HMBS October 2022 Part II: Refinancings Going, Going … but not Gone

HMBS payoffs fell again in October, as the refinancing wave continued its steady retreat. October payoffs totaled about $900 million, the lowest level in 20 months. Outstanding HMBS rose to a record $59.5 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” (now $970,800) and surging home prices. Higher interest rates finally caught up with the HMBS market, driving down Principal Limit Factors (initial loan-to-value ratios or “PLFs”) sharply. With the 10-year treasury above 4% and average loan margins well above 2%, HECM borrowers face higher rates and lower PLFs. This will prevent many potential new HECM borrowers from refinancing.

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 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 HECM loan remains outstanding. According to our friends at Recursion, 43% of HMBS payoffs last month were due to Mandatory Purchase. Last month’s 98% MCA Mandatory Purchases totaled $373 million, the highest total in 2 ½ years.

Including the Mandatory Purchases, HMBS paid off at a 17.1% annual rate in October, only the third one-month payoff rate of less than 18% in the last 20 months. 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 below 10% for the first time in 2 ½ years, barely half the rate of a year ago.

Despite the industry volume slowdown, 2021’s previous $13.2 billion HMBS issuance record will almost certainly fall: over $12.5 billion was issued in the first ten months of 2022.

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

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