The one constant in the reverse MBS arena since I entered the market in 2006 is change. There haven’t been many dull moments! The main issue continues to be the concern that GNMA issuers are not receiving “true sale” upon the origination and sale of securitized HECMs. Obviously, you cannot have a viable, sustainable securitization program without achieving a true-sale accounting and one hopes these matters get resolved in D.C. sooner rather than later. There is no private market solution to fall back on as the non-agency securitization market is still in a coma.
I would guess that the holders of the 2006 and 2007 vintage non-agency HECM deals, with their bonds trading at 70 cents on the dollar, won’t be the first to jump back in, even if there were a revival of these issues. The buyer base of these non-agency issues is very different than the buyer base of GNMA Reverse MBS. With yields where they are in non-agency residential MBS, interest rates for newly originated HECMs would have to be raised a great deal for bondholders to achieve similar yields. This would greatly impact upfront proceeds to the borrower, and would cause the origination market to contract upward of 50-75 percent. Bottom line: The accounting issue needs to be fixed.
Spreads have gotten tighter after a technical widening in early summer. Fixed-rate spreads are 105 to swaps for August settle bonds, with floaters trading at a high 60s to low 70s discount margin for premium paper. There’s a scarcity of paper dynamic occurring in the market, which will continue to benefit originators and keep spreads contained. We’d need a macroeconomic/FHA program event to happen for spreads to push materially wider from here (end of 2010, etc.). In July, there was $681 million of GNMA HMBS issued, with Reverse Mortgage Solutions and Urban Financial comprising 66 percent of that. Additionally, more than $500 million of H-REMICs was issued and sold to investors. Bank of America Merrill led the pack with a $166 million in transactions, followed by Knight Capital Group at $153 million, and RBS and Barclays at $103 million and $87 million respectively. Prepayment speeds for 2010 and 2011 fixed-rate vintages came in at roughly 50 percent of the HECM prepayment curve. The 98 percent maximum claim buyouts will continue to register a higher percentage of the cash-flows for the 2008 and 2009 vintages going forward.
So, heading into the ever tumultuous fall season, performance in the HMBS arena continues to be strong. We are hopeful that originations will begin to uptick given the fact that some of the origination landscape has been shifting, there are rumors of new entrants to the market, and new GNMA Issuers are coming aboard and ramping up (Silvergate Bank, Security One Lending, One Reverse, Genworth, LiveWell Financial). There will be next steps with the CFPB and originators are currently crafting responses to its recent report to Congress. Still, there is really only one news item here and it’s called true sale.
