The second installment of New View Advisors’ Reverse Mortgage Draw Index features the first release of its Annual Adjustable Draw Index.
The latest Ginnie Mae data for Monthly Adjustable Home Equity Conversion Mortgages (HECMs) show a steady draw rate of 1.92% in October, which is consistent with the 2.12% and 1.93% rates of September and August, respectively, according to a New View Advisors commentary published this week.
Data also show that Annual Adjustable draw rates were 1.89% in October, which New View Advisors noted as being “consistent with and converging” to Monthly Adjustable HECM draw rates.
For Annual Adjustable HECM-mortgage backed securities (HMBS) loans in October (1.89%), the index value is expressed as a monthly draw rate that is calculated by taking the amount of Line of Credit draws taken in any given month, and dividing that by the Total Line of Credit Amount available at the beginning of that month.
New View Advisors notes that the index applies to only to loans with a Line of Credit feature and does not include fixed monthly term or tenure payments.
The Reverse Mortgage Draw Index, which New View Advisors launched in October, is focused specifically on draw behavior to provide an understanding of the underlying characteristics of HECMs and Ginnie Mae HMBS.
Every month, Ginnie Mae releases pool level and loan level data on their HMBS securities and the loans underlying those securities.
“This comprehensive Ginnie Mae data repository enables a greater understanding of the underlying loan characteristics and behavior that drive performance within the reverse mortgage industry,” stated New View Advisors in its commentary. “Prepayment, Default, and Draw behavior are the Big Three of Reverse Mortgage performance indicators.”
For HECM loans securitized into HMBS, New View Advisors estimate that the industry is funding approximately $95 million in line of credit draws each month in the monthly adjustable segment, and about $28 million in the annual adjustable product segment.
For these loans, New View estimates the industry makes about $52 million per month in Mortgage Insurance Premium advances, funds about $10 million Term/Tenure Draws, and urns about $15 million in excess spread.
“This adds up to $200 million, which squares nicely with the issuance of HMBS “Tails,” also running at about $200 million each month,” stated New View Advisors in its commentary. “These Tail HMBS are a crucial component of industry profitability.”
Because the draw rate affects prepayment rates, HMBS Tail issuance and even the frequency and severity of defaults, having an accurate measure of draw rates is essential for all market participants in managing cash flow, forecasting future capital needs and profitability as well as measuring enterprise risk.
Draw rates, which follow the loan life cycle, tend to be higher in the early years of a loan and then decline to a stable plateau as the loan matures, New View Advisors notes.
The overall draw rate jumps materially in month 13, as a result of the HECM program change introduced in FY 2014 that limits the amount of reverse mortgage proceeds borrowers can access upfront during the first year of the loan.
“This explains why 12 month adjustable draw rates are lower but converging with the Monthly Adjustable Loans,” states New View Advisors.
Annual adjustable loans are a relatively new product, with only a handful of these loans seasoned more than two years.
“However, each month a larger and larger number of annually adjustable loans reach the expiration of the restricted draw period,” New View Advisors states. “As a result, the Annual Adjustable loan draw rates are converging with the Monthly Adjustable Rates.”
Read the New View Advisors commentary.
Written by Jason Oliva
