"Reverse mortgages are primed for massive growth"

The long running television show that I watched in re-runs as kid showed a successful middle class world where all problems could be solved in thirty minutes and the future always looked bright. Well, it has been over forty years since the last episode was filmed and most, if not all, of the original viewers including the real Theodore “Beaver” Cleaver are now old enough to qualify for a HECM loan.

The late 1950’s world and the expectations these people had were likely quite different than the economic situation they may find themselves in today. Reread the title of this piece and you will understand the driving reason coupled with a graying population as to why reverse mortgages are primed for massive world growth. The Leave it to Beaver world is dead and we are now fully into The Five Phases of Market Growth.

The Five Phases of Growth

Accounts often ask how I see this market developing. In the past, clients who asked this question were often trapped in a conference room with me and were then forced to endure a rambling dissertation meandering between past and future potential. I have now put my thoughts down on paper in order to increase future listeners’ attention span and solidify my own coherency.

1. In the Beginning

Eighteen years after the FHA HECM program began, we witnessed the first issuance and sale of a HMBS security. For the next few years, HMBS pools traded primarily as a one-off asset crossing through broker-dealer agency CMO desks and placed with a handful of very large investors. The accounts buying this paper were already familiar with the product from doing the analytical work on reverse mortgages when the product traded exclusively as non-agency whole loan deals prior to 2007.

Over the next two years, a few more investors entered the market and a few more broker-dealers occasionally placed paper but there was little push to develop the market into anything more than an esoteric side trade for most players.

2. The Future is Now

As 2010 approached, Wall Street broker-dealers began setting up dedicated reverse mortgage trading desks. This caused a fundamental change in the market growth and velocity. No longer were these dedicated desks satisfied with doing an occasional trade but now had to go out and build the market in order to justify their existence.

Many of the original buy-side investors who supported the market began stepping back as the year wore on. While they had all acquired paper at very wide relative spreads, the pickup in investor demand many had anticipated did not meet their expectations. This fueled the need for broker-dealers to bring in more investors by telling the HECM story to an even wider audience as liquidity tended to be very choppy.

Overtime, an increased number of relatively smaller investors began looking into and buying the asset. This included hedge funds, credit unions, banks, insurance companies and all sizes of money managers.

3. Liquidity

The markets have just begun to evolve towards the liquidity phase. I view this as the most important stage as it will be when HECMs lose the novel asset class moniker and become a core account holding. This phase will be defined by a very high degree of liquidity and anticipate the following events will occur:

Perceptions that there are extreme liquidity issues between HECM pools and HECM CMOs will no longer exist. Secondary trading and bid lists will be a very frequent occurrence and dealer HECM inventories will also be available. Domestic players will range in all sizes which will drive in the pricing differential between large and small pools. We will also have a handful of large foreign money managers regularly trading paper.

HECMs will be viewed and traded thru a relative value frame work. CRA, SBA, CMO, GNMA project loan, and agency debenture buyers will traffic regularly in the HECM world. Rarely will HECM markets be affected by technical trading issues confined exclusively to reverse mortgages. Additionally, like all other capital debt markets, there will be annual conferences where originators, dealers and investors will be in regular attendance.

4. Globalization

This period will mark the change from primarily a domestically traded asset to a global investment vehicle. Strong participation from multiple European and Asian accounts will become a regular occurrence. We will also witness multiple US based broker-dealers trading in foreign country originated reverse mortgages. Initially trades may be done as whole loan transactions but a securitization market will inevitably develop along the lines of the US HECM market.

5. Standard Practice

It will be hard to imagine they were ever considered a niche product as reverse mortgages will trade all over the world. Relative value pricing will float somewhere between agency debentures and well structured GNMA CMOs. Bid-ask spreads will have decreased tremendously and structural creativity and pool customization will become standard practice.

Jeff Traister is the Managing Director for the Mortgage Securities Group at Cantor Fitzgerald, a global financial services firm and capital markets investment bank.

 

Disclosures

The information contained herein is based on sources that we believe to be reliable, but Cantor Fitzgerald & Co. and its affiliate companies (collectively “Cantor Fitzgerald”) do not warrant its completeness or accuracy. It is not to be considered as an offer to sell or solicitation of an offer to buy the securities or other products discussed herein. Any commentary contained herein was prepared by trading desk personnel. Trading desk personnel responsible for this information receive compensation based upon, among other things, the overall profitability of Cantor Fitzgerald, including profits derived from proprietary trading activities. This is not a research report and the commentary contained herein should not be considered to be research. The views of trading desk personnel may differ from the view of research personnel. All prices, yields and opinions expressed are subject to change without notice. Cantor Fitzgerald may have a position in the securities or other products discussed herein (or options with respect thereto), and may sell to and/or purchase from customers on a principal basis or as agent for another person. In addition, Cantor Fitzgerald may have acted as an underwriter of such securities or other products, and may currently be providing investment banking services to the issuers of such securities or products. The information herein may contain general, summary discussions of certain business, tax, regulatory, accounting and/or legal issues. Any such discussion is necessarily generic and may not be applicable to, or complete for, any particular recipient’s specific facts and circumstances. Cantor Fitzgerald is not offering and does not purport to offer business, tax, regulatory, accounting or legal advice and this information should not be relied upon as such. Prior to entering any proposed transaction, recipients should determine, in consultation with their own business, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the business, legal, tax, regulatory and accounting characteristics and consequences, of the transaction. Cantor Fitzgerald disclaims any and all liability relating to this information.

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