If there’s one point of consensus when it comes to recent reform’s effect on Home Equity Conversion Mortgages and the securitized market for them, it is that they will be in shorter supply going forward, but enough investors still seem to like them.
“Here are the issues. It’s volume. It’s likely the volume is going to go down soon, at least in the short term, and it’s not a big industry now,” Michael McCully of New View Advisors LLC told this publication, when asked about HECM reform’s implications for the secondary market these loans are sold into.
This doesn’t mean the market for HECM mortgage-backed securities is in danger of illiquidity. It is “still fairly robust” and attractive to investors given their FHA insurance, Ginnie Mae wrap and prepayment certainty, he clarified, noting, “There is a liquid market for them. It’s material.”
Citing figures from his business partner, Joe Kelly, McCully said there is currently about $44.7 billion in outstanding flow.
But monthly volume has not been at its highest level recently. At about $1 billion at its peak, it recently has been around $625 million.
Since the first round of reform hit Sept. 30, “we haven’t seen any of the new production yet” that will be affected by it, McCully noted. But it is expected to ebb. “There is going to be consolidation. There is no question about that,” said Atare Agbamu, president/CEO of consultancy ThinkReverse LLC.
Large players pulled out of the business a little while ago, as concern about poor performance in a certain form of the loan—which is slated to be addressed by reform—put a huge dent in Federal Housing Administration finances. Although there also has been at least one acquisition of a servicing platform, departures could continue.
NewDay USA recently said it was pulling out of the reverse mortgage business to concentrate primarily on serving U.S. military veterans and their families. NewDay cited numbers which show FHA HECM endorsements in August were down 7% compared with July and that trend is expected to continue.
Joe Murin, the president of NewDay USA and the former president of Ginnie Mae, said in an interview that while he headed up the government agency he believed and still believes the HECM business is a very important product that FHA provides for senior citizens. But the big players leaving have left a smaller market and that has made it difficult to do business.
The reverse business is not the same as it was three, two or even one year ago, Murin said. FHA is “forever tweaking the requirements for HECM. One doesn’t know ultimately where that is going to go.
“Is there a future for the HECM business?” he asked, noting there are some in Congress who have proposed eliminating it, although that may just be a negotiating ploy. The company still likes the reverse business, but the VA space is so successful and expanding so rapidly that its current plan is focusing on the latter for the foreseeable future, he said.
HMBS investors have been trying to get their heads around all this and reform, and are skittish about change. But the securitized market for HECMs has not experienced any significant disruptions, perhaps due to its aforementioned attractive government protections and prepayment profile, McCully said.
While there are concerns, there are still some potential positives for the market in the wake of reform, he added.
For example, because the reform has lowered loan-to-value ratios allowed on the loans, borrowers will have a greater amount of equity to draw on in the future, which extends the duration of the security, something that should be attractive to investors, as it extends the time prepayments occur. (Other than death and move-out, HECMs are also treated as prepaid when the loan balance equals 98% of the home value and the loan is assigned to HUD.)
“It may feel too constrictive to some, but these changes are being implemented to protect the program,” McCully said. “If you can remove a design flaw I think that’s helpful and if it can be fixed in a business-friendly manner, I think it’s a positive.
— Brad Finkelstein contributed to this story.