HMBS spreads for annual adjustable-rate HECMs have continued a steady march tighter to 45 discount margin after touching 85 DM earlier this year. The annual LIBOR product type comprises 75 to 80 percent of total new loan issuance. Broker dealers are creating HREMIC securities backed by this production in the form of par-priced floating-rate classes and interest-only bonds. Demand from the investor base for both classes of securities has remained solid amid a volatile interest rate background.
Fixed-rate spreads have not tightened as much as the annual LIBOR product and are clocking in at roughly 75 to swaps. Levels touched just north of 100 to swaps earlier in 2016. The HREMIC execution for fixed-rate tends to be a harder execution to place with investors, and if HMBS (pool) investors are out of the market, there won’t be much of catalyst to encourage tightening.
Additionally, fixed-rate origination is a very small percentage of the total, which makes it a harder proposition from a supply-spurs-demand context. One-month LIBOR paper has tightened a bit to 70 DM and again is only 15-20 DM tighter since early 2016. Production is much less in comparison to annual and similarly to fixed-rate; there is too little supply to create large swaths of investor demand.
Prepayment speeds for HECMs have slowed down a good amount due to two dominant factors. First, the introduction of the 18-month HECM-to-HECM refinance moratorium has greatly limited the number of refinances and has chopped newly issued HMBS speeds by about 50 percent. Additionally, the more recent focus by NRMLA and FHA on early partial prepayments has rooted out bad loan officer behavior and contributed to slower speeds.
Newly originated annual LIBOR speeds were running 6-8 CPR (conditional prepayment rate) and are now 2-3 CPR. More seasoned paper continues the longstanding story of slow and predictable with fixed-rate HMBS slowing to 15 to 30 percent of the HECM prepayment curve and floating rate to 40 to 50 percent of the HECM prepayment curve. The delta between the two usually relates to the equity position of the home upon maturity event. When there is equity preserved (usually in the case of an adjustable rate), there is more motivation on behalf of the heirs to quickly liquidate and pay off the UPB. The fully drawn fixed-rate loan won’t have as much equity preserved and hence less heir motivation to do anything in quick fashion. All in all, with the introduction of Financial Assessment and subsequent sharp drop in production levels, market participants will need to continue to develop ways to penetrate the consumer base to boost originations. The secondary market is operating well, and the story of a fully robust capital markets solution to a growing social issue is in place. The heavy work now is on the originator entities to bring home the value proposition to the large untapped marketplace.
