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Reverse Mortgage Securities Market Booming—for Now

February 2018 was an excellent month for investors in reverse mortgage securities. According to New View Advisors, a financial services advisory firm located in New York, issuers of home-equity conversion mortgage-backed securities (HMBS) sold 129 pools in February, totaling $1.47 billion. That made for the second-highest month on record, surpassed only by the December 2009. Good news all around, right? Not so fast, says New View.

New View’s February report points out that principal limit factors are dragging down origination volume. As defined by MyHECM.com, the principal limit factor on a reverse mortgage is “a percentage value multiplied by the maximum claim amount (equal to the appraised value for most reverse mortgage borrowers) to determine the initial amount of proceeds available to a reverse mortgage borrower.” PLFs are set by HUD, and the Department altered the rules regarding them last October as part of an overall tightening of restrictions on the reverse mortgage program.

According to New View’s report, production of original new loan pools totaled $604 million in February 2018, down from $657 million in January and $747 in December 2017. New View predicts that this trend will continue, with reverse mortgage originations decreasing “as issuers run out their remaining supply of unsecuritized loans with the old, higher principal limit factors.”

However, New View finds a possible bright spot in the form of tail pools, which represent issuance created from portions of home equity conversion mortgages (HECMs) that have “already had their original HMBS issuance.” Tail issuance in February totaled $209 million. “HECM loans can generate profits through its monthly tails for years, helping HMBS issuers in challenging periods like this year,” states the New View report.

The Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage reverse mortgage program allows homeowners to withdraw some of the equity in their home. These HECM loans can also be pooled into HECM mortgage-backed securities within the Ginnie Mae II MBS program.

About David Wharton

David Wharton, Online Editor at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has over 15 years of experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. Wharton and his family currently reside in Arlington, Texas. He can be reached at David.Wharton@DSNews.com.

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