An annual actuarial review of the Mutual Mortgage Insurance (MMI) Fund’s finances for the Home Equity Conversion Mortgage (HECM) book of business includes updated data on the use of HECM loans by borrowers, as well as a longer perspective on emerging trends related to the product’s use by borrowers. This is according to the report on the HECM program conducted by actuarial firm Pinnacle Actuarial Resources, released on Monday alongside FHA’s Annual Report to Congress.
While some of the longstanding trends from the HECM program in recent years have remained either unchanged or featured only moderate movement in fiscal year (FY) 2021, events over the past year have caused a degree of sharp movements on other trends as it relates to HECM-to-HECM refinance activity, the HECM program’s active rate index and moderate changes to the market penetration of the HECM for Purchase (H4P) program.
Key elements of data related to product usage were also predicted by industry analysts earlier this year, and RMD has begun reaching out to industry leaders and stakeholders for reaction to the latest MMI report and its implications for the business in 2022.
Loan types, rate index
One very stable, though accelerating trend in the industry concerns the type of HECM loan most commonly used by borrowers. In data analyzing the types of payment plans most frequently used by borrowers, the line of credit (LOC) option remains the far-and-away favorite, with over 96% utilization in FY 2021.
“The majority of HECM borrowers select the line of credit option,” the report reads. “This option has accounted for over 90% of the endorsements since Fiscal Year 2009, and has been increasing since 2017.”
In 2017, LOC utilization stood at 93.6%. In the highlighted period, the lowest usage rate that the LOC option ever received was 91.9% in FY 2009, according to the report. The tenure payment option stood at only 0.4% in FY 2021, unchanged from one year ago.
In terms of the rate index, Pinnacle has documented the popularity of the London Interbank Offered Rate (LIBOR) index. It provides additional context about the effect of the impending cessation in favor of the Secured Overnight Financing Rate (SOFR) index.
“The LIBOR indexed loans were in the 30 to 40% range for fiscal years 2009 to 2013,” the report reads. “In [FY] 2014, the percentage of LIBOR indexed loans increased to 81%, as the fixed-rate option correspondingly declined in popularity. As of [FY] 2020, this percentage had increased to over 98%. Monthly adjustable LIBOR loans were more popular in [FY] 2014 and 2015; however, in [FY] 2016 – 2021, the annually adjustable LIBOR loans were significantly more popular.”
This was partially due to HUD limiting the insurability of fixed interest rate mortgages under the HECM program to mortgages with the single-disbursement lump sum payment option in 2014, the report says. Additionally, while LIBOR was the dominant rate index as recently as last year, the turbulent journey toward its cessation has severely undercut its use for annual adjustable-rate mortgages (ARMs) in FY 2021.
“Beginning in 2021, the LIBOR rate has [been] discontinued,” the report says. “As a result, the SOFR will replace the LIBOR as an option for an index for adjustable mortgages. As a result, the percentage of loans using the LIBOR index has decreased to just over 30%.”
Product type, H4P use moves down
Reverse mortgages are far and away more commonly used by borrowers on existing homes compared with the usage of a HECM for Purchase (H4P) transaction, as has been the case for years. However, codifying trends observed by industry analysts earlier this year, the actuarial report reveals that H4P use trended downward in FY 2021 even despite the increased volume and an overall healthier HECM book of business.
“[T]hese HECM for Purchase loans have been a small percentage of HECM endorsements each year [since FY 2009],” the report reads. “The distribution of HECMs for Purchase loans increased slowly from 2009 – 2019, but decreased in [FY] 2020 and 2021. In our analysis, the traditional and for-purchase HECMs are treated the same, as the volume of for-purchase HECMs is small.”
According to the data shared in the report, H4P usage in FY 2021 stood at only 4.45% of the total share of volume. When looking at H4P market penetration earlier this year, a sizable drop from the already low 5.9% figure occurred in FY 2020 but remained reasonably well in line with industry analysts’ projections compiled by Reverse Market Insight and shared with RMD this past summer.
According to that RMI data, in 2019 there were 2,305 H4P endorsements in a year, with 34,420 overall HECM endorsements leading to an H4P penetration rate of 6.7% (slightly lower than Pinnacle’s figure for FY 2019 of 7.34%).
The following year in 2020, when the reverse mortgage industry saw a notable uptick in general interest during the onset of the COVID-19 coronavirus pandemic, the overall HECM endorsement count increased by roughly 10,000 loans but only saw a marginal increase in the rate of H4P endorsements. Out of 44,418 HECM endorsements in 2020, 2,493 of them were H4P loans, coming out to a penetration rate of 5.6%, a drop of more than one full percentage point even though the raw numbers were higher.
At the time, RMI President John Lunde attributed the lower uptake of H4P figures as indicative of the trend dominating the reverse mortgage industry related to HECM-to-HECM refinances.
“The industry is clearly trending downward in terms of H4P share of endorsements,” said John Lunde, president of RMI. “But that’s mainly because other areas of the industry are growing much faster than H4P, especially refinances.”
While slight fluctuations in the full year 2021 data related to H4P are likely, substantive differences will likely elude the product this year. Find the actuarial report at HUD.