Reverse mortgage securities market shrinks

Will lower HMBS float scare off investors?

Reverse mortgage volume has taken a nosedive in the past year, a fact that is glaringly evident by the product’s performance in the secondary market.

The latest commentary from New View Advisors reveals that outstanding float of HECM-mortgage backed securities, or HMBS, has fallen yet again. December closed out with just $55.1 billion in HMBS, down from November’s $55.3 billion and a sign that float could eventually fall below the $55-$57 billion range it has been stuck in for the past two years.

Fixed-rate HMBS, which once dominated the market, now comprises just $13 billion of HMBS float. This is down from $19.1 billion at the end of 2017 and $24.8 billion at the end of 2016.

Barely $1 billion in fixed-rate HMBS was issued in 2018, according to New View, a fact it attributes to HECM program changes that limited the initial principal limits on these loans.

New View also notes that the era of peak buyouts from HMBS, and corresponding assignments to the U.S. Department of Housing and Development, has likely come to an end.

Buyouts occur when a loan reaches 98% of its maximum claim amount, at which time the issuer purchases the HECM out of the HMBS and assigns the active HECMs to HUD to receive payment. HECMs in default or matured status are not assigned to HUD but instead remain with the issuer.

Almost every month for the past year, buyouts have exceeded $1 billion as a wave of fixed-rate, full-draw laws originated in 2009-2012 reached the 98% threshold, but New View says this will likely be the exception rather than the norm moving forward.

What does this mean for HMBS investors? New View Partner Michael McCully said the reduction in buyouts will be a benefit for HUD.

“Lower buyout figures mean fewer loans assigned to HUD, which will help relieve their backlog and loss exposure,” McCully explained. “Because buyouts are treated as a prepayment from the perspective of the HMBS investor, fewer buyouts mean prepayment speeds will slow, which is good for premium securities, which most HMBS are.”

But the shrinkage in float could be problematic for investors.

“As for the outstanding float breaching $55 billion on the downside, there is no magic number, but the direction signals new originations are not keeping up with payoffs,” McCully added. “At some point, declining float could affect HMBS liquidity and therefore pricing.”

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