Reverse Mortgage Investor Market Lags in Response to Rising Rates

The demand and pricing for reverse mortgage securities among investors has fallen  sharply, leading to a downward shift in broker pricing for individual loans in the market.

Leading up to news out of the Federal Reserve Bank that sent markets reeling, secondary market pricing declines for HECM Backed Mortgage Securities (HMBS) had already been under way, according to those who trade the securities. But the Fed stating it could begin to back away from downward pressure on interest rates further sent prices on a sharp decline.

“Long before the Fed news [last] week, it seemed that the HECM market, regardless of its growth is still dwarfed in investor sponsorship versus these other assets,” one Wall Street trader told RMD. “It has been basically supported by very few broker dealers.”

Brokers in the market for individual loans have also reported prices falling, with the most substantial downturn seen following the Fed announcement, which indicated the Fed will taper back its bond purchasing which has

“I think we are about to see a major repricing occur if things don’t turn quickly,” the trader said.

One effect of the higher rates is shorter repayment of the loans, relative to lower rates, which may lead to pricing shifts.

“If rates rise, HECMs supporting adjustable rate HMBS reach the 98% assignment to HUD faster, shortening average lives” says Michael McCully, partner with New View Advisors. “For fixed rate HMBS in a rising interest rate environment, the underlying HECMs will have less value, and HMBS prices will fall. Investors paying premiums will be concerned about this dynamic.”

Average rates for 30-year fixed rate mortgages rose 50 basis points to 4.38% week over week according to real estate hub Zillow, which released data Tuesday, with analysts foreseeing rate volatility in the short term.

The decline is not specific to HMBS, but spans fixed-income securities more generally relative to other products.

“It’s a roller-coaster ride,” Walter Schmidt, head of mortgage strategy at FTN Financial told the Wall Street Journal with respect to the impact on mortgage-backed securities. “We’re kind of getting a feeling of stability, but like a roller coaster it’s very tenuous because you know the next drop is coming.”

Written by Elizabeth Ecker

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