‘Might Flowers’ for Reverse Mortgage Quantity, Securities Issuance Whereas Refis Stay Excessive
In May, Home Equity Conversion Mortgage (HECM) approvals rose 3.9% to 4,350 loans. It’s another month of over 4,000 loans, a notable increase from the very slight decline in volume in April. HECM volume declined in the final months of 2020 leading up to December, according to Reverse Market Insight (RMI) data.
In addition, new Home Equity Conversion Mortgage (HECM) backed securities (HMBS) production saw just over $ 1 billion in HMBS issues in the third month of the post-London Interbank Offered Rate (LIBOR) era . In total, HMBS issues totaled $ 10.6 billion in 2020, which is a recent industry high of $ 10.5 billion, according to Ginnie Mae publicly available data and private sources compiled by New View Advisors dwarfed in 2017.
Both metrics continue to show steady state health for the general industry, but the overall industry empowerment from refinancing volume remains a problem for refinancing business growth, according to analysts asked for comment on the new data from RMD.
HECM Endorsement Volume: Territories Go Up, Big Lenders Go Down, and Refis Go On
Of the 10 national regions surveyed by the RMI based on data from public sources and its own in-house analysis and measurement tools, six had higher volumes in May, while these six were also the top 6 of 7 regions for the year are far. The Central Atlantic region led the way in terms of percentage increases (up 24.5% to 239 loans); followed by the Northwest / Alaska region (up 16.7% to 496 loans) and Southwest (up 15.5% to 394 loans), which itself posted a 12-month high according to the RMI.
However, major lenders’ performance for the month was far more mixed with only three of the top 10 posting gains from their April totals. American Advisors Group (AAG), the industry leader, held a sovereign lead with a 32.4% increase to 1,650 loans, a new 12-month high for the lender and more than four times the volume of its closest competitor RMI fixed.
HighTechLending, on the other hand, rose 16.2% to 86 loans, while Advisors Mortgage Group rose 10.5% to 63 loans. Every other top 10 lender saw cuts, albeit relatively minor ones, for the month.
While the refinancing volumes for the month of May are not yet clear, there is little reason to believe that the previously seen refinancing volume figures, which account for up to 40% of the endorsement volume, changed last month, according to John Lunde, president have from RMI.
“It is fair to say that refinancing has been driving volume lately, over 40% in 40% in both March and April [HECM-to-HECM] refis, ”he told RMD in an email. “We don’t have such detailed May data yet, but I see no reason why that would have changed.”
Lunde assumed that the regional volume growth will be carried by the refi volume, since the largest pools of available loans for refinancing are in the highest-volume markets. It’s just no secret where much of the industry’s additional volume is coming from right now, he said.
“This is the most refinancing-intensive year for reverse mortgages ever,” he said. “It seems we are on our way to pushing the boundaries of this niche in a way that has never been seen before. Will we run out of credit to refinance before the seasonal restrictions expire? Will investors stop paying premiums on loans that have so much higher prepayment expectations than they did a few months or a year ago? Will regulators decide that further restrictions are necessary? Will interest rates and home prices no longer stimulate the fundamental forces behind refinancing? “
The associated rhetorical questions about the so-called “refi boom” are likely to continue, provided that no other development takes place with an influx of new borrowers.
However, New View Advisors’ HECM Endorsement Analytics report notes that a six-month period of over 4,000 units monthly volume has not been seen in the industry since the Mortgagee Letter (ML) 2017-12 was published in late August 2017 and announced disruptive changes, including reducing Principal Limit Factors (PLFs).
HMBS issue: ‘May Flowers’ in another strong issuing month
New HMBS production remains strong in what is now the third month of the “era” after the reverse mortgage industry moved away from the London Interbank Offered Rate (LIBOR) index and currently the Constant Maturity Treasury (CMT) index while a more permanent solution – probably the Secured Overnight Financing Rate (SOFR) – is codified.
In May, 105 pools were issued, including 45 CMT pools for first participation. New, original loan pools production totaled $ 862 million for the month.
While the existing funding volume is recognized, the strength of HMBS issues remains strong and bodes well for the industry as a whole, according to Michael McCully, partner at New View Advisors.
“HMBS issues remain a great metric for industry health as they incorporate new, experienced and ongoing issues and have strong liquidity,” McCully said in an email to RMD. “Although 40% of new issues are H2H refis, the overall HMBS volume figures remain encouraging.”
The production of new, original credit pools in May is slightly below the numbers seen in April, but is still higher than any other month of the year except April. It is too early to point to a trend on that side of things, McCully said, and it is also difficult to predict whether or not an impending transition to SOFR will have an impact on investor confidence.
“HMBS volume will fluctuate from month to month,” said McCully. “The steady increase in volume since the rate cuts in 2020 is the trend that we will follow. […] There are too many variables to predict market behavior prior to the introduction of SOFR. “
Ultimately, however, the credit environment is conducive to a productive phase for the reverse mortgage industry, McCully said.
“We are in an excellent credit environment,” said McCully. “Defaults have decreased significantly (thanks largely to financial valuation and other program enhancements at HUD), interest rates remain near all-time lows, and home price appreciation is skyrocketing. The more difficult question to answer is: ‘Why is the origination volume not significantly higher?’ “
Read the HECM Lenders Report at RMI and the HECM Endorsement Analytics Report and HMBS Issuance Report (h / t for “May Flowers”) at New View Advisors. You can also listen to the latest episode of The RMD Podcast, which featured RMI’s John Lunde as a special guest for additional context on the current funding volume.