Reverse mortgage securities issuance consolidates, refis persist despite higher rates

While production of new Home Equity Conversion Mortgage (HECM)-backed securities (HMBS) reached a new high in December 2021, recent sales of servicing portfolios have consolidated as much as 41% of all outstanding HMBS under the roof of a single issuer. While refinances remain at or over half of reverse mortgage volume according to recent data, the upward trend of interest rates could see the diminishing of the recent reverse mortgage refinance “boom” observed in 2021 but it is not over yet.

This is according to analysis, publicly available Ginnie Mae data and private sources compiled by New View Advisors.

As noted recently, the production of new HMBS reached a record in December, coming in at $1.5 billion in HMBS issuance. A total of $13.2 billion in HMBS was issued in 2021, easily overtaking the previous industry record of $10.8 billion set in 2010. All told, 2020 saw $10.6 billion in total HMBS issuance, eclipsing a previous industry high of $10.5 billion in 2017.

Reverse mortgage refi volume continues, December’s data disappointment

According to the “snapshot report” for November 2021’s reverse mortgage activity released by the U.S. Department of Housing and Urban Development (HUD) and cited by New View, of the total 4,948 HECMs recorded in November industry-wide, 2,529 of those loans are listed as “HECM for Refinance” transactions. This comes out to a total of 51.1% of industry volume in November being composed of HECM-to-HECM refinances, beating the 46.68% of HECM-to-HECM transactions recorded in FY 2021 as detailed in the Federal Housing Administration (FHA)’s Annual Report to Congress released that month.

According to a recent analysis conducted by New View, high levels of issuance and HECM loan payoffs continued in December largely fueled by refinancing activity.

“HMBS payoffs exceeded $1 billion for the tenth month in a row,” New View notes in its commentary analyzing recent data. “Outstanding HMBS rose $310 million despite these near-record payoffs. As we predicted, December’s data is a disappointment for HMBS investors hoping for a prepayment slowdown. While falling short of November’s record payoffs, December came close in both dollar amount and speed: $1.28 billion, representing a 24% annual payoff rate.”

When asked about why the December data will likely prove disappointing for investors, the data simply indicates lower yield according to Michael McCully, partner at New View Advisors.

“Investors typically pay a premium over par for most reverse mortgage securities,” McCully says. “As with all fixed income investments, a faster-than-expected return of principal on a premium security lowers yield.”

While interest rates are rising, reverse mortgage refis yet to slow down

As noted previously, the major attributes fueling higher HECM-to-HECM refinance volume largely come down to two primary factors which directly benefit borrowers: historically low interest rates and high levels of home price appreciation (HPA). HPA was attributed as the primary factor in the improvement of the HECM book of business inside the Mutual Mortgage Insurance (MMI) Fund by HUD in late November.

In terms of what might be able to slow down the amount of refinance volume, higher interest rates are likely not going to do it alone, according to McCully. Now that we’re into January 2022, one of the things likely helping refis persist is the increased reverse mortgage lending limit of $970,800. When asked about how long higher rates may have to continue in order to begin mitigating refi volume, the answer was unclear, McCully explained.

“It’s difficult to say,” McCully said. “Rates have started to rise, yet there is no slowing down of refinancing. Refinance activity appears driven by the new MCA effective January 1, 2022 and continued home price appreciation, both of which enable homeowners to access additional equity in their homes. Technology likely also has a role as well.”

Based on the data present in the FHA Annual Report, refinances in fiscal year (FY) 2021 made up the largest share of total HECM endorsements going back to at least FY 2009. Industry analysts and other participants have been vocal about the trend of refinance activity bolstering industry volume to an unsustainable degree, considering that the amount of loans able to be refinanced is a finite resource especially when considering the product’s generally low penetration rate into its target market of senior homeowners.

HMBS consolidation, the new top issuer

In 2021, two major transactions of reverse mortgage servicing portfolios have helped to upend the rankings on issuer league tables, while also consolidating a significant portion of all outstanding HMBS under the umbrellas of only a few companies. Based on two recent portfolio transactions, the top five HMBS issuers in the industry now account for more than 93% of all outstanding HMBS, according to New View.

Last summer, mortgage servicing, origination and transaction-based services company Mr. Cooper Group announced the sale of its reverse mortgage servicing portfolio – operating under the Champion Mortgage brand – to Mortgage Assets Management, LLC (MAM).

Terms of the deal were not disclosed, but the transaction telegraphed the continued interest of MAM to operate in the reverse mortgage space even in spite of a previous deal involving servicer Reverse Mortgage Solutions (RMS) leading to a lawsuit against one of its former executives. That lawsuit was quietly settled in 2021 before it progressed to a trial, and the Mr. Cooper/MAM deal was ultimately finalized in early December.

Late last year, Reverse Mortgage Funding, LLC (RMF) acquired a portfolio of mortgage servicing rights (MSRs) and other assets from industry-leading lender American Advisors Group (AAG), consisting of more than 75,000 loans totaling $12.1 billion in unpaid principal balance (UPB). Terms of the deal were not disclosed, but recently-appointed AAG President and COO Ed Robinson described the deal as one allowing further investment by AAG into its customer experience initiatives.

“According to Ginnie Mae data, AAG was listed in October as the issuer of record for 1,529 HMBS pools totaling $13.1 billion,” New View said in its recent commentary. “At yearend, AAG is listed for just 55 pools totaling $1.6 billion. Reverse Mortgage Funding is now the issuer of record for over 3,800 pools totaling $23.5 billion, more than 41% of all outstanding HMBS.”

This is indicative of a trend in the HMBS space but should not have an impact on investors, McCully explains.

“The industry is reallocating capital between originators and portfolio investors,” he says. “Expect that trend to continue. It should not impact investors of reverse mortgage-backed securities.”

When asked about RMF’s status as a leading issuer, the company elected not to directly comment instead expressing optimism about its new position.

“RMF does not comment on strategic business initiatives,” said RMF President David Peskin in a statement. “Our goal is to continue to help older Americans financially thrive during retirement through our origination and servicing businesses, and we are pleased our new ownership has allowed us to expand our efforts.”

Read the recent additional HMBS Issuance commentary at New View Advisors.

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