HMBS September 2022 Part II: Refi Retreat Resumes

HMBS payoffs fell again in September, as the refinancing wave resumed its retreat. September payoffs totaled about $948 million, the lowest amount in 19 months. Outstanding HMBS rose to a record $59.3 billion due to a faster roll-up from rising interest rates and the drop in payoffs.

The HECM refinance wave was assisted by a higher HECM lending limit or Maximum Claim Amount (“MCA,” now $970,800) and surging home prices. Higher interest rates have finally caught up with the HMBS market, driving down principal limit factors (initial loan-to-value ratios) sharply.

September HMBS paid off at a 17.6% annual rate, only the second 1-month payoff rate below 20% in over a year. The natural rate of payoffs is falling rapidly. Natural HMBS payoffs result from underlying HECM loan payoffs, including HECM loan payoffs due to mortality and refinancing and excluding Mandatory Purchases (see below). Natural HMBS payoffs are barely half of what they were a year ago and are bound to fall further, perhaps sharply, in the fourth quarter.

As interest rates rise, HECM loans hit their 98% MCA threshold faster. When a HECM loan balance reaches 98% MCA, the HMBS issuer is required to buy these loans out of the HMBS pool. Although this is effectively a prepayment event for the HMBS investor, the HECM loan remains outstanding. Our friends at Recursion broke down the prepayment numbers further: 40% of HMBS payoffs last month were due to Mandatory Purchase. Last month’s 98% MCA mandatory purchases totaled $363 million, the highest total in nearly 2 ½ years.

While 2021 is the current issuance volume recordholder with $13.2 billion of HMBS issued, that record may still fall: over $11.6 billion was issued in the first nine months of 2022.

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

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