Building on momentum seen in April, reverse mortgage volume and securities issuance each posted gains in May, with a caveat in place about the runway ahead from case number assignments in April.
Home Equity Conversion Mortgage (HECM) endorsements increased by 16.9% to 2,460, while HECM case numbers remained relatively flat compared to April, which could result in a scenario that interrupts a recent streak of consecutive monthly increases. This is according to data compiled by Reverse Market Insight (RMI).
Meanwhile, HECM-backed Securities (HMBS) issuance also rose in May by $23 million, totaling $526 million total for the month. There were 86 pools issued compared to the 89 pools issued in April. This is according to Ginnie Mae data and private sources compiled by New View Advisors.
HECM volume spikes, but case numbers are flat
The pace of endorsement growth has notably increased this year, but the flatness of April’s case number assignments could result in volume slowdown in the months ahead, according to RMI’s newest HECM Lenders report.
Good numbers are always encouraging but must be taken in concert with broader business realities, according to RMI President John Lunde.
“I always caution about monthly volatility, but I’m generally encouraged by the steady growth so far this year,” he said. “I believe originators spending their time on the harder but more sustainable path is responsible for this, in spite of a challenging rate environment, like bringing forward mortgage LOs on board with the product.”
Overall cases issued dipped by 0.4% to 3,488, which mostly maintained the peak seen in March but close enough to par that it could reflect in future volume. Equity takeout cases — loans that are neither purchases nor refinances — also dipped slightly by 0.9%, while purchases declined by 0.5%.
One loan type that did increase, however, were HECM-to-HECM (H2H) refinances, which jumped by 3.3% during the month. When asked about it, Lunde said it’s about striking when loan officers and borrowers see a chance.
“The strong home price levels and appreciation seen in some markets will continue to create very limited pockets of refi opportunity along with dips in the 10-year rates, but I think it’s more the former than the latter given recent rates,” he said.
Interestingly, among the tracked geographic regions, the Southeast/Caribbean managed to overtake the largely dominant Pacific region for the month. Lunde said that certain business dynamics helped push this result.
“Pacific has long been a leader in the industry, but it’s good to see Southeast picking up,” he said. “Pacific had disproportionate refi volume given its large installed base of existing loans, which opens the door for more parity given declines in the refi segment.
“It’s definitely a case where originators should dive back into the Southeast markets in more depth using our retail dashboard to identify where they can best position their sales and marketing resources to capture that volume.”
At the end of the day, however, the future growth for endorsements through the summer months rests on case numbers.
“If we don’t see increases in case numbers in future months, then we can expect endorsements to plateau and possibly decline, but hopefully we’ll see resumed growth in the next report,” Lunde explained.
HMBS issuance: Improved liquidity, but rates rule
HMBS issuance remains at historically low levels. It is not expected to come close to the records set in 2022 by the time this year is said and done, according to commentary accompanying the New View Advisors data.
Still, the first-participation production figure of May 2024 outpaced that of the same month one year ago, and liquidity has improved, according to Michael McCully, a partner at New View Advisors.
“Spreads have tightened and investor interest has improved for both HMBS and HECM buyout securitizations,” McCully said. “An expectation of rates peaking, and Ginnie Mae HMBS 2.0, are likely both contributing to the improved execution and liquidity.”
At the end of the day, however, rate movements will continue to correlate with industry performance on both issuance and volume levels, he said.
“As we have stated previously, HECM origination volume — and therefore, HMBS issuance — is highly correlated to interest rates,” McCully said. “As the 10-year Treasury goes, so goes volume. The increase in issuance volume in the past two months is marginal and issuance remains at an historically low level.”
A total of 22 pools in May featured aggregate sizes of less than $1 million, stemming from a policy change made last year by Ginnie Mae. This and other policy changes made by the government-owned company have helped the liquidity situation, McCully explained, but the smaller pools have another primary benefit.
“Every program enhancement from Ginnie Mae and FHA help liquidity,” he said. “But the sub-million pools help more with lowering intra-month financing cost than with liquidity. The reduction in intra-month financing cost can be significant, especially for issuers with large HMBS portfolios.”
Let’s test the astounding statement that HECM endorsement volume spiked last month. If one simply multiplies May’s endorsement volume by 12, that is a rate lower than 30,000 HECM endorsements per fiscal year.
Last fiscal year, nine months had more HECM endorsements than the total for May 2024 and the total volume for all last year was the second worst for any fiscal year since fiscal year 2003, almost 21 years ago. Further every month of the first eight months of this fiscal year except October 2023 had less HECM endorsement volume than May 2024.
Will HECM endorsement volume reach 30,000 for this fiscal year? With a modified annual conversion rate of just 70.6% of HECM applications with case numbers assigned becoming HECM endorsements for the twelve months ended May 31, 2024 and with case number assignments staying relatively low, it is hard to imagine the total HECM endorsements for fiscal year 2024 reaching 30,000. Even reaching 28,000 HECM endorsements is less than a 50% proposition for this fiscal year ending September 30, 2024.
With a total less than 17,800 HECM endorsements for the first eight months of this fiscal year, this fiscal year seems doomed to become the worst fiscal year for HECM endorsements since October 1, 2003. The overall downward trend since fiscal year 2009, at times has been breath taking. Yes, interest rates have been high but we need help from HUD to turn it around; a substantial drop in interest rates will help but a substantial increase in PLFs and the expected rate floor would help even more.