Home Equity Conversion Mortgage (HECM)-to-HECM (H2H) refinances remained at nearly 50% of total reverse mortgage industry endorsement volume in February 2022, according to the newest HECM Originators report compiled by Reverse Market Insight (RMI). While reaching an all-year high for 2021 in December, January 2022 pushed total reverse mortgage industry volume even higher. While February recorded a slight dip, business levels still remained elevated and volume reached an historic high the following month.
“We can […] say that refis continued at a high level at just over 50% of all endorsements in February – consistent with the past 9 months starting last June in a tight range between 48.6-51.4%,” RMI said in its commentary accompanying the new February data.
HECM-to-HECM refinances composed 45.9% of all HECM loans in 2021, and 50.8% of all loans in the fourth quarter of the year. In Q4 2020, HECM refis made up 35.6% of all endorsements, and in FY 2020 they made up roughly 25% of endorsements based on data found in FHA’s Annual Report to Congress.
Ongoing reverse mortgage refi volume
While it was initially thought that the refi boom observed in 2021 might diminish this year based on higher rates and slower levels of home price appreciation (HPA) in comparison to last year, H2H refi volume has remained largely consistent with the levels seen particularly at the end of 2021.
However, it may be too soon to determine the full impact of rising rates based on how long the data takes to fully digest according to John Lunde, president of RMI.
“I think it’s key to look at the 10-year CMT history here as timing is important,” Lunde explains. “That rate rose to the 1.7-2% range earlier this year, but really didn’t jump closer to 2.5-3% until last month. Given the delay in endorsements from funding, we won’t see the pain from that bigger leap for a few months yet.”
Rates are likely secondary to the levels of HPA that borrowers have been observing, even if HPA in general appears to be slowing in 2022 when compared with last year. However, just because it is slowing does not mean that it has stopped rising.
“Incredible HPA is a huge part of this equation, since it directly adds to borrower funds available,” Lunde says. “That has always been the fundamental appeal of H2H even back to the housing boom in the early 2000s, but the rate sensitivity is more recent since FHA lowered the expected rate floor to 3% from 5% in October 2017 (and before that 5.5%). That creates a compounding effect for H2H in periods where rates are low and/or falling and home prices are rising.”
Signs of slowdown?
While some have speculated that the refi boom will slow down, just because such a prediction has yet to materialize does not mean that it will never happen. Letting certain realities further solidify could be critical to any potential slowdown that could still play out, Lunde says.
“We’re seeing a significant leg of the H2H business under pressure with dramatic jumps in the 10-year rate that I would expect to dampen volumes there somewhat,” Lunde explains. “But as long as HPA remains explosive, it will continue to create opportunities for borrowers to refinance.”
Investor activity is another metric to observe in this scenario, and refinances could make that side of the equation more complicated as time goes on.
“Right now the industry is experiencing lower HECM-backed Securities (HMBS) pricing as investors expect significant future refinance activity, but making it up on volume,” Lunde explains. “If refis start going down and underlying H2H drivers look less favorable, will HMBS pricing go back up as lender volumes are pressured or will the industry pay for refi gains for longer?”
The refinance issue as it stands now remains unsettled, Lunde says. That means the industry should continue to monitor industry metrics to see how the dynamic could settle for the remainder of the year.
“We haven’t seen the end of the refinance story — just the up leg,” Lunde says. “Stay tuned to see where we go from here.”
When March volume saw such a high threshold, RMI’s Jon McCue echoed some of the sentiments expressed by Lunde as it relates to the 10-year CMT rate.
“Our industry has done a fabulous job through the first 3 months of the year with volume, but with the 10-year CMT rate rising, one can assume there may be some turbulence ahead especially for those looking to do H2H,” he explained earlier this month. “Now is a great time to be shifting business models back to new reverse mortgages and H4P as ways to continue to drive volume going forward.”
Reverse mortgage lender strategies, utility for the borrower
Certain lenders have emphasized that 2022 strategies will revolve around capturing refinance volume while seniors can still benefit, but preparing for the creation of new loan production as a priority when refis become less desirable for borrowers and lenders.
“From a consumer perspective, there’s definitely the ability to put more money into the pockets of seniors, which is an absolute positive and I’m ecstatic we can do that,” said Ed Robinson, president and COO of American Advisors Group (AAG) to RMD in February. “[However, there] is direct downward pressure on mortgage servicing rights (MSRs), on margins and gain on sale. What I believe many have missed is the fact that the industry is actually missing a real opportunity to expand new production because of being able to go after the easy refi money if you will. So, it’s with that lens — especially with the lens that we don’t just want to chase easy money — but with the view that rates will indeed rise.”
Because of heightened refinance activity, Wade Pfau added a new section on H2H in the latest edition of his reverse mortgage book. Refinances could have a clear borrower benefit, he told RMD, but that should always remain at the forefront of any refinance decision made by a borrower.
“That was another area I added just because as noted, there’s been so much growth in the refinance option,” Pfau told RMD in March. “The caution is just to make sure that there’s a substantial increase in borrowing capacity through doing that, because there will be costs involved in setting one up. And if you think you may never use that additional principal limit anyway, it may not be worth the need.”