August 2018 HMBS: Cat Has Eight Lives Left

HMBS issuance rose slightly in August 2018 to just over $579 million, a small increase over July, which was the lowest issuance month in nearly four years. No highly seasoned pools were issued. In all, 110 pools were issued in August. Over $1.2 billion in payoffs shrank HMBS float by a record $500 million. Last month we noted that since February 2017 HMBS float has been range-bound between $55 billion and $57 billion but could fall below that range with the continued payoff deluge and issuance drought. That could happen as early as next month, with outstanding HMBS now below $55.5 billion.

Payoffs have exceed $1 billion per month for 11 of the last 13 months, a trend likely to continue as many loans reach their buyout threshold, equal to 98% of their Maximum Claim Amount (“MCA”). Meanwhile, reverse mortgage lenders face a long winter of reduced volume, primarily due to the new lower Principal Limit Factors (“PLFs”) for Home Equity Conversion Mortgages (“HECMs”) effective this fiscal year. Rising interest rates will not help either, as they generally require lower PLFs.

Production of original new loan pools was about $344 million, up from July’s $318 million, but these small, short-term upticks in HMBS production or HECM endorsements are hardly proof of a recovery or even a dead cat bounce. They are more like the window awnings that break the fall of a cat from a high roof. August production was also down from June’s $353 million, May’s $367 million, April’s $401 million, and down sharply from $604 million in February, $657 million in January and $747 million in December 2017. HMBS issuance topped $916 million in August 2017. Last month’s tail pool issuances totaled $235 million, within the range of recent tail issuance. We shall see if the cat still has eight lives left or merely bounces eight times when it hits the ground.

Our friends at Recursion broke down the prepayment numbers further: the 98% MCA mandatory purchases accounted for $869 million, or about 70%, of the payoffs in August. This shatters the record $791 million set last November.

August issuance divided into 51 original pools and 59 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. As we noted last month, Tail HMBS issuance can generate profits for years, helping HMBS issuers in challenging periods.

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

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