Speed of change is scaring investors in reverse mortgage bonds

Uncertainty surrounding the HMBS (HECM MBS) securitization program, sponsored by Ginnie Mae, has left investors feeling skittish, according to players up and down the line who participate in the process of pooling reverse mortgages for sale into the secondary market. A panel on the subject, at the NRMLA Road Show last month in Philadelphia – and another one at the MBA Government Housing conference in New York this month – reflects continuing concern.

Speaking at the Philadelphia event, David Fontanilla, director at Knight Fixed Income in New York, referred to the “speed of change” in the HMBS program, warning that it is “scaring investors,” specifically those purchasing the bonds funding sale and purchase of reverse mortgage-backed securities.

Despite a growing list of institutional investors, which includes insurance companies, banks and asset managers, Fontanilla admitted it’s still a very fragile market. Only in the last six months has investor demand really picked up and if the industry can put out the same product for a year, he is confident the investor base will continue to grow. But, he noted, it can change in a heartbeat.

Fontanilla cited elimination of the servicing fee set-aside as one example of this unsettling change. “When you go to a zero servicing fee, it changes the coupon on the bond. Will this create an adverse effect to the kind of borrower that I will get?” Fontanilla asks rhetorically.

Ginnie’s parent FHA also has revised upward net worth and liquid asset requirements for all its approved lenders, including those who originate HECMs.

“Participation accounting is key,” says Robert Yeary, chairman and CEO, RMS Inc., a Ginnie Mae issuer and participant in both conference panels. Under Ginnie Mae guidelines, its HMBS issuers must perform the “monitoring and accounting of pooled participations designated in a Schedule of Pooled Participations and Mortgages, (form HUD-11706H) for each issue of Ginnie Mae-guaranteed mortgage-backed securities (HMBS).”

“The risk in issuing Ginnies,” Yeary notes, “is different from the forward world. You have to be in the REO business” with the former, he says, adding: “The risks are complex [and] people need to understand” that. Yeary joins Regina Lowrie, president and CEO, Vision Mortgage Capital; Joe Kelly, partner, New View Advisors; Stephen L. Ledbetter, senior vice-president, Ginnie Mae; and Christopher Witeck, partner, BuckleySandler, on the MBA panel in New York on May 24.

Written by Neil Morse

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