HMBS prepayments fall in November, RMF maintains a third of the full portfolio

The analysis from New View Advisors weighs recent activity for mandatory purchases and natural payoffs

While Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) issuance fell in November, so did HMBS prepayments for investors, according to an analysis and commentary by New View Advisors.

“HMBS payoff speeds decreased in November; Mandatory Purchases and natural payoffs were 10.0% and 6.1% per annum, respectively,” New View said in its commentary, which was based on data from private sources as well as Ginnie Mae. “November payoffs totaled about $825 million. Outstanding HMBS increased slightly and remains just under $59 billion.”

After Ginnie Mae assumed control of Reverse Mortgage Funding (RMF)’s servicing portfolio, the portfolio’s designation as “Issuer 42” became the issuer of record for 4,033 former RMF pools.

“About $301 million of Issuer 42’s portfolio paid off in November, but Issuer 42 still accounts for $18.3 billion, or about 31% of all outstanding HMBS,” New View said. “Issuer 42 has not issued any tail pools; we estimate Issuer 42 now has well over a $1 billion uncertificated position, that is, the excess of the portfolio’s HECM asset balance over the balance of its HMBS liability.”

Mandatory purchases — when a reverse mortgage loan that reaches 98% of its maximum claim amount (MCA) is then bought out of the HMBS pool by the issuer, and often assigned to the U.S. Department of Housing and Urban Development (HUD) — constitutes a prepayment event for an HMBS investor, even if the purchased loan remains outstanding, New View explained.

“According to our friends at Recursion, 62% of HMBS payoffs last month were due to mandatory purchase, totaling about $512 million, a decrease from last month’s $531 million, but remaining above the average for the prior 10 months of 2023 ($496 million per month) and all of 2022 ($315 million per month).”

These securities paid off at an annual rate of 16.1% in November, and 16.9% over the past 12 months, New View said.

“Exclusive of Mandatory Purchases, the rate of HMBS payoffs has fallen significantly over the past 12 months,” they added. “Natural payoffs (those other than mandatory purchases) for the 12-month period ending November 30th were 7.4% per annum, compared to 15.2% for the prior 12-month period.”

There are potential positives and negatives for investors when it comes to prepayments. Faster prepayments may lead to quicker returns, but reinvestment activity may be challenged when investors search for similar yields elsewhere.

Slower prepayments could also increase cash flow, but expose investors to a longer- or shorter-than-anticipated life of a particular investment.

In its annual report, Ginnie Mae detailed some of its HMBS policy changes, its forthcoming HMBS priorities in 2024 and tabulated the top 10 reverse issuers as of late 2023.

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