Archive for the ‘HECM Program’ Category

HECM Endorsement Analytics – May 2019

Monday, June 3rd, 2019

HUD released its May 2019 HECM Endorsement Summary Reports today, our summary of which can be found here: NVA Endorsement Report 2019_05. There were a total of 2,697 endorsements, in line with average monthly volume since the beginning of 2019. However, year over year, endorsements are running 20% behind last year’s totals.

Regionally, the Santa Ana Center remains the number one office, with significant contributions from the Los Angeles, San Francisco and Santa Ana field offices. The Denver office had the second highest endorsement count in May outside of the Santa Ana Center.

Of the HECMs endorsed in May, AAG originated nearly one third, with 853 endorsements. The #2 lender ORM originated 238 units, less than one third of AAG’s tally. There are just four other originators with an endorsement count market share of 5% or more.

Fairway Independent Mortgage has been the most active wholesale originator, notching 89 HECMs endorsed by HUD. Over the past 12 months, FAR has been the most active sponsor of HECMs originated by another lender, however Liberty Home Equity Solutions had the highest sponsor count in May with 328 HECMs endorsed.

With the strongest treasury rally in ten years, HECM loan rates are heading lower. The 10-year LIBOR benchmark is at its lowest point since September 2017. Yet, HECM refinance activity remains low. Given the lower PLFs enacted as of FY 2018, it seems unlikely we will see another refinance boom like the one experienced in 2017.

Please contact us if you’re interested in subscribing, or learning more about our expanded endorsement data services.

HECM Endorsement Analytics – April 2019

Wednesday, May 1st, 2019

New View Advisors’ April 2019 HECM endorsement analytics is posted: NVA Endorsement Report 2019_04. Each month, HUD releases HECM endorsement data to the public, links to which are provided in the report’s summary. New View Advisors’ reports compile HUD’s data into user-friendly and more informative formatting. Customized reports for client-specific needs are also available upon request.

Please contact us if you’re interested in subscribing, or learning more about our expanded endorsement data services.

New View Advisors HECM Endorsement Analytics

Monday, April 8th, 2019

New View Advisors is launching its monthly HECM endorsement report as part of our growing suite of products in the reverse mortgage industry.  Each month, HUD releases HECM endorsement data to the public, links to which we have provided in the report’s summary.  New View Advisors’ reports compile HUD’s data into user-friendly and more informative formatting.  Customized reports for client-specific needs are also available upon request.

The March 2019 report can be found here: New View Advisors Endorsement Report March 2019

Please contact us if you’re interested in subscribing, or learning more about our expanded endorsement data services.

Financial Assessment Is Working (Part IV)

Wednesday, November 1st, 2017

Financial Assessment is still working. FHA’s new policy of requiring a financial assessment (“FA”) of the borrower’s ability to pay has cut tax and insurance default by nearly three quarters and serious defaults by almost two-thirds. These results continue to validate the encouraging data we shared in previous quarters.

FHA’s objective for the new Financial Assessment regulations was to reduce the persistent defaults, especially Tax and Insurance defaults, plaguing the HECM program. 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 April 27, 2015. Since then, HECM lenders must make a financial assessment of the borrower’s ability to meet their obligations, including property taxes and home insurance. Tax and 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 have remained a thorn in the side of the program.

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

With this in mind, New View Advisors looked at a data set of just over 125,000 HECM loans, comparing loans originated in the immediate post-FA period from July 2015 through September 2017 to loans originated in the 27 month pre-FA period from January 2013 through March 2015. After July 2015, there were few (if any) loans originated under the pre-FA guidelines. As the guidelines took effect in April 2015, the second quarter of 2015 includes a mix of FA and pre-FA loans.

The data show a very strong reduction in Tax and Insurance Defaults in the post-FA period. After 27 months, the pre-FA data set shows a T&I default rate of 2.3%, and an overall serious default rate of 3.1%. By contrast, the post-FA data set shows a T&I default rate of about 0.6%, and an overall serious default rate of 1.2%. For the purposes of this analysis, we define serious defaults as T&I defaults plus foreclosures and other “Called Due” status loans.

Given this result, we once again give the Financial Assessment concept high marks for reducing defaults. However, this is another mid-term grade that needs to be tested further as the post-FA portfolio ages.

Average loan size and subsequent draws are also higher for the post-FA market. Average loan balances are about 12% higher for loans currently aged 27 months or less compared to the comparable HECM loan population as of March 2015. This is not surprising since homeowners of more expensive home generally have better credit and ability to pay. Also, FHA now limits the amount that can be lent in the first 12 months. As recent months of HMBS issuance show, subsequent draws and HMBS “tail” issuance are a driving force in the industry’s profits. Dollars lent, and not just at initial loan funding, is the true metric by which the industry should measure industry growth.

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

Financial Assessment Is Working (Part III)

Wednesday, August 16th, 2017

Financial Assessment is still working. FHA’s new policy of requiring the financial assessment (“FA”) of the borrower’s ability to pay has cut tax and insurance default by nearly three quarters and serious defaults by almost two-thirds. These results continue to validate the encouraging data we shared 3 months and 6 months ago.

FHA’s objective for the new Financial Assessment regulations was to reduce the persistent defaults, especially Tax and Insurance defaults, plaguing the HECM program. 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 April 27, 2015. Since then, HECM lenders must make a financial assessment of the borrower’s ability to meet their obligations, including property taxes and home insurance. Tax and 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 have remained a thorn in the side of the program.

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

With this in mind, New View Advisors looked at a data set of just over 115,000 HECM loans, comparing loans originated in the immediate post-FA period from July 2015 through June 2017 to loans originated in the 24 month pre-FA period from April 2013 through March 2015. After July 2015, there were few (if any) loans originated under the pre-FA guidelines. As the guidelines took effect in April 2015, the second quarter of 2015 includes a mix of FA and pre-FA loans.

The data show a very strong reduction in Tax and Insurance Defaults in the post-FA period. After 24 months, the pre-FA data set shows a T&I default rate of 2.1%, and an overall serious default rate of 2.8%. By contrast, the post-FA data set shows a T&I default rate of only 0.6%, and an overall serious default rate of 1.0%. For the purpose of this analysis, we define serious defaults as T&I defaults plus foreclosures and other “Called Due” status loans.

Given this result, the Financial Assessment concept gets high marks for reducing defaults. The table below shows the improving portfolio trendline from pre-FA to post-FA at 18, 21, and 24 months. We will continue to monitor progress as the post-FA portfolio ages.

Average loan size and subsequent draws are also higher for the post-FA market. Average loan balances are about 11% higher for loans currently aged 24 months or less compared to the comparable HECM loan population as of March 2015. This is not surprising since homeowners of more expensive home generally have better credit and ability to pay. Also, FHA now limits the amount that can be lent in the first 12 months. As recent months of HMBS issuance show, subsequent draws and HMBS “tail” issuance are a driving force in the industry’s profits. Dollars lent, and not just at initial loan funding, is the true metric by which the industry should measure industry growth.

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

 

Financial Assessment Looks Better and Better

Wednesday, May 24th, 2017

Financial Assessment is still working, only more so. FHA’s new policy of requiring financial assessment (“FA”) of the borrower’s ability to pay has cut tax and insurance default by nearly three quarters and serious defaults by almost two-thirds. These results are even better than the encouraging data we shared this past February.

FHA’s objective for the new FA regulation was to reduce the persistent defaults, especially Tax and Insurance (“T&I”) defaults, plaguing the HECM program. 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.”

T&I and other defaults can lead to foreclosure and result in significant losses to the FHA’s insurance fund, issuers of HMBS securities, and other HECM investors. Defaults rose steadily during the financial crisis and have remained a thorn in the side of the program.

Financial Assessment requirements became effective for HECMs with case numbers issued on or after April 27, 2015. Since then, HECM lenders must make a financial assessment of the borrower’s ability to meet their obligations, including property taxes and home insurance. Because it’s been more than two years since Financial Assessment began, we can measure the effect of this policy by comparing the default rates of loans originated before and after the FA rule was implemented.

With this in mind, New View Advisors looked at a data set of just under 100,000 HECM loans, comparing loans originated in the immediate post-FA period from July 2015 through March 2017 to loans originated in the 21 month pre-FA period from July 2013 through March 2015.   After July 2015, there were few (if any) loans originated under the pre-FA guidelines. As the guidelines took effect in April 2015, the second quarter of 2015 includes a mix of FA and pre-FA loans.

The data show a very strong reduction in T&I Defaults in the post-FA period.   After 21 months, the pre-FA data set shows a T&I default rate of 1.9%, and an overall serious default rate of 2.5%. By contrast, the post-FA data set shows a T&I default rate of only 0.5%, and an overall serious default rate of 0.9%. For the purposes of this analysis, we define serious defaults as T&I defaults plus foreclosures and other “Called Due” status loans.

Given this result, we once again give the Financial Assessment concept high marks for reducing defaults. However, this is another mid-term grade that needs to be tested further as the post-FA portfolio ages.

Average loan size and subsequent draws are also higher for the post-FA market. Average loan balances are about 10% higher for loans currently aged 21 months or less compared to the comparable HECM loan population as of March 2015. This is not surprising since homeowners of more expensive home generally have better credit and ability to pay. Also, FHA now limits the amount that can be lent in the first 12 months. As recent months of HMBS issuance show, subsequent draws and HMBS “tail” issuance are a driving force in the industry’s profits. Dollars lent, and not just at initial loan funding, is the true metric by which the industry should measure industry growth.

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

Financial Assessment Works

Friday, February 17th, 2017

Financial Assessment is working. FHA’s new policy of requiring financial assessment (“FA”) of the borrower’s ability to pay has cut tax and insurance default by two-thirds and serious defaults almost in half, according to an analysis by New View Advisors.

FHA’s objective for the new Financial Assessment regulations was to reduce the persistent defaults, especially Tax and Insurance (“T&I”) defaults, plaguing the HECM program. 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 April 27, 2015. Since then, HECM lenders must make a financial assessment of the borrower’s 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 have remained a thorn in the side of the program.

It’s been nearly two years since FA began, so we should be able to measure the effect of this policy by comparing the default rates of loans originated just after and just before the FA rule was implemented.

With this in mind, New View Advisors looked at a data set of over 85,000 HECM loans, comparing loans originated in the immediate post-FA period from July 2015 through December 2016 to loans originated in the 18 month pre-FA period from October 2013 through March 2015. After July 2015, there were few (if any) loans originated under the pre-FA guidelines. As the guidelines took effect in April 2015, the second quarter of 2015 includes a mix of FA and pre-FA loans.

The data show a very strong reduction in T&I defaults in the post-FA period. After 18 months, the pre-FA data set shows a T&I default rate of 1.17%, and an overall serious default rate of 1.80%. By contrast, the post-FA data set shows a T&I default rate of only 0.39%, and an overall serious default rate of 1.03%. For the purposes of this analysis, we define serious defaults as T&I defaults plus foreclosures and other “Called Due” status loans.

Based on this result, we should give the Financial Assessment concept high marks for reducing defaults, however this is a mid-term grade that needs to be tested further as the post-FA portfolio ages.

Average loan size and subsequent draws are also higher for the post-FA market. This is not surprising since homeowners of more expensive home generally have better credit and ability to pay. Also, FHA now limits the amount that can be lent in the first 12 months. As the recent month of HMBS issuance shows, subsequent draws and HMBS “tail” issuance are a driving force in the industry’s profits.

Given these trends, estimates based on unit counts of HECM endorsements overstate the negative impact of financial assessment. Measuring by dollars lent, and not just at initial loan funding, is the true metric by which we should measure industry growth.

On a side note, this is New View Advisors’ 100th blog dating back to June 2009, a modest milestone, but a milestone nonetheless.

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

Dog Days of December: Return to the New Normalcy; Fixed Rate Adjusts Down

Tuesday, January 19th, 2016

The HMBS market returned to the new normal of the post-Financial Assessment era last month. Issuers created approximately $685 million in new HMBS pools during December 2015, down sharply from November’s $1.2 billion. Without any large seasoned pools, HMBS reverted to what is now a more usual month of issuance: $515 million in original loan pools and tail issuance of $170 million. A total of 92 pools were issued, consisting of 48 original issuances and 44 tail pools.

HMBS issuance in 2015 totaled about $9.5 billion, well above 2014’s $6.6 billion. This $2.9 billion increase consisted of a $1.0 billion increase in tail issuance, a $0.3 billion increase in seasoned original pool issuance, and an encouraging $1.6 billion increase in HMBS issues backed by pools of new loans.

Total outstanding HMBS is still about $53.3 billion, up only $58 million from the end of November. We estimate that this small increase is composed of approximately $162 million in negative amortization, plus the $685 million in new issuance, minus a record $789 million in payoffs. Payoffs are trending higher, driven primarily by assignments to HUD of seasoned HECM loans whose loan balances have reached 98% of their Maximum Claim Amount. Total HMBS float could soon shrink for the first time as early as this month.

The supply of outstanding Fixed Rate HMBS is already shrinking rapidly, to $29.1 billion at year end, down approximately $200 million from the end of November, and down almost $2.5 billion from its peak of about $31.5 billion in mid-2014. During 2015, Fixed Rate issuance accounted for only 19.0% of total issuance, down from 32.1% in 2014.

Original HMBS pools are created when a pool of FHA-insured Home Equity Conversion Mortgages (“HECMs”) is securitized for the first time. Tail HMBS issuances are HMBS pools created from the Uncertificated Portions of previously securitized HECMs. Newly originated loans usually comprise a large majority of HMBS issuance in any given month. As a result, HMBS issuance is a good barometer of recent HECM production.

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

Will Factor Rate Fracture HECM’s Fate? Present Value and the Future of HECM

Tuesday, November 25th, 2014

During FHA’s 2014 fiscal year, the following events occurred:  Home prices increased about 5% nationwide.  FHA’s Home Equity Conversion Mortgage (“HECM”) reverse mortgage program shifted from production of predominantly fixed rate loans to predominantly adjustable rate loans. Thousands of seasoned loans paid off and were replaced by a FY 2014 vintage with lower Principal Limit Factors, i.e. Loan-to-Value (“LTV”) ratios, and higher Mortgage Insurance Premiums (“MIPs”).  Each new HECM loan now pays a colossal 2.5% MIP at closing, or else is restricted for one year to a 60% draw of the Initial Principal Limit. The result of all this good news, according to FHA’s newly released MMI Fund Report and Fiscal Year 2014 HECM Actuarial Study:  the value of the HECM portion of its Mutual Mortgage Insurance (“MMI”) fund declined by $7.7 billion.  How is that possible?

The MMI Fund Economic Net Worth estimates are “Present Values,” that is, a single number that quantifies the economic value in today’s dollars of the fund’s future cash flows.  In both the MMI report and the accompanying Actuarial Review (see page i), the vast majority (67%) of this decline is attributed to a change in the “Discount Rate.”  What does that mean?

The terms “discount rate” and “discount factor” are central components of present value.  They describe two different numbers that are inversely related.  The “discount factor” is a number from 0 to 1 which, when multiplied by an amount of future cash flow, equals that future cash flow’s equivalent present value.  The “discount rate” is a number from 0 to 1, typically expressed as a percentage, which is a measure of how much value is discounted over a discrete period, typically a year or a month.  The two terms are related to one another in the basic present value equation:

Discount Factor = 1 / (1 + Discount Rate)t

Where t = time period

For example, if the annual discount rate is 10%, the discount factor for cash flow at the end of year 1 is approximately 0.9090909.  It follows that at a 10% discount rate, $100 received one year from now is worth approximately $90.91 today, and that $90.91 compounded at 10% for one year equals approximately $100.  The Actuarial report gives another example on page C-4.  Now, bear these relationships in mind when reading the Actuarial Report’s explanation for the large decline in the MMI Fund value, under Section f, “Discount Factor Update” on page 19:

“This decomposition step shows the effect of the FY 2015 budget discount factors. The latest OMB published discount factors are higher than the values of the FY 2014 factors used in last year’s Review, as shown in Appendix C.  The higher discount factors decrease the present values of both future positive and negative cash flows.  The net impact of discount factors is a balance among these opposing cash flow items.  As HECM recoveries occur at longer durations in the future than claims, the higher interest rate assumption in the long run has a larger negative impact on the cash inflows than outflows.  As the result [sic], the FY 2014 HECM economic value decreased by $5,182 million and the FY 2020 HECM economic value decreased by $13,763 million. This is the largest factor leading to the much lower economic value this year than last year.”

Let’s apply some decomposition steps of our own, and decompose this paragraph one sentence at a time.

The latest OMB published discount factors are higher than the values of the FY 2014 factors used in last year’s Review, as shown in Appendix C.

But wait a minute; at the bottom of page C-4, the same report states:

“The discount factors used in this Review are lower than the corresponding discount factors in last year’s Review.”

This contradicts the statement on page 19.  Which one did they mean?  Let’s read on and look for clues.

“The higher discount factors decrease the present values of both future positive and negative cash flows.”

This statement is doubly wrong.  First, higher discount factors increase the present value of future positive cash flows.  Second, the effect on positive and negative cash flows cannot be the same.  Higher discount factors mean lower discount rates.  Therefore, higher discount factors increase the present values of positive future cash flows, but decrease the present value of negative cash flows.  This is because the higher the discount factor (in other words, the lower the discount rate), the higher the absolute present value of the future amount.  That means a higher value for positive cash flows and lower value (that is, more negative) for negative cash flows.  So no clues there.

“The net impact of discount factors is a balance among these opposing cash flow items.  As HECM recoveries occur at longer durations in the future than claims, the higher interest rate assumption in the long run has a larger negative impact on the cash inflows than outflows.”

 We assume that the reference to “higher interest rate assumption” means “higher discount rate assumption,” given the context.  The federal government tends to use interest rates approximating the Treasury yield curve as the discount rates for calculating present values, as the Actuarial Report explains on page C-4.  The discount factors shown in Appendix C, when translated into the corresponding rates, do indeed result in a reasonable set of discount rates which approximate the Treasury yield curve a few months back. In the attached spreadsheet, we translate the present value factors into discount rates.

Given the conclusions of this year’s report, we have to conclude that the report really does mean higher discount rates, which means they meant to say lower discount factors on page 19 as well as in the Appendix.

But the issue is still confused.  That’s because the nature of FHA’s cash flows with regard to HECM are NOT as simple as “HECM recoveries occur at longer durations in the future than claims, the higher interest rate assumption in the long run has a larger negative impact on the cash inflows than outflows.”  This implies that FHA’s cash flows are all back loaded, and its negative cash flows are all front loaded.  In fact, this does not describe the lifecycle of any HECM loan.  Consider the present value equation in Appendix C, paragraph C3 of the Actuarial Report, “Net Future Cash Flows” on page C-4:

 “The portfolio cash flow for a HECM book of business can be computed by summing the individual components:

 Net Cash Flowt = Upfront Premiumst + Annual Premiums t + Recoveries t – Claim Type 1st – Claim Type 2st – Note Holding Expenses t

In other words, there is a lot more to HECM cash flow than recoveries and claims.  What’s more, different loans have different patterns of cash flows, so one can’t make general statements about the impact of changing discount rates.  Consider further four possible types of HECMs, categorized by four possible life cycles:

HECM Loan Type 1:  This loan never defaults and pays off before reaching 98% of the Maximum Claim Amount (“MCA”) and before the loan balance exceeds the property value.  FHA will simply collect premiums and never pay a claim.  For these loans, a higher discount rate decreases present value but, as the cash flow is all positive, the present value to the MMI fund is positive regardless of the discount rate.

HECM Loan Type 2:  This loan defaults and/or has a “crossover loss” before reaching the 98% Maximum Claim Amount.  A crossover loss happens when the loan balance exceeds the property value at the time of payoff.  For these loans, the MMI fund will earn premiums for months or years and then may pay a Type I claim when the loan pays off, if a loss occurs that is covered by FHA. For these loans, or any set of cash flows that is positive then negative, higher discount rates can increase present value, depending on the timing and magnitude of the cash flows.

HECM Loan Type 3:  This loan never defaults and pays off after reaching 98% of the Maximum Claim Amount, but before the loan balance exceeds the property value.  FHA collects premiums for several years, then buys the loan at the 98% Maximum Claim Amount (Type II claim), and then collects the accreted loan balance when the loan finally pays off.  For these loans, FHA’s cash flow is positive, then negative, then positive again. The present value impact of higher discount rates also depends on the magnitude and timing of these cash flows.

Looking at the discount factors however, we notice that they are well below the interest rates that FHA would earn once it purchases a loan at 98% of the MCA.  In other words, FHA pays a price of par to buy a loan earning premium interest, a fact much lamented by HMBS issuers.  So even if these discount rates are higher than last year, they are not so high that FHA has a negative carrying cost.  In the absence of losses, a loan in which FHA receives premium, then pays par, then collects premium interest, must generate positive present value for the MMI fund.  Higher discount rates may or may not decrease the present value, but the present value cannot be negative.  But of course, losses are not always absent, which brings us to:

HECM Loan Type 4:  This loan defaults and/or has a crossover loss after reaching 98% of the Maximum Claim Amount.  Premiums are collected, then FHA purchases the loan at 98% of the Maximum Claim Amount, then it eventually pays off.  For these loans, cash flow is positive, then negative, then positive.  At the time of payoff/liquidation, FHA suffers a loss, so the interest earned from buyout to payoff may not make up for losses (i.e. excess of Claims over Recoveries) and advances (i.e. the “Note Holding Expenses” in the equation above).  FHA does not buy HECM loans that are in default, which means that these loans acquired under the Type II claim are clean loans that have been in compliance for years, including payment of taxes and insurance.  HECM loans can default after FHA buys them, and these loans may become a larger problem for FHA, however, as the Actuarial report states on page D-4: “Default is a decreasing function of elapsed time from origination.”  The likelihood of default diminishes with each passing year, so these loans are positively selected from FHA’s standpoint.

The report’s characterization of HECM cash flow describes at best part of the life cycle for some HECM loans.  It could conceivably apply to the current MMI portfolio of HECM loans, which are all at different stages of their life cycle, but this seems unlikely, with so many new loans so far from the 98% assignment trigger.  As a result, the report falls far short of explaining the results of its model.

The report also does not adequately account for the FHA’s conclusion “that the HECM portfolio is well over ten times more volatile than the Forwards” (MMI Report, page 41).   Is this assertion supported by recent performance?  The reports have very little empirical data on past performance.  How many loans liquidated with losses last fiscal year?   What were realized losses from claims on these loans?  What was net cash flow?  How much MIP was collected?  Perhaps this data was in Exhibits II-10 and II-11, which seem to have gone missing from the MMI report.

A careful reading of these reports reveals a big difference between actual performance and projected performance.  For example, Exhibit II-5 (MMI Report, page 37) shows the experience of the Fund during FY 2014.  The Capital Resources of the forward loan portfolio declined 4.6%, the Capital Resources of the reverse portfolio declined 3.3%.  That doesn’t sound like ten times more volatility.

How does this volatility break down by each variable, for example, home prices?  The average LTV ratio of a new HECM barely exceeds 50%; many FHA loans have original LTVs as high as 97%.  Yes, HECMs have negative amortization and future draws, but are HECMs really ten times more volatile when they start off with at least 30% more equity?

Finally, these Economic Net Worth numbers that cast HECM in such a relatively bad light are projections based on a set of assumptions.  So which is really volatile:  the loans or the assumptions?  Are these assumptions more volatile in ways that favor forward mortgages versus reverse mortgages?   With all of these problems and unanswered questions, we must question the model’s methodology and the validity of its conclusions.

HMBS Issuance Hits 5-Year Low

Monday, March 17th, 2014

HMBS issuers created just $493.6 million in new HMBS pools during February 2014, the smallest monthly HMBS issuance since May 2009. 76 pools were issued, 44 original issuances and 32 tail pools. By comparison, HMBS issuance totaled $710 million in January 2014, $695 million in February 2013, and averaged nearly $800 million per month during 2013. Original HMBS issuances are the pools created when a pool of FHA-insured Home Equity Conversion Mortgages (“HECMs”) is securitized for the first time. Tail HMBS issuances are HMBS pools created from the Uncertificated Portions of HECMs that have already had their original HMBS issuance.

HMBS pools can be formed using seasoned collateral, but the healthy premiums of HMBS drive the vast majority of new HECM production quickly into HMBS. Since January 2013, at least 75% of every month’s HMBS issuance has consisted of participations from HECM loans aged 3 months or less. As such, HMBS issuance is a good barometer for recent HECM production.

February 2014 represents the first month in which original HMBS issuances almost entirely reflect HECMs originated in Fiscal Year 2014. Beginning with FY2014, HECM principal limits were cut once again, and FHA imposed new restrictions on the initial draw allowed for certain borrowers. The resulting lower HECM production inevitably reduces HMBS production.

Seasonality, secondary market conditions, and day count also affect monthly issuance totals. Day count differences account for nearly all the $16 million decline in tail issuance from January to February. However, with a still robust secondary market, and with other previous February issuances at least 40% higher, seasonality is not a factor. In fact, February 2010 was the third highest HMBS issuance month ever, with over $1.4 billion in new pools.

Overall Ginnie Mae issuance is down significantly too, with $21 billion issued in February 2014, compared to an average of $38 billion per month in FY2013. (These figures include both forward and reverse, Ginnie Mae I and Ginnie Mae II securities.) The $76 billion issued in the first quarter of FY 2014 is the lowest quarterly total since the 3rd quarter of FY2008. This reflects the decline in mortgage originations generally, especially refinancing.

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