Written by Darren Stumberger, as originally published in The Reverse Review.

Much like the strong performances seen in the mortgage and securitized product markets, HECM MBS spreads have continued to tighten, with fixed-rate HMBS tightening dramatically into higher prices as we move into mid-September. New Issue, fixed-rate HMBS have retraced a good amount of the early summer widening and are back to high 80s for corporate settle swaps. Par-priced floaters have grinded tighter to the high 40s/low 50s discount margin context with interest-only spreads trading very well.

Investor appetite has remained strong and balanced across fixed and floating HMBS

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and HECM Real Estate Mortgage Investment Conduit classes. Volumes have recently picked up with August HMBS issuance at $700 million. Urban Financial Group led the pack with 32 percent of the market share and Reverse Mortgage Solutions trailed at 28 percent. There were only two Collateralized Mortgage Obligations done in August with Knight Capital Group and Bank of America Merrill Lynch bringing $132 million and $89 million in transactions respectively. I expect originations to continue to uptick into the fall and the deal calendar to remain robust as new structures come to market by the dealer community. I also expect some of the newly minted HMBS issuers to come to market with their initial HMBS securitizations.

Speeds
Prepayment speeds on both fixed-rate and floating-rate HMBS have continued to be slower than the HECM Prepayment Curve (HPC). We are beginning to observe a slight uptick in the speeds of the 2009 vintage, primarily due to 98 percent buyouts. The buyout-adjusted speeds on this paper are amazingly slow, creating a neat cash flow profile that is attractive to investors. Barring any changes to the HECM program (interest rate floor change, principal limit factor adjustment, etc.), we expect bonds within the HMBS universe to continue paying slow in the months ahead.

I mentioned earlier in the year that there would be more monetary accommodation from the Fed in the fall, and today the Fed announced QE3, which will support the mortgage basis and HMBS spreads in the near term. However, as the election and fiscal cliff draw closer, one can expect treasuries to rally given the uncertainty that may cap mortgage outperformance but keep premiums elevated.