The investor market for reverse mortgages may have seen a demand surge in the near term due to market dynamics beyond the control of the insular HECM industry. But the secondary market isn’t likely to gain the long-term attention of mainstream investors until the reverse mortgage market takes off itself.
Heading into 2012, investor demand was strong, says Jeff Traister, managing director and HMBS trader and managing director for New York, N.Y.-based Cantor Fitzgerald. “Coming into 2012, there was a lot of money on the sidelines and a good chunk finally got put to work,” he says.
And in recent weeks, demand for Ginnie Mae Home Equity Conversion Mortgage securities (HMBS) has improved even further, positioning the products closer to more traditional investments, and having a trickle down effect leading to improved pricing for originators and reverse mortgage brokers.
“HMBS has tightened spectacularly in the past week across fixed and floating and different vintages,” says Darren Stumberger, managing director with New York, N.Y.-based Knight Capital Group, owner of Top-10 reverse mortgage producer Urban Financial. “Whereas Reverse Mortgage MBS has lagged other sectors in terms of ratcheting in, some of the gap has closed recently.”
This improvement takes place in light of lenders and HMBS issuers such as Bank of America and Wells Fargo leaving the reverse mortgage space last year.
Issuance in 2011 totaled just less than $10 billion with an additional $3 billion in HECM Real Estate Mortgage Investment Conduits, or HREMICs.
New issuers such as Urban Financial Group have stepped in to fill the issuer void left by the Bank of America and Wells Fargo exits from last year, but few have been approved since.
“I want people to be committed to the industry to get into issuing HMBS,” Ginnie Mae President Ted Tozer told RMD during a January interview. “We’re looking more for quality than quantity.”
Yet since Urban received its approval, the only other reverse mortgage lender to become approved by GNMA is Live Well Financial, a relatively small lender based in Maryland. Others like Cherry Creek’s 1st Reverse Mortgage USA, which closed close to 400 loans last year, have applied to issue as well.
But despite a growing list of lenders who wish to become GNMA approved issuers, overall industry origination volume has fallen about 27% on average since the major lender exits in 2011, according to estimates from Reverse Market Insight.
“I do have concerns about volume levels as not having enough product to go around makes it difficult to maintain investor interest,” Traister says. “No one likes to chase what appears to be a decreasing supply of product.”
The Saver
The HECM Saver, now in its second year of origination, has yet to amass the data needed to adequately attract investor interest, says Chris Mullins, Chief Operating Officer of Irvine, Calif.-based reverse mortgage lender American Advisors Group.
“[The interest from investors] will come down to prepayment speed,” Mullins says. “If they’re not comfortable with the prepayment rate, they are not going to buy it,” he says. “It’s going to take at least two years for people to get comfortable.”
AAG does not currently issue HMBS securities and declined to comment on whether it is in the company’s future plans.
With origination of the new HECM Saver product starting in October 2010, about 10% of reverse mortgages done today are savers according to HUD data. But the product hasn’t made the splash FHA initially projected it would, with initial projections placing the Saver proportion of the market around 20%.
“The HECM Saver is a very important product,” Stumberger says. “We’re hoping that it gains more traction in the market. To some extent it’s a different type of borrower, and there hasn’t been much volume—last year was just north of $300 million in origination, if that.”
What it will take for the product to sell to investors however, is time.
Due to the Saver being new, pricing is less attractive now than the Standard in wholesale and correspondent channels, Stumberger says, causing the majority of the product to be originated through retail channels.
“Prices paid to brokers and bankers need to improve for Saver volumes to rise, and prices will rise once the gap closes between Saver and Standard execution in the capital markets.”
Growing Pains
The investor market may be stable, but it hasn’t exactly grown. Until volume of reverse mortgages rises, the HMBS product will likely remain on the sidelines, traders say.
A recent development in investor products should open the door at least in the short term. The Yield Book, an investor analysis tool developed by CitiGroup, has recently expanded to include HECM analysis. The change is very well received in the secondary market because there are some investors who will only consider an investment if it can be run through the Yield Book.
“It’s a fantastic development, and think it will help attract new entrants to the space and help liquidity,” Stumberger says.
But large-scale interest isn’t likely to come until volume shows an uptick. With volume hovering around the 70,000 mark in 2011 and projected to remain around 71,000 in 2012, it remains to be seen what it will take for that to happen.
“This is still a pretty small industry,” Mullins says. “As the industry grows, larger players come in. They want to gobble things up in the $500 million range. It’s just a matter of time.”
Knight’s purchase of Urban Financial in 2010 gave the company access to Urban’s production and issuance. Cantor Fitzgerald, while not a producer, is making an effort to grow the investor base as well.
“We are constantly talking and meeting with new potential investors,” Traister says. “We are also working on elements that will vastly improve investor confidence in addition to product valuation abilities. We intend to do everything possible to mainstream HMBS product.”
HMBS mainstays remain positive about the future, even if today’s volume is not where it needs to be.
“At the end of the day, there’s strong support from HUD for the program,” says Stumberger. “…it’s conceivable some of the larger commercial banks re-enter the space to serve this consumer segment once the atmosphere calms down.”
This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.
Written by Elizabeth Ecker
