HMBS November 2022 Part II: Winter Headwinds Blowing

HMBS payoffs fell again in November, as the refinancing retreat turned into a rout. November payoffs totaled about $830 million, the lowest dollar amount in 22 months and the lowest payoff rate in over 6 years. Outstanding HMBS rose to a record $59.7 billion due to faster roll-up from rising interest rates and the drop in payoffs.

The HECM refi wave was assisted by a higher lending limit or Maximum Claim Amount “MCA” (for now $970,800) and surging home prices. 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. Additional woes came in the fourth quarter. In October, the trend of declining home prices became more clear and widespread. In November, Reverse Mortgage Funding, 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.

However, the 10-year treasury fell sharply in recent weeks and the lending limit/MCA will be raised to $1,089,300 in 2023; it remains to be seen if this will slow the steady decline in industry volume.

As interest rates rise, HECM loans hit their 98% MCA threshold faster. When a HECM loan balance reaches 98% of its MCA, the HMBS issuer is required to buy the loan 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 HECM loan remains outstanding. According to our friends at Recursion, over 50% of HMBS payoffs last month were due to Mandatory Purchase. Last month’s 98% MCA Mandatory Purchases totaled nearly $400 million, the highest total in 2 1/2 years.

Including the Mandatory Purchases, HMBS paid off at a 15.6% annual rate in November, the slowest one-month rate since June 2016. Exclusive of Mandatory Purchases, the rate of HMBS payoffs is falling rapidly. HMBS payoffs resulting from underlying HECM loan payoffs, including payoffs due to mortality and refinancing, fell to about 7.5% for the first time in over 3 years, barely one-third the rate of a year ago.

Despite the recent industry volume slowdown, 2022 has already set a new volume record: over $13.2 billion in HMBS issued, topping last year’s record. With the strong headwinds faced by the reverse mortgage industry, it seems unlikely that record will be surpassed in 2023.

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

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