HECM spreads have stayed remarkably resilient over the last several months. Mortgages have widened significantly (15 to 20 LOAS) in recent weeks, driven largely by extension and convexity reasons. New issue fixed-rate Standard HMBS spreads are currently trading at 56 to interpolated swaps, while new issue LIBOR Standard HMBS trades at 40 discount margin (DM).
Par floater DMs have widened 10 to 15, but collateral has held firm. Notably, fixed Saver spreads have tightened considerably from roughly 150 to swaps to 120. LIBOR Saver spreads have tightened a tad to inside of 100 DM. While I don’t expect much tightening for Standard, Saver has room to tighten, but directionally the story remains that new issue HMBS continues to be well bid on Wall Street. Seasoned paper and IOs also remain well bid across vintages. We’ve seen large blocks of IOs and IIOs trade very well along with 2008 thru 2011 fixed Standard pools and blocks of seasoned CMT.
With the springtime surge in fixed Standard, HMBS volumes were just shy of $1 billion in April with three HMBS issuers comprising roughly 80 percent of issuance. Reverse Mortgage Solutions issued $365 million or 37 percent of the market, with Urban Financial Group and Livewell Financial next in line at $220 million (22 percent) and $209 million (21 percent) respectively.
In May, issuance dropped to $840 million with RMS, Urban and Livewell issuing 77 percent of the month’s HMBS. RMS issued $295 million, Urban $215 million and Livewell $147 million. I expect monthly volumes to continue to contract as fixed-rate Standard pipelines run out in earnest in June and the market shifts to 90 to 95 percent LIBOR Standard. Utilization rates are hovering around 75 percent for LIBOR loans, so even without losing any originations on a unit basis, industry dollar volumes will be considerably lower.
Additionally, as expected, we’ve seen the front-loading effect from the origination community, with many getting a high number of borrowers into the fixed Standard before the cut-off. We should expect higher-utilized LIBOR Standard production to dominate origination statistics until financial assessment or utilization testing is rolled out in the fall. (I should say, “if this is rolled out”—at press time H.R. 2167 has not been brought to the House floor yet.)
Away from spreads and volumes, the same basket of hot topics remain, the largest of which is the true sale accounting issue that’s reaching its second anniversary. Based on unofficial, verbal guidance in late summer 2011, the big four accounting firms still will not grant HMBS issuers sale treatment upon the pooling and sale of HMBS to a third party. Talk of this issue has been quiet in recent months, and it’s mainly because the industry is dominated by firms who don’t use big four accounting firms. (How convenient!) We can talk about the important need to get FHA authority to implement underwriting guidelines via mortgagee letters all we want, but without HMBS issuers getting sale accounting treatment upon securitization, the industry is not sustainable in its current form. This must be fixed; it’s a GNMA securitization program and it’s a bit ridiculous that we’re going on year two with no resolution.
What else to expect? There’s been chatter about loan limits dropping at year end, initial and periodic caps, along with lower lifetime caps being implemented on adjustable-rate products and the interest rate floor being lowered again from 5.06. Seems like a lot of medicine to be taking at once along with the soon-to-be-released financial assessment, utilization testing and escrows. In any event, even if the industry gets a short-term fix via H.R. 2167, it has a massive amount of work to do on the Hill in terms of education and buy-in for the program. CIS and NRMLA are critically important in this endeavor, particularly as the FHA reform bill gets traction. That being said, proprietary products will return to the market sooner than