Written by Mark Acchione, as originally published in The Reverse Review.

I recently stumbled upon some old data tapes on my desktop. They were loaded with CMT HECM offerings. The tapes triggered memories of the not-so-good old days. I’m referring to the days when the sole HECM takeout was Fannie Mae. Don’t get me wrong—I’m thankful for the old girl. Fannie provided a much-needed backstop to an industry that lost its private market in a matter of hours as banks and investment firms imploded overnight. While I riffled through my files, from 2008 to my most recent set of transactions, I was reminded how truly resilient this industry and market really is.

In the beginning there was Goldman Sachs. Sachs put together the first GNMA HMBS pool, which consisted solely of low margin CMTs. The deal couldn’t

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be sold, so they collapsed it and sold the whole loans to Fannie Mae. There were pools that later traded with success, but in reality, the secondary markets only began to take notice in 2008 with the introduction of the LIBOR and fixed options. Lenders initially offered a margin stack that ranged from .65-.85 percent with the .85 percent trading at a healthy 4 handle. In mid-2008 (the not-so-good old days I mentioned earlier), capital markets all but shut down and lenders struggled to find the liquidity needed to clear their warehouse lines. Some were stuck holding production on their balance sheets while others sold off pools below par. The market turned almost entirely to Fannie Mae.

Prior to 2008 Fannie was relatively consistent with pricing and things were looking up for the industry in the short term, despite the lack of a private market. Then, in September 2008, the Fed placed Fannie into conservatorship, demanding that they “shrink their balance sheet” to a reasonable level and transfer some of the mortgage business back into private sector. Fannie reacted by reducing premiums paid on HECMs across the board in an attempt to spark the private market. At one point it would have taken a 4 percent margin to earn 103.5 on the back end. I remember +/- 2.50

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percent margins trading near par as Fannie approached their exit in mid-2009.

In my opinion, the Fannie announcement couldn’t have come at a better time. While Fannie planned its exit, the private market was creeping back in, providing a strong bid on H-REMIC (LIBOR), coupled with a growing interest in the fixed HECM, the latest addition to a very limited product lineup. Once again, the industry withstood a major hit and marched forward.

The most damage to date came on October 1, 2009, the day PLF factors were reduced across the board. With the exception of the changeover from CMT to LIBOR, this was the first material change the HECM program had experienced since its inception. With a flick of HUD’s pen, endorsements declined dramatically from 111,924 in CY2009 to 72,748 in CY2010, a 35 percent year-over-year drop in overall endorsements. A second round of PLF cuts followed in 2010, though they were far less impactful as they coincided with a drop in the PLF floor, from 5.5 to 5 percent.

In four short years we experienced a temporary shutdown in capital markets, the loss of the product’s sole investor, two rounds of principal limit factor cuts, a big bank exodus and a constant stream of erroneous negative press. Yet we soldier on. In fact, as I am writing this, the demand for HMBS on Wall Street is at its peak. Dealers claim there is an abundance of reverse inquiry for bonds. The axe for the product is growing and N-spreads are at an all-time low. Unfortunately, with less than 55,000 endorsements YTD2012, the demand far outweighs the supply, which

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frustrates investors.

Nonetheless, with the ever-growing number of baby boomers turning 62 and a still relatively untapped market given the low penetration rate, we have extraordinary potential to substantially increase the supply we offer to Wall Street. A healthy balance of supply versus demand is vital to maintaining consistent markets and flowing liquidity.

As we tread into a new year, regardless of the changes looming on the horizon, I’m confident that the industry will act as it has in the past: poised and prepared to grow, whatever the outcome.