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Reverse Mortgage-Backed Securities: Good News and Bad News

Issuance of home equity conversion mortgage-backed securities (HMBS) rose to $1.2 billion in April 2018, according to a new report by New View Advisors, “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.” That gave April the seventh highest monthly issuance level on record, according to New View Advisors, which bases their analysis on a combination of publically available Ginnie Mae data and other private sources.

New View reports that the $1.2 billion issuance for April included over $542 million in highly seasoned pools, coupled with more than $260 million in tail pool issuance. The New View report states, “The supply of highly seasoned, unsecuritized HECM loans is a rapidly melting iceberg, but it’s a big iceberg. Fannie Mae still has about $25 billion in HECMs on its books, years after ceasing its HECM loan purchases.”

However, New View reports that the lower principal limit factors (PLF) for that were implemented for HECMs this fiscal year continue to drive down HMBS volume. “The supply of recently originated unsecuritized HECMs originated at the old PLFs is essentially exhausted,” states the report, “allowing the full effect of the new PLFs to hit hard. Higher interest rates will not help either, as they generally require lower PLFs.”

The production of new original loan pools totaled $401 million in April, continuing the downward trend. For perspective, original loan pool production for March was $419 million. The months preceding March totaled $604 million (February), $657 million (January), and $747 million (December 2017). Total HMBS issuance for March was $626 million, the lowest monthly level since September 2014.

April HMBS issuance was divided between 63 original pools and 57 tail pools.

New View explains, “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 like the long winter of discontent ahead.”

The FHA’s 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 Author: David Wharton

David Wharton, Editor-in-Chief 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 nearly 20 years' 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. He can be reached at [email protected].

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