New View Advisors is pleased to release the second installment of its Reverse Mortgage Draw Index, including the first release of our Annual Adjustable Draw Index. The latest Ginnie Mae data for Monthly Adjustable HECMs show a steady draw rate of 1.92% in October, consistent with the 2.12% and 1.93% rates of September and August, respectively. The data also show that Annual Adjustable draw rates were 1.89% in October, consistent with and converging to Monthly Adjustable HECM draw rates.
Our index values for Monthly Adjustable Rate HECM loans during the last 3 months are:
Our index values for Annual Adjustable Rate HECM loans during the last 3 months are:
In the table above, 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. Unseasoned Loans are defined as loans originated no more than 2 years ago, and Seasoned Loans as loans originated more than 2 years ago.
Each month, Ginnie Mae releases pool level and loan level data on their HMBS securities and the loans underlying those securities. This 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.
For HECM loans securitized into HMBS, we estimate that the industry is funding approximately $95 million in line of credit draws each month in the monthly adjustable segment, and about $28 million in the annual adjustable product segment. For these same loans, we estimate the industry makes about $52 million per month in Mortgage Insurance Premium (“MIP”) advances, funds about $10 million Term/Tenure Draws, and earns about $15 million in excess spread. This adds up to $200 million, which squares nicely with the issuance of HMBS “Tails,” also running at about $200 million each month. These Tail HMBS are a crucial component of industry profitability.
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 month is available through subscription). This explains why 12 month adjustable draw rates are lower but converging with the Monthly Adjustable Loans. Annual adjustable loans are a relatively new product; only a handful of these loans are seasoned more than 2 years. However, each month a larger and larger number of annually adjustable loans reach the expiration of the restricted draw period. As a result, the Annual Adjustable loan draw rates are converging with the Monthly Adjustable Rates.
New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.