Analysts have warned for months that the loss of the Home Equity Conversion Mortgage (HECM)-to-HECM (H2H) refinance boom has necessitated a renewed push toward finding new-to-reverse customers, with H2H totals sitting at or over 50% of industry volume for several months on end. Now, with a pronounced drop, the nail appears to have been driven into the refi boom’s proverbial coffin.
HECM endorsements fell sharply in September 2022 by 43.5% to 3,235 loans, dropping under 4,000 loans for the first time since November 2020 and to a level not seen since the original onset of the COVID-19 coronavirus pandemic in April 2020. This is according to data compiled by Reverse Market Insight (RMI).
Meanwhile, the production of new HECM-backed securities (HMBS) in September fell to $966 million, a drop from the $988 million in HMBS issuance seen the prior month. September marked the 19th month after the London Interbank Offered Rate (LIBOR) “era.” Issuance is still on track, however, to outpace the total figure seen in 2021 according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.
HECM endorsements drop off
Neither the top 10 reverse mortgage lenders nor any of the tracked geographic regions of the country were spared from a drop in reverse mortgage business activity, though the drops varied in severity according to the data.
Industry leader American Advisors Group (AAG)’s August volume was effectively halved in September when compared to the prior month, and the drop for Finance of America Reverse (FAR) was similar. Longbridge Financial’s volume in September was less than a third of the business it pulled in the prior month, while other top 10 lenders recorded less severe drops.
The best performing top 10 lenders for the month — i.e. the ones that had the least severe drops — were Mutual of Omaha Mortgage and Open Mortgage, respectively. Mutual of Omaha saw a drop of 7.3%, while Open Mortgage recorded an 18.5% drop. All other top 10 lenders recorded drops in volume of 20% or more.
“I’m expecting that refis account for most of the drop, but will be very interested to see how much new to reverse dropped once those numbers come out later next month,” said John Lunde, president of RMI in conversation with RMD.
When asked about what he thinks this development will mean for business through the remainder of the year, Lunde says that this eventuality only helps bolster the argument regarding the need for new-to-reverse borrowers.
“It really underlines that refis are not the place to focus right now, but I continue to see very favorable conditions for new-to-reverse borrowers with the growth in HELOC originations,” he said. “Every age-eligible borrower should be comparing reverse mortgages to HELOCs before signing and that should be the goal of every reverse originator to make that happen.”
Regarding whether or not we’ve seen the bottom of the latest drop, it depends on the timing of recent sales cycles, he explained.
“I see a timing question for originators in harvesting longer sales cycle business like new-to-reverse versus refis,” he said. “If marketing and sales activities pivoted away from reverse mortgages six months ago when it was clear refis were declining, then we should see that backfill soon. But if the pivot was more recent, then more declines could be ahead.”
HMBS issuance also drops, though record is still in sight
The HMBS issuance total of $966 million — $22 million lower than the figure recorded in August — marks a fifth straight month of declines, attributed to higher interest rates continuing to have an impact on the market according to a commentary accompanying data shared by New View Advisors.
Historically speaking the figure is still relatively high, with this marking only the second time in the past 18 months that HMBS issuance fell under $1 billion. With that level having been maintained for a while up through nearly the end of 2022, there is still likely to be an issuance record broken by the end of the year, New View writes.
“With nine months in the books and over $11.6 billion issued, HMBS is still on pace to eclipse 2022’s record $13.2 billion issuance total,” the commentary reads. “However, for the foreseeable future, higher interest rates will challenge the reverse mortgage market, driving down home price appreciation and the Principal Limit Factors that determine how much HECM originators can lend against those likely-falling home values.”
The rate environment is unlikely to change — in a downward direction, at least — and that will likely keep industry activity in this sense from rising too much beyond what has been seen over the past 1-2 months, New View Partner Michael McCully told RMD in September.
“Unless interest rates drop materially, it is unlikely there will be any meaningful pickup in month-to-month issuance volume for the remainder of 2022,” he said.
Recent data from Black Knight reported this week by RMD sister site HousingWire shows that home prices are now posting the biggest monthly declines since January 2009. Elevated home price appreciation levels in late 2020 through the end of 2021 helped propel the HECM book of business inside the Mutual Mortgage Insurance (MMI) Fund to positive territory last year for the first time since 2015.
While home prices are cooling, Federal Housing Administration (FHA) Commissioner Julia Gordon indicated in an interview with RMD that the HECM program was performing well, though did not give any specific indications regarding performance, preferring the FHA Annual Report to speak for itself when it’s released in November.
“HECM performance is still strong,” Gordon told RMD in August. “Of course, we’ll have to wait for November to tell you the results of this year’s Annual Report to Congress. But right now, HECM performance remains strong. I do think there are legitimate questions about combining the forward program and the HECM program inside the MMI Fund.”