HMBS May 2018 Part II: Reprieve Over, Supply Shrinking at Record Rate

HMBS supply fell in May by a record $317 million, due to a combination of high prepayments and low issuance.

We noted in 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 in May was a measly $367 million; overall new supply was $579 million, as tail issuance remained strong.

We estimate that negative amortization of outstanding pools totaled $203 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 RecursionCo show about $693 million of the payoffs resulting from Mandatory Buyouts, the second highest total ever. However, for the third 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. The second and third quarters of 2018 may prove to be “Peak Buyout,” followed by a decline in Mandatory Buyouts in the fourth quarter and beyond.

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