The trends in Home Equity Conversion Mortgage (HECM) -backed securities (HMBS) observed during the pandemic last year seem to favor the reverse mortgage industry, considering the various headwinds and tailwinds from policy changes and the impending price index shift. This emerges from the SVP of Capital Markets John Getchis of the Government National Mortgage Association (GNMA or “Ginnie Mae”), who spoke at the Virtual Policy Conference of the National Reverse Mortgage Lenders Association (NRMLA).
One of the headwinds was the disruption of financial market liquidity from the pandemic; the US Federal Reserve’s MBS market intervention and cancellation of HECM loans indexed to the London Interbank Offered Rate (LIBOR); Tailwind, which has been shown to be beneficial to the product category’s reputation, included scaled-up and rapid government interventions during the pandemic as needed; HECMs and HMBS cheap compared to other single-family MBS; and the low interest rate environment coupled with an increased HECM credit limit.
New administration and termination of LIBOR-indexed HECMs disruptive but not crippling
The termination of the LIBOR-indexed HECMs has certainly put pressure on the reverse mortgage industry’s operational and market-responsive capabilities and suspended loan production for a period of time, Getchis explains. However, HECM and HMBS are proving resilient compared to other categories, he says.
“HECM and HMBS are enjoying tailwind because the performance and security as fixed income securities are actually cheap compared to mortgage-backed single-family homes,” he explains. “Because although the prepayments are picking up, the volatility is not quite as great and predictable. That’s the key. I think whether with the purchase of the derivatives or the interest-bearing structures, both sides of the investor market will remain connected to the product. “
A solid tailwind is expected for the reverse mortgage product category, according to Getchis, as the current interest rate environment and the recovery from the pandemic become clearer.
“For the future, we have really good tailwind for this and especially for your product,” he told the audience from the reverse mortgage industry at the conference. “One is the low interest rate environment in which we operate and we can see the effects. But we can also expect at least some of the current economic signals [to show] that the engine starts slowly, and that already brings – for many reasons – some very large increases in the appreciation of home prices. “
Not only does this help the Federal Housing Administration (FHA) reverse mortgage prospect, it can also provide the reverse mortgage industry with future opportunities to lead the product into the future, Getchis says.
Bright spots to highlight
HREMICs, or the real estate mortgage investment conduits, which include reverse mortgage and HMBS spreads, have narrowed, according to Getchis, largely due to liquidity in the interests of investors. This is also illustrated by the other industry tailwinds mentioned earlier.
“Production has certainly recovered very well thanks to your refinancing activities, your increased credit limit and certainly also the appreciation of your own homes,” says Getchis. “I think in the latest outlook we certainly think the growth will be pretty big in the second quarter and will last for much of the summer, certainly until the vaccination rates hit, which we know can change quite abruptly.”
However, the emergence of a plan and the general forward momentum of the American public in vaccinating against COVID-19 seem to be accelerating the relaxation of certain pandemic restrictions, including the ability for businesses to operate with a level of normalcy not seen in the first few months in the year Year 2020, he says.
The capital will continue to be tied up by HREMIC sponsors, Getchis says, and the dampening effects of the influential GNMA All Points Memorandum (APM), the announced New restrictions on HMBS’s approval for floating rate loans, based on the LIBOR index, appear to have eased, he explains.
“HREMIC sponsors, who are transferring all of the HMBS infrastructure to create the additional demand, are still tying up capital, and they are very happy to do so,” he says. “From this point of view, that’s a very good sign. […] We also know that our APM 20-12’s cushioning effect that ruined your boys many months of winter and the adaptation of [APM] 20-19 is now behind us, and it looks like your issue size, market prices and investor prices, as far as I can tell, are responding quite nicely. “
APMs in the rearview mirror, the MMI Fund
APM 20-19 delayed the restriction on the approval of HMBS for floating rate loans that are operated outside the LIBOR index until March 1, 2021. The delay for originators was made to give them additional flexibility in adapting to a Issuing environment without LIBOR index, the standard for several years. The delay also meant Ginnie Mae had heard the concerns of the reverse mortgage industry. according to to a representative of the agency.
In addition, the FHA’s Mutual Mortgage Insurance (MMI) Fund appears well placed to answer questions that have arisen from the pandemic and previous stresses from the reverse mortgage program.
“Most importantly, we talk about what will happen in 2021 and 22 [will look like] The FHA fund is actually in a healthy place to break into this pandemic, ”Getchis says. “I think this allows him to have more tools, more listening, and probably less worrying about what previous HMBS Reverse Mortgage Program perceptions are or are not. And that’s an important thing, that’s essentially a new audience with maybe a new mindset that needs to be explored. “