New View Advisors is pleased to announce the introduction of its Reverse Mortgage Draw Index. The New View Advisors Reverse Mortgage Prepayment Index has become the industry standard since its introduction in 2010. Ginnie Mae’s HMBS program was then in its infancy, but now dominates the HECM industry. Each month, Ginnie Mae releases pool level and loan level data on their HMBS securities and the loans underlying those securities. This increasingly comprehensive Ginnie Mae data repository enables a greater understanding of the underlying loan characteristics and behavior that drive performance within the reverse mortgage industry. Prepayment, Default, and Draw behavior are the Big Three of Reverse Mortgage performance indicators.
Draw behavior depends on several factors, but for investors, lenders, and HMBS issuers none is more important than loan age. The draw rate affects prepayment rates, HMBS “Tail” issuance, even frequency and severity of defaults. For all market participants, an accurate measure of draw rates is essential for managing cash flow, forecasting future capital needs and profitability, and measuring enterprise risk.
Draw rates follow the loan life cycle: draws tend to be higher in the early years of a loan, then decline to a stable plateau as the loan matures. The draw amount for many HECM loans is restricted in the first year, a program change introduced by FHA for FY2014. As a result, the overall draw rate jumps materially in month 13 (a complete report showing draw rate by loan age is available through subscription). The index value is expressed as a monthly draw rate, equal to the amount of Line of Credit draws taken in any given month, divided by the Total Line of Credit Amount available at the beginning of that month. The index applies to loans with a Line of Credit feature, and does not include fixed monthly “Term” or “Tenure” payments.
Our index values for August and September 2015 are:
Unseasoned Loans are defined as loans originated no more than 2 years ago, and Seasoned Loans as loans originated more than 2 years ago. Our initial release pertains only to Monthly Adjustable Rate HECM loans that have been collateralized into Ginnie Mae HMBS. The vast majority of these loans have 1-Month LIBOR as their underlying index, but a few are based on the 1-Month Constant Maturity Treasury “CMT” index. A 12-month LIBOR loan index will be introduced in a subsequent release.
We estimate the industry is funding between $90 – $100 million in draws each month for this product segment, which accounts for about one third of outstanding HMBS. These draw amounts are then securitized by Ginnie Mae issuers into “Tail” HMBS, an increasingly important component of industry profitability.
(Note: The following was published by New View Advisors, which compiles data from publicly available Ginnie Mae data as well as private sources.)