New Year’s Resolution: Use HMBS Data Properly

The HMBS market began 2018 much like it began 2017, with a month of just under $870 million in total new issuance and range bound in total outstanding float. This may change in 2018 as the new Principal Limit Factors (“PLFs”) start to reduce origination volume. In January, HMBS float rose by over $112 million dollars, helped by a dip in payoffs, which in turn was caused by a sharp decline in HECM refinancings. HMBS prepayments fell to $943 million, the lowest amount in 6 months. Issuers kept HMBS supply up with 111 new pools totaling $869 million.

January issuance divided into 60 original pools and 51 tail pools. No highly seasoned original new loan pools were issued. Production of original new loan pools was decent at $657 million, but is down from December’s big $747 million total. New production pools will probably continue to decrease as issuers run out of their remaining supply of unsecuritized loans with the old, higher PLFs.

However, new HMBS pools secured by new loans do not tell the whole story. Original pools are those HMBS pools backed by first participations in previously uncertificated HECM loans. Tail issuances are HMBS pools consisting of subsequent participations. In other words, tail pools are created from the Uncertificated Portions of HECMs that have already had their original HMBS issuance. Last month’s tail issuance was $212 million, consistent with the record pace of tail issuance in 2017. Tails are not from new loans, but they do represent new amounts lent. An active HECM loan can generate profits through its monthly tails for years, helping HMBS issuers in challenging periods like this year. Analysis that relies on unit-count endorsements or focuses only on original pools production does not give a complete picture of the industry’s health.

Last month, total outstanding HMBS rose by about $112 million from December. We estimate that last month’s change in HMBS balance was composed of over $187 million in negative amortization, plus the $869 million in new issuance, minus $944 million in payoffs. Payoffs have exceeded new issuance in 16 of the last 17 months.

Payoff figures were sharply lower in January, at an approximate 19% annual rate, driven more and more by seasoned HECM participations being liquidated from HMBS pools as they reach 98% of their Maximum Claim Amount (“MCA”). Our friends at RecursionCo crunched the numbers: the payoffs from 98% MCA assignments totaled approximately $619 million last month, the second highest total however. Mandatory 98% MCA purchases are approaching 70% of all HMBS payoffs. Recursion’s data also shows January HMBS payoffs due to refinancing falling below $43 million, the lowest amount since March 2016. This is a sharp decline from the $74 million average in 2017, but not surprising given rising rates and lower PLFs.

(Editor’s note: The following article was published with permission from New View Advisors, which compiled this data from publicly available Ginnie Mae data as well as private sources.)