HMBS April 2018 Part II: Temporary Reprieve from Supply Shrinkage; Are We at Peak Mandatory Buyout?

HMBS supply rose in April, increasing by nearly $360 million from $56.2 to $56.5 billion. High prepayments were outweighed by high issuance, including two large highly seasoned pools totaling $542 million. Without these seasoned pools, HMBS supply would have declined by over $180 million.

We noted in our previous blogs that reverse mortgage lenders face a long winter of reduced volume, primarily due to the new lower Principal Limit Factors (“PLFs”) for Home Equity Conversion Mortgages (“HECMs”) effective this fiscal year. The total for new pools backed by new loans was a measly $401 million, but with the seasoned pools and strong tail issuance HMBS securitization volume rose to $1.2 billion, the seventh highest HMBS monthly issuance level ever.

We estimate that negative amortization of outstanding pools totaled $210 million, slightly exceeding last month’s record. Despite the $1.057 billion in payoffs (5th highest ever), total outstanding HMBS float rose $358 million. Most of the payoffs were once again due to mandatory buyouts, in which the issuer buys out HMBS participations backed by HECM loans whose balances have reached 98% of their Maximum Claim Amount. Our friends at Recursion show about $676 million of the payoffs resulting from Mandatory Buyouts, the second highest total ever. However, for the second month in a row, this was a lower percentage of overall buyouts. This wave of buyouts is an echo of the very large issuance from 2009 through the first half of 2013, especially those backed by fixed rate HECMs with higher interest rates and higher initial PLFs. We may be at “Peak Buyout,” and see a relative decline in Mandatory Buyouts in the near future.

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