HMBS payoffs increased in August, as Mandatory Purchases continued to rise and natural payoffs increased to approximately 8.2% per annum. August payoffs totaled about $980 million. Outstanding HMBS fell for the seventh month in a row and is now under $59 billion for the first time in a year due to continued weak issuance.
Higher interest rates finally caught up with the HMBS market in 2022, driving down Principal Limit Factors (initial loan-to-value ratios or “PLFs”) sharply. Big trouble came in the fourth quarter. In October, the trend of declining home prices became more clear and widespread. In November, Reverse Mortgage Funding (“RMF”), holder of the largest HMBS servicing portfolio, declared bankruptcy. In December, AAG, the top HECM originator, agreed to sell its assets to Finance of America Reverse, taking another major HMBS issuer out of the picture.
Also in December, Ginnie Mae took 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 4,042 former RMF pools. About $339 million of Issuer 42’s portfolio paid off in August. “Issuer 42” HMBS accounts for just over $19 billion, or about 32% of all outstanding HMBS.
Issuer 42 is not issuing any tail pools. We estimate Issuer 42 has an approximate $900 million uncertificated position, that is, the excess of their portfolio’s HECM asset balance over the balance of their HMBS liability. So far Ginnie Mae’s position is like Fannie Mae’s HECM portfolio, a big melting iceberg which has dwindled from $75 billion to less than $5 billion today, more than a decade after Fannie bought her last HECM.
The lending limit/MCA was raised to $1,089,300 in 2023; so far this has not prevented a significant decline in industry volume. Higher interest rates and slowing home price appreciation will challenge the HMBS market for the foreseeable future.
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, totaling about $550 million, continuing a trend of rising HMS buyouts and HECM assignments to HUD.
Including the Mandatory Purchases, HMBS paid off at an 18.8% annual rate in August, and 16.9% over the last 12 months. Exclusive of Mandatory Purchases, the rate of HMBS payoffs has fallen significantly over the past twelve months. Natural payoffs (those other than Mandatory Purchases) for the 12 month period ending 8/31/2023 were 7.9% per-annum compared to 17.5% for the prior 12 month period.
New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.