 delayed the previously-declared January 1, 2021 restriction on the eligibility of HMBS for adjustable rate loans operating off of the LIBOR index to March 1, 2021. The delay for originators was made to offer them some additional flexibility in adjusting to an origination environment without the LIBOR index, the standard for several years. The delay also represented that Ginnie Mae heard the concerns presented by the reverse mortgage industry, according to a representative of the agency.
Additionally, the FHA’s Mutual Mortgage Insurance (MMI) Fund seems well-suited to answer issues that arose from the pandemic, and prior stresses placed upon it by the reverse mortgage program.
“Most importantly, as we talk about what 2021 and 22 [will look like] FHA’s Fund is actually in a healthy place entering into this pandemic,” Getchis says. “So, I think that allows it to have more tools, more listening, and probably less concern about what prior perceptions of the HMBS reverse mortgage program is or is not. And that’s an important thing, that’s essentially a new audience with perhaps a new mindset that needs to be explored.”