Reverse mortgage-backed securities spreads tightened into the end of January after an expected and dramatic year-end widening. The lower-volume landscape is dominated by the HECM 60 product, which is what originators are calling the new program loans. Fully drawn fixed-rate HMBS have traded as tight as 80 to swaps and as wide as 100 to swaps for 30- to 45-day settlement.
Given the principal limit factor reduction, the average life extends out to seven years at 100 percent of the HECM prepayment curve and trades at a low to mid-3 percent yield to the investor base. Fixed rate issuance has been running about 15 to 20 percent of the market. Floating-rate securities have traded in a similar range, trading as tight as the low 80s DM (discount margin) and as wide as 115 DM. The average life profile is a bit longer than the fixed-rate collateral and falls in the low to mid-seven-year context. One key variable with floating rate is how to model the draws given the new restrictions post-closing.
It is HUD’s wish, and in speaking with several senior members of NRMLA, it seems to be the hope, that borrowers will draw upon their remaining line of credit responsibly over time. We do not want to see a situation where borrowers are being told to draw the remaining line of credit at day 366 and HUD feels like they need to put life-of-loan restrictions in place. We shall see how this plays out.
In December, as the last wave of the front-loading effect was realized, the industry saw a total of $811 million of HMBS issuance among the 10 active issuers, with Urban Financial of America leading the pack at $228 million. This was down slightly from November’s total of $873 million, and the books closed on the fourth quarter at just over $2.4 billion. With no HREMIC deals brought to market in December, January saw two transactions totaling $330 million, with Stifel Nicolaus coming to market with $183 million and Bank of America Merrill Lynch bringing $147 million.
I recently returned from the annual Asset Securitization conference, which was attended by numerous issuers and investors, and the overwhelming questions regarding the industry included expected volumes in 2014; the proliferation of new fixed-rate HECM products; and what to expect in terms of non-conforming reverse mortgage origination and securitization. I can’t say I’m overly bullish on any of these, as I expect volumes to be closer to $400 million than $600 million a month, although I hope I’m wrong. That being said, I do think originators are working feverishly to rebrand the product and break into new channels to increase penetration. I also think many originators are hard at work crafting non-conforming guidelines that pick up where the newly designed HECM left off. So again, we shall see how this plays out, but most if not all would agree this is a year of transition.
