Home Equity Conversion Mortgage (HECM) endorsements rose in July, 2021 by 3.2% to 4,293 loans, marking yet another month of reverse mortgage volume reaching a threshold of over 4,000 loans and raising the streak of monthly volume above that figure to eight months. This is 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 $1.1 billion in HMBS issuance in the fifth month of the period 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 who spoke with RMD.
HECM endorsements rise as regional performance surprises
While figures recorded for June saw a general reduction in HECM volume and commensurate performance drops among specific lenders and regions, it was surprising to see the trends observed in June effectively inverted in July’s figures. This is according to John Lunde, president of RMI.
“Last month had larger lenders and regions generally doing poorly, while this month that was flipped,” Lunde told RMD. “It could be just timing with endorsements and probably balances out if we average the two months so we’ll have to wait to see if there’s anything significant in those movements.”
A major topic of conversation in the reverse mortgage industry recently has settled on the ongoing “boom” of HECM-to-HECM refinance activity providing a major boost to overall industry performance, leading to the possibility of reverse mortgage business not bringing in enough new borrowers. While the indication from the perspective of the data is difficult to parse, there does not seem to be any major diminishing activity on the part of refinances at the moment, Lunde says.
“This first read on volume doesn’t include any sort of breakdown of refis so it’s unknown [what role they played in July],” he said. “But we have yet to see a sign of refis slowing down. If anything, the larger regions growing volume is more likely to indicate continued or even extended refinance activity.”
In terms of regional activity, the Pacific/Hawaii region recorded 1,643 loans in July, nearly 1,000 loans ahead of the second-place region, the Southeast.Caribbean. Meanwhile the Rocky Mountain region gained 8.5% in July to settle at 537 loans, its largest monthly total in over a year and the only tracked region to post volume gains in each of the last two months, RMI described. The gains posted there have the potential to come from the generally lesser-used HECM for Purchase (H4P) program, though right now it’s difficult to tell exactly where the gains came from, Lunde said.
“Digging into that a bit, it’s the Salt Lake City field office (covering Utah) that is showing the most growth, so I’d say that’s the primary driver behind the region’s growth,” he explains. “Through May there hadn’t been a notable increase in H4P for the state, but the state has had strong H4P volume for years so as we get more detailed numbers for June and July it will be interesting to see if that picks up as well or a different source.”
For lenders, Reverse Mortgage Funding (RMF) posted a 62.1% gain to 582 loans, overtaking Finance of America Reverse (FAR) in the rankings to settle at second place under American Advisors Group (AAG). That kind of competition appears to be a bright spot in terms of industry activity, Lunde says.
“It’s a great battle that’s healthy for the industry to see important companies competing to grow,” he said. “It’s great to see the consistent volume levels show stability so individuals and companies can focus on the next leg of growth.”
HMBS issuance, refi burnout likely
While HMBS issuance continued to show strength in the month of July, there could be signs of the current refinance boom slowing down in the months ahead according to Michael McCully, partner at New View Advisors.
“Interest rates for new production HECMs are at or near the minimum expected rate, so refinance burnout should start to occur, all else equal,” McCully told RMD.
Still, the reverse mortgage industry could be headed for a record year on the HMBS issuance front, McCully explained, citing the last time records were broken and the very different state of affairs that defined the industry in terms of its regulatory reality.
“The industry is on pace to break the previous volume record set in 2010, when principal limits were high and no borrower financial assessment safeguards had been established,” he told RMD. “That record may fall this year, as over $7 billion was issued in the first seven months, but it remains to be seen how long the refinancing boom can continue,” New View elaborated in its commentary accompanying the new data.
In terms of what the industry should keep in mind about business in the future, McCully reiterated the general idea that appraisal quality must remain at the forefront of industry concerns in order to adequately maintain demonstrable benefit to borrowers if the rate environment changes.
“The industry will need to stay alert on appraisal quality as the impact of lower rates producing genuine net tangible benefit to borrowers recedes,” McCully said.
In the $1.1 billion of new issuance recorded in July, 106 pools were issued including 43 first-participation CMT pools. Prior to the beginning of 2021, no new CMT pools had been issued in several years due to the transition to the LIBOR index.
Recently, FHA allowed recently-allowed exterior-only appraisal provisions to expire in light of the wide availability of vaccinations for the COVID-19 coronavirus, as well as internal government data indicating that use of the exterior-only option for reverse mortgages was being used by appraisers less and less.
Appraisers reached by RMD at the time largely lauded the move as one that can increase appraisal quality, since an exterior-only inspection naturally leaves out important attributes of a property in the examination process.