New Appetite for HMBS Helps Secondary Market Bounce Back

The secondary market for reverse mortgages has been a volatile thing, but recent trends show investor demand has increased and execution continues to improve.

Over the last few weeks, pricing has bounced back as new investors continue to move into the market, according to Jeff Traister, managing director and head of agency and non-agency reverse mortgage trading at Cantor Fitzgerald in New York.

“Most of the original [HMBS] buyers are still on the sidelines, but the market is being driven by many new entrants, end users, and the broker-dealer community,” he said. “Many original buyers have said they had been waiting to see more investors climb aboard and this appears to have occurred.”

As a result, pricing for reverse mortgage lenders has started to improve again after a significant drop in February. Rates for HECM Fixed product have fallen down to 4.25% according to several brokers who said rate sheets are much better now than they were a few weeks ago.

Pools of fixed Ginnie Mae HMBS product continue to receive the highest bids, possibly due to the fact that there are fewer variables to analyze compared with adjustable rate HMBS. However, that could change with so many new accounts coming into the market, says Traister. “With [adjustable rate products] being a smaller percentage of the total origination, it wouldn’t take much change in demand to drive prices,” he said. “As demand continues to build in the fixed product, some investors will then start looking at adjustable paper.”

Despite the improvement in pricing, broker dealers are quick to point out that positive price action does not determine a long term trend. The industry saw a similar type of rally last April, only to see it taper off in May as investors slowly step back from buying HMBS product.

“I do think we have turned a positive corner in building the market demand from an investor standpoint, but I also find it very curious that almost exactly one year ago, prices in HECMs also caught a serious bid,” he said. The demand could possibly be driven by some seasonal balance sheet type buying as well. “At the least, if it is due to some seasonal balance sheet demand from investors, there is much greater depth of buyers versus one year ago,” he said.

In theory, more investors should make pricing more consistent, but there are so many factors that could quickly change things. After only three years of a market for the HMBS product, David Fontanilla, director for Knight Capital Americas says he is hopeful there is enough liquidity in the market, but that could change if rates go higher or there is some kind of change in the program that investors see as negative.

“For the last three years, we’ve had a program change each year and it will be interesting to see how everything shakes out for the rest of 2011,” he said.

With a report from the Department of Housing and Urban Development showing the HECM program as cash flow positive for FY 2012, the industry doesn’t anticipate any significant changes so far. At the moment, investors need to put money to work, and relative to other assets, “reverse mortgages are providing more value and that’s creating demand,” he said.

But it’s impossible to tell if pricing currently available to lenders and consumers will last forever.

“After every successful purchase,” said Fontanilla, “if [the price] continues to go up, it does cause the buyer to examine [what they’re paying].”

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