October 2018 HMBS: Scary Seasonal Mask Hides Market Decline

HMBS float grew in October thanks to a large issuance of highly seasoned collateral. Despite over $1 billion in payoffs, HMBS ended the month at $55.5 billion, up from about $55.3 billion at the end of September. HMBS issuance was also just over $1 billion, $473 million of which accounted for by three large highly seasoned issues. HMBS float has been range-bound between $55 billion and $57 billion, but could fall below that soon as payoffs usually outweigh issuance of new pools and negative amortization of existing pools.

Production of original new loan pools was about $325 million, down from September’s $360 million and August’s $344 million totals. Last month’s tail pool issuances totaled $220 million, within the range of recent tail issuance. In October 2017, HMBS issuers sold 107 pools totaling $913 million, of which $615 million was original new loan pools.

October 2018 issuance divided into 43 original pools and 56 tail pools. Original pools are those HMBS pools backed by first participations in previously uncertificated HECM loans. Tail HMBS issuances are HMBS pools consisting of subsequent participations. Tails are not from new loans, but they do represent new amounts lent. As we noted last month, tail HMBS issuance can generate profits for years, helping HMBS issuers in challenging periods.

We predicted earlier this year “we may be at Peak Buyout, and see a relative decline in Mandatory Buyouts in the near future.“ Peak Buyout is an echo of the peak issuance from 2009 through the first half of 2013. Much of this production has already been repurchased or repaid by borrowers. Payoffs have exceeded $1 billion per month for 12 of the last 15 months as many loans reached their buyout threshold, equal to 98% of their Maximum Claim Amount (“MCA”).

Our friends at Recursion broke down the prepayment numbers further: the 98% MCA mandatory purchases accounted for $632 million, or about 65%, of the payoffs last month. This continues a downward trend from August’s record of $869 million.

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

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