Industry analysts have long described that the industry was moving to the other side of a reverse mortgage refinance boom, and it appears that the end is here.
Home Equity Conversion Mortgage (HECM) endorsements fell in July 2022 by 17% to 4,928 loans, the first time the monthly total has fallen below 5,000 loans since November, 2021. This is according to data compiled by Reverse Market Insight (RMI). While both March and April featured historic production of over 6,000 loans — a threshold that would’ve seemed highly unlikely just a couple of years ago — the dissipation of the HECM-to-HECM refinance boom has brought with it a reduced level of overall industry activity.
The production of new HECM-backed securities (HMBS) in July reached $1.2 billion, a drop from the $1.3 billion in HMBS issuance seen the prior month. July marked the 17th month after the London Interbank Offered Rate (LIBOR) “era.” As previously stated, a total of $13.2 billion in HMBS issued in 2021 easily overtook the previous industry record of $10.8 billion set in 2010, according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.
All regions, nearly all major lenders see reductions
While the reverse mortgage industry managed to grow its endorsement count between May and June in a direction counter to the headwinds facing the broader mortgage business, July is the month that more of those headwinds began to catch up. Eight of the 10 geographic regions tracked by RMI were down compared to June, with the remaining two — the Southwest and New York/New Jersey — managing to remain unchanged compared to the prior month.
Nine of the top 10 lenders also saw volume reductions in July, with Mahwah, N.J.-based Longbridge Financial remaining the only top 10 lender to grow its volume compared to the prior month from 484 loans in June to 632 in July, a rise of 30.6%. Losses seen among the top 10 were generally modest all things considered outside a couple of examples.
Other lenders outside of the top 10 were singled out by RMI for performance gains in July, with Primary Residential Mortgage, Inc. (PRMI) rising 3,000% compared to their figures over the first seven months of 2021, while Midwest Equity Mortgage hit the rank of no. 36 with a 1,675% rise.
When asked if the data trend should be a concern for the industry, RMI President John Lunde said that focus should be on how new borrowers are tracking as opposed to a drop in refis, which has been expected for a while.
“For me, the part that is more important is that non-refi case numbers issued dropped roughly ~1,000 in June, which suggests weakness beyond H2H from the higher expected rates,” he says. “While that makes sense in some ways, it’s also likely partially the result of pricing volatility we’ve seen the past few months, which hurts what should otherwise be very favorable conditions for new reverse customers (high home prices and high inflation).”
The industry should likely be looking ahead toward the whittling down of refi volume in the near future, he explains.
“From an endorsement perspective, I think we’ll see the new, lower level of H2H refis flow through [the metrics] in the next 2-3 months,” he explains. “Hopefully we get more new reverse and purchase volumes as well, but that can be a longer cycle time to see results.”
When asked about the performance of the top 10 lenders for the month, Lunde said that technical changes at the lenders themselves likely account for some fluctuations, but the next few months will be telling in terms of how well the major lenders are weathering the change in refi-focused business.
In that same vein, reverse mortgage companies would be well-suited to shift their primary focus to generating new customers if they haven’t already, he says.
“[I]f a reverse company hasn’t shifted focus from refis to new reverse customers at this point then they have to expect dramatically reduced volumes,” he says. “We do hear a lot of interest in new ways to approach forward customers with reverse scenarios, which makes a ton of sense given that the refi bust on the forward side makes originators there much more receptive than when they’re busily closing new loans for all their past clients.”
HMBS issuance falls but remains on track for year-end record
While HMBS issuance has now seen three consecutive months of losses, that has not diminished the track that the market is on for another record-breaking year, according to New View Advisors. This is also largely due to the reduction in refinance volume, similarly to the attributes driving the fall in endorsements.
When asked about this, New View Partner Michael McCully reiterated long-standing guidance for the industry to pivot once again to new customers.
“The takeaway [for the industry] should be that refinance volume is slowing and there needs to be a dedicated re-focus on new, first-time borrowers,” he tells RMD. “A slowing of H2H refis likely accounts for the drop in July issuance.”
The strength of the market is a ways off highs observed last year, and broader economic factors including the effects of the Federal Reserve’s recent meeting will likely impact the securities side of the reverse mortgage business, he says.
“The HMBS market is still well off its 2021 highs as spreads have widened since the beginning of the year, lowering capital markets execution for HMBS issuers,” McCully said. “Rising rates reduce [principal limit factors] for HECMs, all else equal. Lower proceeds to borrowers will put downward pressure on origination volume and industry profitability.”