The changes that have been handed down to the Home Equity Conversion Mortgage (HECM) program by the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), the Government National Mortgage Association (GNMA, or “Ginnie Mae”) and others have resulted in a flurry of major alterations that the reverse mortgage industry has had to adjust to.
However, these changes can likely be seen as a “net positive” for the industry considering the impacts that much of the changes over the past few years have had on investor confidence in the reverse mortgage product category, as well as the overall improvement in client perceptions of reverse mortgages as these changes have taken greater hold on the policies and practices of the wider industry.
This is according to Timothy Isgro, chief investment officer of Reverse Mortgage Investment Trust (RMIT), the parent company of top-10 lender Reverse Mortgage Funding (RMF), who offered his perspective on the health of the business and investment activities taking place within at at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Policy Conference in April.
Industry changes which have been ‘net positive’
Speaking with RMF National Sales Leader in Wholesale and Correspondent Lending Mark O’Neil, Isgro was first asked about whether or not the abundance of industry changes seen over the past several years have been good or bad for the reverse mortgage industry, and for its investors. Overall, the changes have been generally positive, but that also needs to be balanced with the perspective that some changes were not beneficial, Isgro says.
“I think you have to admit that policy changes have both helped the space, as far as the institutional investor goes, and hindered the space a little bit,” he says. “On balance, I think it’s a net positive because if you look back at the policy changes since 2013 with the Reverse Mortgage Stabilization Act, that act is a very simple act, and it gave the secretary of HUD the power to make changes to the HECM program by Mortgagee Letter, of course.”
That ended up being a simple but still demonstrable change in the way the business of the HECM program was conducted, and the use of that power by subsequent HUD secretaries has been illustrative of the priorities that the government has in managing the HECM program.
“That was important, because it ushered in this period of pretty rapid development and change for the program,” Isgro explains. “Largely, the secretary has used those powers to reduce the risk on newly-issued HECM loans. So, things like limiting borrower upfront draws to 60% of principal limit outside of extenuating circumstances, enacting financial assessment rules, effectively underwriting for the space [was] of course, dramatic, and we’d all agree is a good change.”
Also proving to be a meaningful change both in the past and recently was the introduction of new rules governing non-borrowing spouse (NBS) protections, which have been largely praised by lenders and servicers whenever an effort is made on the part of the government to insulate such situated stakeholders from an adverse event including acceleration to a loan’s due-and-payable status.
“Those changes – and reducing the risk of the newly-issued HECM loans – those have had an enormous impact on reducing the stigma that the space suffered from in the past. And that, in turn, enables a new institutional investor with the confidence to go to an investment committee at a large investment firm and pitch reverse mortgages [to them].”
How some industry changes have hindered the reverse mortgage business
When it comes to some potentially negative impacts on the industry that have stemmed from reverse mortgage policy guidance, many times it can come down to the speed with which it’s rolled out, and whether or not either stakeholders and/or the government fully comprehend what the effect is going to be, particularly for investors, Isgro explains.
“On the negative side, I think you have to acknowledge the fact that the policy changes, in some cases could have been more thoughtfully rolled out,” he says. “Constant [or] surprise changes make it difficult for investors to have the confidence that their investment theses will remain constant, will still play out, and will hold in a few years or even 12 or 24 months from now. You don’t have to look very far just to come up with some examples of where HUD could’ve done a little bit better [in this regard].”
In citing a key example for his point, Isgro mentions the introduction and subsequent consolidation of the “HECM Standard” and “HECM Saver” reverse mortgage options, which can have a negative impact on the attitudes investors maintain about reverse mortgages, he says.
“You have [HECM] Saver and Standard programs being introduced and then retired, changes to the principal limit factors, which are generally becom[ing] more conservative,” he adds, citing late 2017 changes to reverse mortgage PLFs. “And those disrupt investor forecasts of prepayment speeds, which are the biggest concern for investors in HECM-backed Securities (HMBS), and even proprietary products.”
It’s also difficult to ignore the disruption that comes with changes to the reverse mortgage’s foundational rate index, with a Mortgagee Letter announcing earlier this year that the London Interbank Offered Rate (LIBOR) would be retired as the index for adjustable-rate HECMs in favor of the Secured Overnight Financing Rate (SOFR). While disruptive, however, SOFR stands as the stated preference of the reverse mortgage industry.
“More recently, of course, the announcement by Ginnie Mae that it would cease acceptance of new LIBOR loans and securities [factors in],” he says. “Each of those surprises hurts investor confidence. But, I think if you look back on balance, the major changes that increased the lower risk on new products, you have to [acknowledge that] those were a net positive for the space.”
The state of investor confidence
In terms of where investor confidence currently stands for reverse mortgages, Isgro believes that even with the amount and pace of changes that have been handed down, there is general positivity present in the marketplace about the potential for the reverse mortgage category in both the FHA-sponsored and proprietary products. When Mark O’Neil remarked about his relief that investors have not been “scared off” of the category, Isgro made his feelings on the matter clear.
“No, on the contrary, I think there’s more investors in the space than ever before,” he explains. “The HMBS space has deepened, but I think more than that, the private-label securitization space has deepened, too. [That] space has grown from nothing in 2013 or 2014, to now dozens or maybe even 100 different investors who invest not in Ginnie Mae-guaranteed securities, [but] private-label-issued securities.”
Both panelists agreed that such a development makes for encouraging news for reverse mortgages.