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What’s Happening With Reverse Mortgage-Backed Securities?

Home equity conversion mortgage-backed securities supply took a bit of a dive in March 2018, dropping by over $200 million month-over-month. That’s according to a new report by New View Advisors [1], “a financial services firm advising clients on capital markets, product development and valuation, mergers and acquisitions, and asset investment strategies in the reverse mortgage industry.” As reported by New View, HMBS supply decreased in March from $56.4 to $56.2 billion. New View’s analysis is based on a combination of publically available Ginnie Mae data and other private sources.

This trend toward decreasing HMBS supply isn’t new. According to New View Advisors [2], March marked the sixth time in a row that HMBS supply has decreased month-over-month. March’s drop, however, was the largest decline of that run thus far.

HMBS issuance fell to $626 million in March, the lowest monthly level since September 2014.

New View estimates that negative amortization of outstanding HMBS pools totaled $210 million for the month, a record. However, New View’s report adds that “the meager issuance and nearly $1.036 billion in payoffs (5th highest ever) resulted in the $200 million reduction in total outstanding HMBS float.”

New View Advisors notes that downward trends in HMBS issuance are being driven by several factors, including new lower Principal Limit Factors (PLFs) for Home Equity Conversion Loans (HECMs) that became effective this fiscal year. As succinctly defined by MyHECM.com [3], 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 [4], and the Department altered the rules regarding them last October as part of an overall tightening of restrictions on the reverse mortgage program.

The Federal Housing Administration’s [5] (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 [6].