Financial Assessment Is Working (Part VII)

May 12th, 2023

Financial Assessment is still working. Now in its ninth year, FHA’s policy of requiring the financial assessment (FA) of borrowers’ ability to pay has helped cut tax and insurance default by over 80% and serious defaults by over 75%. These results validate the encouraging data we shared in previous years.

FHA’s objective for its Financial Assessment regulations was to reduce the persistent defaults, especially Tax and Insurance (T&I) defaults, plaguing the HECM program in 2009-2014. As FHA put it, “… an increasing number of tax and hazard insurance defaults by mortgagors led FHA to establish … a requirement for a Financial Assessment of a potential mortgagor’s financial capacity and willingness to comply with mortgage provisions.” Financial Assessment requirements became effective for HECMs with case numbers issued on or after March 2, 2015. Since then, HECM lenders make a financial assessment of borrowers’ ability to meet their obligations, including property taxes and home insurance. T&I and other defaults can lead to foreclosure and result in significant losses to FHA, HMBS issuers, and other HECM investors. Defaults rose steadily during the financial crisis and remained a thorn in the side of the program until Mortgagee Letters 2014-21 and 2014-22 were released.

It’s been eight years since Financial Assessment began, so we can measure with increasing confidence the effect of this policy by comparing default rates of loans originated before and after the FA rule was implemented.

With this in mind, we looked at a data set of more than 300,000 HECM loans, comparing loans originated in the post-FA period from July 2015 through March 2023 to loans originated in the pre-FA period before March 2015. After July 2015, there were few (if any) loans originated under the pre-FA guidelines. As the guidelines took effect in March 2015, the second quarter of 2015 included a mix of FA and pre-FA loans.

The data show a very strong reduction in T&I default in the post-FA period. As of March 31, 2015, the pre-FA data set had a T&I default rate of 7.1%, and an overall serious default rate of 10.5%. As of March 31, 2023, the post-FA data set shows a T&I default rate of approximately 0.9%, and an overall serious default rate of 2.3%. For the purpose of this analysis, we define serious defaults as T&I defaults plus Referrals to Foreclosures, actual foreclosures and other “Called Due” status loans. These results remain consistent when we compare comparable cohorts by loan age.

Over the past several years, FHA has taken a number of steps to reduce defaults in its HECM program. These include Mortgagee Letter 2013-27, which limits in certain cases the amount that can be lent in the first 12 months. Also, a series of Principal Limit Factor (PLF) reductions has reduced the amount lent even when the loan is fully drawn. Not surprisingly, the economic health of FHA’s HECM insurance fund has improved dramatically, from negative $8 billion in Fiscal Year 2016 to a positive $15 billion as the end of Fiscal Year 2022.

Given these results, we continue to give Financial Assessment high marks for reducing defaults. After nearly eight years of experience, it is clear the HECM program has graduated to a sounder credit footing.

New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.

New View Advisors and Recursion Reverse Mortgage Prepayment Indices – April 2023

May 10th, 2023

The New View Advisors and Recursion April 2023 expanded HECM reverse mortgage prepayment indices can be found here: New View Advisors Recursion Cohort Speeds 04_2023. The indices are derived from underlying HECM data in HMBS made public by Ginnie Mae, as well as private sources. This new expanded set of prepayment data is calculated using dollar principal balance, not unit count.

The enhanced data set shows current trends in prepayment activity by product type and Principal Limit Factors (PLFs), and for current 12-month LIBOR PLFs by Expected Rate. HECM loans with higher Expected Rates originated in the year or so prior to the precipitous fall in interest rates brought on by the pandemic are experiencing higher prepayment rates. Therefore, we segregate indices for recent production 12-month LIBOR PLFs into Expected Rates greater than 4% and Expected Rates less than or equal to 4%.

Prepayment speeds are expressed as annualized percentages in three categories: Total Payoffs, Payoffs Other Than Assignments, and Payoffs from Assignment. For each category, we calculate the 1-month, 3-month, 6-month and 12-month CPR, or annual rate of prepayment.

HMBS April 2023 Part II: Still Waiting For … Oh Never Mind

May 9th, 2023

HMBS payoffs fell in April, as Mandatory Purchases continued to rise and natural payoffs fell to less than 8% per annum. April payoffs totaled about $900 million, within the range of recent months. Outstanding HMBS fell slightly to $59.5 billion due to continued weak issuance.

Higher interest rates finally caught up with the HMBS market in 2022, driving down PLFs sharply. Big trouble came in the fourth quarter with the trend of declining home prices became more clear and widespread, RMF declaring bankruptcy, AAG selling its assets to FAR, and Ginnie Mae taking over RMF’s HMBS portfolio. In Ginnie Mae’s recent data release, “Ginnie Mae – Reverse Mortgage Funding 42” is now shown as the issuer of record for the 4,046 former RMF pools. About $300 million of Issuer 42’s portfolio paid off in April. Issuer 42 HMBS accounts for just over $20 billion, or just under 34% of all outstanding HMBS.

Might an “Issuer 43” take over this portfolio, or will it be a big melting iceberg like Fannie Mae’s HECM portfolio? Fannie Mae’s portfolio has dwindled from $75 billion to approximately $5 billion today, more than a decade after Fannie bought her last HECM. At a certain point, Issuer 42’s net cash flow will turn positive, with net loan payoffs exceeding borrower credit line draws and other advances. When that point is reached, Ginnie Mae might be tempted to follow her stepsister’s example, and be content to let its HMBS portfolio run off over several years.

When a HECM loan balance reaches 98% of its MCA, the HMBS issuer is required to buy the loans out of the HMBS pool, and then may assign the loan to HUD if the loan is not in default. This is effectively a prepayment event for the HMBS investor, even though the underlying HECM loan remains outstanding. According to our friends at Recursion, 56% of HMBS payoffs last month were due to Mandatory Purchase. Last month’s 98% MCA Mandatory Purchases totaled $507 million, the highest dollar total in over 3 years.

Including the Mandatory Purchases, HMBS paid off at a 17.0% annual rate in April, down from March’s 17.8% pace. Exclusive of Mandatory Purchases, the rate of HMBS payoffs has fallen significantly. HMBS payoffs resulting from underlying HECM loan payoffs, including payoffs due to mortality and refinancing, is about 7.4%, compared to 18.4% a year ago.

New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.

HECM Endorsement Analytics – April 2023

May 8th, 2023

April’s HECM endorsement count dropped to 1,963 loans. As expected, last month’s high count was due to nothing more than AAG clearing its backlog. This month the report shows no endorsements from AAG, without which the trend of declining HECM production continues. Our full report can be found here: NV Endorsement 2023_04.

HUD’s March Endorsement Snapshot Report was just released on its website. HECM to HECM refis dropped to less than 10% of all endorsements for the first time since September 2019. Also of note, Fairway Independent Mortgage Corporation production has dwindled to just eight loans this month. For years, Fairway was the lead wholesale originator (originating loans sponsored by another party).

HMBS April 2023: April Showers Bring … Not Much

May 1st, 2023

New View Advisors is 15 years old today, May 1st. Thank you to all our clients, employees, and friends that have provided insight, encouragement, and business all these years.

The HMBS new issue market posted its best month of 2023, but that’s not saying much. HECM Mortgage-Backed Securities (“HMBS”) issuance rebounded slightly in April to $534 million, rising month to month for the first time in a year. 80 pools were issued, low by historical standards, but much better than the 53 pools issued in March.

On November 30 of last year, Reverse Mortgage Funding (“RMF”), the largest HMBS issuer of record, filed for bankruptcy. As a result, Ginnie Mae acquired RMF’s HMBS portfolio. Ginnie Mae/RMF (aka “Issuer 42”) issued no HMBS pools in April.

On March 31, American Advisors Group (“AAG”) was purchased by Finance of America Reverse (“FAR”), continuing the industry’s consolidation, leaving four issuers with approximately 90% total market share. Last month, FAR was the top issuer with $207 million.

HMBS issuance set a new record in 2022, with nearly $14 billion issued. In 2023, HMBS issuers are very unlikely to come anywhere near those numbers; the first four months totaled just over $2 billion.

April’s original (first participation) production rose to $379 million, much better than March’s anemic $259 million, February’s $322 million, and January’s $347 million. However, April was weak by historical standards, less than one-third of April 2022’s record $1.4 billion in new issuance.

The 80 pools issued in April consisted of 25 first-participation or original pools and 55 tail pools. Original pools are those HMBS pools backed by first participations in previously uncertificated HECM loans. Tail HMBS issuances are HMBS pools consisting of subsequent participations. Tails are not from new loans, but they do represent new amounts lent. With Ginnie Mae/RMF abstaining from issuance, last month’s tail pool issuances totaled $155 million, well below the typical range.

New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.

New View Advisors and Recursion Reverse Mortgage Prepayment Indices – March 2023

April 19th, 2023

The New View Advisors and Recursion March 2023 expanded HECM reverse mortgage prepayment indices can be found here: New View Advisors Recursion Cohort Speeds 03_2023. The indices are derived from underlying HECM data in HMBS made public by Ginnie Mae, as well as private sources. This new expanded set of prepayment data is calculated using dollar principal balance, not unit count.

The enhanced data set shows current trends in prepayment activity by product type and Principal Limit Factors (PLFs), and for current 12-month LIBOR PLFs by Expected Rate. HECM loans with higher Expected Rates originated in the year or so prior to the precipitous fall in interest rates brought on by the pandemic are experiencing higher prepayment rates. Therefore, we segregate indices for recent production 12-month LIBOR PLFs into Expected Rates greater than 4% and Expected Rates less than or equal to 4%.

Prepayment speeds are expressed as annualized percentages in three categories: Total Payoffs, Payoffs Other Than Assignments, and Payoffs from Assignment. For each category, we calculate the 1-month, 3-month, 6-month and 12-month CPR, or annual rate of prepayment.

HMBS March 2023 Part II: Waiting For Issuer 43

April 11th, 2023

HMBS payoffs rose in March, as Mandatory Purchases continued to rise and natural payoffs increased to more than 8% per annum. March payoffs totaled $950 million, the highest payoff amount in 7 months. Outstanding HMBS fell slightly to $59.6 billion due to the weak issuance and uptick in payoffs.

Ginnie Mae took over RMF’s HMBS portfolio in December. In Ginnie Mae’s recent data release, “Ginnie Mae – Reverse Mortgage Funding 42” is still shown as the issuer of record for the 4,051 former RMF pools. About $200 million of Issuer 42’s portfolio paid off in February. Issuer 42 HMBS accounts for just over $20 billion, or 34% of all outstanding HMBS.

Issuer 42 is not issuing tail pools. After nearly 4 months, we estimate Issuer 42 has an approximate $400 million uncertificated position, that is, the excess of its portfolio’s HECM asset balance over the balance of its HMBS liability. Is there an “Issuer 43” waiting in the wings to take over this portfolio, or will it be a big melting iceberg like Fannie Mae’s HECM portfolio, which has dwindled from $75 billion to $5 billion today, more than a decade after Fannie bought her last HECM. Only time will tell.

When a HECM loan balance reaches 98% of its MCA, the HMBS issuer is required to buy the loans out of the HMBS pool, and then may assign the loan to HUD if the loan is not in default. This is effectively a prepayment event for the HMBS investor, even though the underlying HECM loan remains outstanding. According to our friends at Recursion, 52% of HMBS payoffs last month were due to Mandatory Purchase. Last month’s 98% MCA Mandatory Purchases totaled $482 million, the highest dollar total in over 3 years.

Including the Mandatory Purchases, HMBS paid off at a 17.8% annual rate in March, up from February’s 15.2% pace. Exclusive of Mandatory Purchases, the rate of HMBS payoffs has fallen significantly. HMBS payoffs resulting from underlying HECM loan payoffs, including payoffs due to mortality and refinancing, is about 8%, compared to 22% a year ago.

New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.

HECM Endorsement Analytics – March 2023

April 10th, 2023

March’s HECM endorsement count unexpectedly increased 73% over the month, reaching 3,789 units. However, the increase came almost entirely from AAG’s last gasp of submissions prior to its acquisition by FAR, endorsing 1,970 loans compared to last month’s 468. AAG clearing its backlog won’t alter the macro trend of declining HECM production as long as rates stay high and property values soften. It also underscores the shortcomings associated with relying exclusively on endorsement count as a metric for HECM production. Our full report can be found here: NV Endorsement 2023_03.

HUD’s February Endorsement Snapshot Report was just released on its website. HECM refinance remains at approximately 10% of all endorsements.

New View Advisors continues to offer its Who Buys What From Whom (WBWFW) report as part of our endorsement report subscription. The report compiles publicly available Ginnie Mae data to show which HMBS issuers buy HECMs from which lenders.

The WBWFW report includes:
—Top Originators – a ranking by original HECM UPB of all lenders over the last twelve months
—WBWFW – an alphabetical cross-reference between every lender and the HMBS issuer that securitizes its loans
—Top 100 Trends – a breakdown of loan sales by month, by Top-100 lender, by HMBS issuer.

Edited samples from recent WBWFW reports are at the end of our endorsement writeup. These reports together provide accurate insight for sales and marketing teams to learn just who’s buying what from whom. The dataset is more complete and timely than what endorsement analysis alone can show.

2023Q1 HMBS Issuer League Tables – Consolidation Is Here

April 3rd, 2023

What a difference a quarter makes. With FAR’s acquisition of AAG, and RMF’s bankruptcy, FAR is now the lead HMBS issuer with $629 million issued and a commanding 42.7% market share. Longbridge is second, with $313.4 million issued and 21.3% market share, PHH is third with $231.2 million issued and 15.7% market share, and Mutual of Omaha is fourth with $155.4 million issued and 10.6% market share. The Top Four – formerly the Top Five – issuers account for 90% of all HMBS issuance.

2023Q1 saw $1.472 billion of HMBS issued, a run rate of less than $6 billion for calendar year 2023, what would be just 42% of 2022’s nearly $14 billion record issuance tally. There were only nine HMBS issuers during the quarter, the lowest issuer count since the earliest days of the program.

New View Advisors compiled these rankings from publicly available Ginnie Mae data as well as private sources.

HMBS March 2023: March Roars Out Like a Lamb

April 3rd, 2023

The HMBS new issue market fell again to new lows. HECM Mortgage-Backed Securities (“HMBS”) issuance fell sharply in March to $442 million, falling for the eleventh straight month. Only 53 pools were issued. It was the lowest month of issuance since June 2014. As we said last month, this HMBS Winter of Discontent will be long one.

On November 30 of last year, Reverse Mortgage Funding (“RMF”), the largest HMBS issuer of record, filed for bankruptcy. As a result, Ginnie Mae acquired RMF’s HMBS portfolio. Ginnie Mae/RMF (aka “Issuer 42”) issued no HMBS pools in March.

On March 31, American Advisors Group (“AAG”) was purchased by Finance of America, continuing the industry’s consolidation, leaving 4 issuers with approximately 90% total market share. In its last month, AAG still led HMBS issuers with $106 million issued.

HMBS issuance set a new record in 2022, with nearly $14 billion issued. In 2023, HMBS issuers are unlikely to come anywhere near those numbers; the first quarter totaled just under $1.5 billion.

March’s original (first participation) production fell to $259 million, down from $322 million in February, $347 million in January, $448 million in December, $516 million in November and less than one-fifth of April 2022’s record $1.4 billion in new issuance.

The 53 pools issued in March consisted of 19 first-participation or original pools and 34 tail pools. Original pools are those HMBS pools backed by first participations in previously uncertificated HECM loans. Tail HMBS issuances are HMBS pools consisting of subsequent participations. Tails are not from new loans, but they do represent new amounts lent. With Ginnie Mae/RMF abstaining from issuance, last month’s tail pool issuances totaled $183 million, below the typical range.

New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.