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Reverse Mortgage Capital Markets Stabilizing Post-Coronavirus Shock

Reverse mortgage capital markets were not spared from the economic impact of the COVID-19 coronavirus pandemic shortly after a national emergency was declared in the United States. However, new data on secondary market trading of Home Equity Conversion Mortgage (HECM)-backed securities (HMBS) appears to be showing increasing signs of stability, potentially signaling that additional stability lies ahead.

This is based on a conversation between Longbridge FInancial CEO Chris Mayer and New View Advisors partner Michael McCully in a capital markets webinar hosted and moderated this week by RMD.

Sources of instability

A freezing of capital markets led to changing daily pricing for Home Equity Conversion Mortgage (HECM) loans in the market, and some lenders then scaled back or pulled their proprietary products as a result. When examining the broad sources of much of the instability that has taken place in the capital markets, a spiral of negative projections that come out of the market’s and investors’ general disdain of an uncertain climate was partially to blame, according to Michael McCully.

“When you combine [falling stock prices] with the belief that the virus and the pandemic could cause rapidly rising unemployment, the impact of that on the value of servicing mortgage securities, portfolios and real estate generally  puts more downward pressure on the value of all real estate related assets,” he says. 

When that happens, lenders that finance those funds and other portfolios owning those assets, it forces portfolio holders to raise cash to meet the margin calls they have also had to put out.

“So, it’s a downward cycle,” he says. “And of course, on top of everything else, the markets really don’t like uncertainty.”

On top of those factors, the speed with which this shock has struck the economy, and the nature of a major pandemic hitting the country has also only contributed to the climate of uncertainty and general financial instability. This has only exacerbated the specific effects on the reverse mortgage business, according to Chris Mayer.

“We don’t know how all of this is going to play out,” he says. “We don’t know when borrowers are going to be able to afford to pay, or when people are going to get jobs back, or when government money will get out into the system in time to start to really help things. Enormous numbers of uncertainties are going to start to play out in the weeks and months ahead.”

Why this moment is different

The speed with which this crisis has hit has certainly made this moment unique, but from the perspective of the capital markets and particularly from the perspective of an originating and issuing entity, Longbridge saw multiple dimensions to this situation, Mayer says.

“Probably from a reverse originator perspective, the sharp decline in HMBS [has been a factor],” he says.”Anything that we and other HMBS issuers had on our balance sheet that we had bought had basically collapsed in value. We’re still in a market condition where prices are at least two-and-a-half to three points lower than they were in February.”

This has led to difficulty in setting wholesale prices in the broker and correspondent market, and during the worst parts of the current situation, closed loan purchasers stopped bidding on HMBS pools.

“In the case of one or two pools, we did the same, because we just didn’t know where prices were. So, it was impossible to even set a price level,” Mayer says.

Another challenge has been presented by the proprietary market, where some products have exited the space for the time being. For the companies that have remained, including Longbridge, that has made it difficult to manage what the proprietary market has been doing.

More stability appears to be coming

Key issues in the near-term that will affect capital market stability, as is usually the case, is pricing and liquidity, McCully says.

“HMBS issuers also have on their balance sheets future tale execution, and to value those portfolios, one must assume future execution for the undrawn tail amounts,” McCully says. “So that has downward pressure on portfolios of HMBS issuers, while pricing is kind of returning to normal. So, that’s kind of a near term impact, too. Iit may resolve itself within a quarter or so.”

Unfortunately, the pandemic also hit at somewhat unfortunate timing right at the end of a quarter, McCully adds. That effect was acute and added to the volatility, but the business appears to be past that.

The Federal Home Loan Mortgage Corporation (“Freddie Mac”) also showed confidence by revising its own outlook of the U.S. housing market higher this week, McCully adds.

“As recently as [Tuesday], Freddie Mac released information that they believe that recovery is going to start in the second half of 2020,” McCully says. “They’re a little unwilling to predict exactly how long it will take for the economy to fully bounce back, but they’ve revised their volume projections. Now again, this is Freddie Mac in the forward business for 2020, to $2.3 trillion which was more than what their projections were back in December 2019. And so, while they see a drop in home sales in 2020, they actually are projecting an increase in home sales in 2021 [overall].”

An open dialogue between the federal government and leadership at the National Reverse Mortgage Lenders Association (NRMLA) has also been instrumental in getting necessary relief to the reverse mortgage industry, both men added.

“FHA has moved incredibly quickly, to respond to problems that have come up, several of which would have basically shut down the industry if FHA hadn’t acted so quickly,” Mayer said. “And Ginnie Mae has just been a stalwart in terms of helping to provide liquidity in the program and indicating their support. So without our regulators and without our banks, those of us who are non-bank operators in the market would have had a lot more problems and we owe a lot to them.”

Short- and long-term impact

While the capital markets for new issuance and tail pools are recovering, some back-end liquidity issues will be slower to recover, McCully says.

“The buyout component of the transactions and some of the financing on some of the assets that are bought out are still in recovery mode,” he says.

Longer term impact is really dependent on the medical side of the equation, both Mayer and McCully said. If those in the reverse mortgage industry return to work at the right time with some precautionary measures still in place in relation to social distancing, there’s a chance that the industry can rebound reasonably quickly if the right pieces fall into place, McCully says.

“I think longer term, this is a product that serves the demographic that’s at risk,” he says. “And I think that if you would take a positive from this, […] equity extraction in general is a very appropriate tool for the senior community and older homeowners in the United States. And I think that once we do get through this, and our world is a little different, that will be one of the big takeaways from this pandemic.”