Reverse mortgage industry activity in June was relatively strong in isolation when directly compared to the prior month, but signs are beginning to accelerate regarding a potentially rocky path the industry may be on in the months ahead.
Home Equity Conversion Mortgage (HECM) endorsements rose in June 2022 by 2.7% to 5,937 loans, breaking a streak of two consecutive monthly volume reductions as the figure remains high by recent historical standards. 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 — higher rates appear to have driven industry activity below that threshold, but the June spike almost took volume to that threshold again.
The production of new HECM-backed securities (HMBS) in May reached $1.3 billion, a drop from the $1.45 billion in HMBS issuance seen the prior month. June marked the 16th 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.
HECM endorsements rise, though potential issues emerge
The rise in volume observed in June ran counter to the headwinds facing the mortgage industry broadly in light of rapidly-rising 10-year treasury rates, according to RMI.
In the geographic breakdown, three of the 10 tracked regions showed gains compared to the prior month: the Mid-Atlantic region jumped 17.3% to 244 loans; the Southeast/Caribbean recorded an increase of 8.8% to 1,124 loans; and the Pacific/Hawaii region rose 7.5% to 2,194 loans.
Four of the top 10 lenders also managed to record volume increases for the month: Finance of America Reverse (FAR) increased volume by 7.3% to 698 loans; Mutual of Omaha Mortgage grew 7.9% to 575 loans marking a new company record; Longbridge spiked by 54.6% to 484 loans; and HighTechLending grew 18.4% to 103 loans.
Also released was FHA’s May production report, which detailed that HECM-to-HECM (H2H) refinance case numbers decline between March and May by 56.3%, potentially indicating that the oft-discussed H2H “refi boom” may be diminishing in light of realities being observed in the broader U.S. economy.
When asked the inevitable question about the refi boom, RMI director of client relations Jon McCue was more sure of the outcome now.
“It is funny, every month [RMD asks] me if the ‘refi boom’ is over or not, and until now I have always said we’d have to wait for the numbers to come out to support this,” McCue said. “Well the numbers are out, and the same May FHA report showed a drop of -56.3% in H2H case numbers issued from March to May, so yeah I think I can finally call it over.”
While not yet supported by hard data, the drop in “new” customers could be attributable to a pickup in proprietary volume based on anecdotal information, according to McCue.
During that same period, an FHA breakout of new reverse mortgage borrowers — those who neither count as refis nor purchase loans — was reduced by 21.8% in the same period. This could mean that HECM volume could show signs of decline in the “near term,” according to RMI.
However, the headwinds need to be properly contextualized according to McCue.
“You can’t quite equate these numbers exactly to the ‘headwinds’ mentioned in our newsletter because other than the 10-year CMT, the others are just case number assignments from the May edition of FHA’s Production Report,” he says. “This means, however, that we expect to see a pretty dramatic drop in HECM volume in the next month or so.”
When asked about what the new data could mean for the trajectory of the business, McCue related the hope that the industry will prioritize new borrowers.
“People need to get back at finding those ‘new’ reverse clients,” he said. “There are millions of age-eligible households that can both qualify and benefit from this type of loan given the losses in retirement accounts as well as the basic necessities going through the roof in price. I’ve even heard recently that H4P is starting to see a slight pick up, and as inventory grows and prices settle down a bit I think this segment is prime to grow again as well.”
HMBS issuance slows but remains on track for 2022 record
In terms of HMBS issuance, the recorded drop from May’s $1.45 billion to June’s $1.3 billion is indicative of diminishing refi volume, according to New View Advisors. Just as it was in May, while June issuance is reduced the trajectory toward a new record being broken for 2022 remains on the table.
“HMBS issuance totaled $13.2 billion for 2021, smashing the previous record set in 2010,” New View wrote in its June HMBS issuance report. “With only six months in the books and over $8 billion issued, HMBS is still on pace to set another new record in 2022.”
Last month, New View Partner Michael McCully related that while the record is still on track to be broken, the overall indication of whether or not that will actually happen should become clearer in the third quarter of the year.
“The industry would have to issue less than $4.7 billion for the remainder of the year to miss another annual issuance record,” McCully told RMD after the release of the June data.
When asked about what the industry should remain focused on in the weeks and months ahead, McCully said that new borrowers must remain the top priority.
“Without refi volume and sourcing new borrowers, overall issuance could decline by more than 50% in the coming months,” McCully said.
In terms of comparison, performance this year industry-wide will be challenged when looking directly at 2020 and 2021, McCully told RMD in June. That challenge strikes the forward and reverse mortgage businesses indiscriminately.
“Rising rates will put downward pressure on earnings, forward and reverse,” he explained in June. “It will be very difficult to replicate the perfect lending conditions that existed during the second half of 2020 and 2021, even with the pandemic.”