Despite feelings of optimism expressed by loan originators in the opening weeks of 2024, the road to more normalized levels of reverse mortgage volume and securities issuances may be longer than expected.
Home Equity Conversion Mortgage (HECM) endorsements fell 11.8% to 1,900 loans in February, a drop telegraphed by lagging case numbers and sluggish endorsement activity in January, according to data compiled by Reverse Market Insight (RMI).
HECM-backed Securities (HMBS) issuance also recorded lower performance in February, dropping to $429 million. That was down 3.6% from the $445 million figure in January, according to Ginnie Mae data and private data compiled by New View Advisors. The data prompted New View analysts to term February’s performance as a “Valentine’s Day Massacre.”
HMBS issuance will have a fairly long road to recover to 2023 levels, which were already severely reduced from the record-setting issuance of 2022 brought about by elevated HECM-to-HECM refinance activity during the COVID-19 pandemic.
Industry remains optimistic
Every tracked geographic region recorded lower volume in February, but the largest — Pacific/Hawaii — recorded the least severe drop of 6.2%, according to RMI. Despite an overall drop in activity, the fact that the Pacific region remained more resilient than others is a good sign, according to RMI President John Lunde.
“It’s great to see the largest region drop less than most others, as that has a disproportionate impact on the overall industry,” Lunde told RMD. “Secondly, the Southwest also held up relatively well among the top three.”
Based on interviews RMD conducted with reverse mortgage originators and managers in the opening weeks of the year, most professionals relayed a sense of optimism about the number of inbound inquiries they were receiving. They also shared the progress they have made in building up loan pipelines, especially compared to the end of last year.
When asked whether this optimism may be misplaced considering the endorsement volume declines over the past two months, Lunde wasn’t so sure.
“I think about this differently in that originators could very well be seeing bright shots at a recovery and the endorsements simply haven’t caught up to that yet given the inherent lag,” he said. “The first sign we’ll get [a rebound] is case [numbers] issued, but that reporting has been later than usual the past few months, so we might not see it for a few more weeks.”
Professionals who have spoken with RMI are also generally optimistic, but Lunde said that could simply be an attribute of people within the industry.
“I’ve mostly heard some optimism, but I feel like all of us in the industry tend toward that by default on a pure survivor’s bias effect.”
Leading lenders
Among the top 10 lenders, only Goodlife Home Loans (a dba of Traditional Mortgage Acceptance Corp.) and Longbridge Financial recorded increases for the month. Lunde said that’s particularly encouraging in the case of Longbridge, considering its trajectory over the past four months and the volume declines of other top 10 lenders in February.
As for what other industry participants can do to keep business moving in a positive direction, Lunde said that recent changes to the HECM for Purchase (H4P) program could illustrate that the little-used reverse mortgage variation could be approaching its breakout point.
“I think the best places to focus right now are giving the H4P a muscular new push due to the seller concessions update, and working with forward mortgage distribution and servicing opportunities to convert forward loans into new reverse borrowers,” he said.
As for professionals who work in the country’s smaller regions, which recorded more severe decreases in February, Lunde said this could translate to opportunity for tenacious local professionals.
“There’s always an opportunity to be a big fish if you’re in a small pond and dominate your local area,” he said. “There may also be some easy, repeatable practices you can take from higher-volume regions that haven’t been fully explored in smaller markets yet. Smaller-market local media could be cheaper and still impactful there in ways that stopped working years ago in the bigger ponds.”
HMBS issuance
HMBS issuance in February came in $16 million lower than January’s figure. It was also the second-lowest monthly issuance ever recorded outside of the earliest days of Ginnie Mae’s HMBS program in 2009, according to New View.
“One would have to look to 2014 to find lower monthly volume,” New View stated in its commentary accompanying the February data.
Despite the fact that the former Reverse Mortgage Funding (RMF) portfolio continues to not produce any HMBS pools, New View partner Joe Kelly explained to RMD that there isn’t much pressure on the larger program because of that.
“No pressure, really — the Ginnie Mae market is very liquid,” he said.
One potentially positive development is that New View had originally predicted that HMBS production would be lower than it actually is, due to larger factors that influence pool production.
“Low issuance is caused by higher interest rates, resulting in lower Principal Limit Factors (PLFs), combined with the high upfront Mortgage Insurance Premium (MIP),” Kelly explained. “Until the upfront MIP is restructured, it will keep origination volume down. Most industry growth must come from proprietary loans.”
A recent addition to the HMBS program that allows for smaller aggregate pool sizes below $1 million is also seeing more buy-in from issuers each month, but it remains in line with expectations, Kelly explained.
Looking back
When asked to compare the low-issuance figures from 2014 with the current market, Kelly referred RMD to its blog post that detailed HMBS results for April 2014.
“Beginning with FY 2014, HECM principal limits were cut once again, and FHA imposed new restrictions on the initial draw allowed for certain borrowers,” the 2014 blog post stated. “The resulting lower HECM production inevitably reduces HMBS production.”
Contextualizing this with the current market, Kelly said that lenders closed more loans in anticipation of the impending changes, which had an adverse impact on that year’s loan production. But other factors influenced the industry then, so 2014 will likely be a better year for issuance than 2024 based on current projections, Kelly said.
“The reverse mortgage industry (in 2014) was in transition,” Kelly explained. “The big banks had just left and new lenders were gearing up: American Advisors Group (AAG), RMF and others. Still, HECM production and HMBS issuance finished strong in 2014 and nearly made it to $7 billion in total issuance, more than 2023 and much more than 2024 at its current trend.”
Despite these lower figures, liquidity is less of a concern, Kelly noted.
“The HECM program is on strong financial footing and the HMBS program is providing excellent liquidity,” he said. “Also, The HMBS program will be greatly improved if Ginnie Mae creates an ‘HMBS II’ securitization program for buyouts. Finally, HMBS execution has improved somewhat [so far] in 2024.”
