HMBS July 2020 Part II: About That Equilibrium …

HMBS July 2020 Part II: About That Equilibrium …

Outstanding HMBS rose by about $686 million in July, as payoffs fell and issuance continued to grow. Payoffs totaled approximately $877 million, as mandatory purchases continued to fall. Total outstanding HMBS rose to over $55 billion, the highest total in 18 months. Is this the end of the HMBS range-bound equilibrium of the last year and a half, in which HMBS issuance and interest roll-up roughly equaled payoffs?

In 2019, HMBS posted the lowest annual total in five years. But 2020 is shaping up differently. In recent months, low interest rates and a higher lending limit boosted production significantly, while Mandatory Buyouts continue to fall. July was a case in point, with buyout dollar volume falling amid strong loan production. Overall Ginnie Mae production was $70 billion in July, also a record, and up 48% from a year ago.

“Peak Buyout” was an echo of the peak issuance from 2009 through the first half of 2013. Much of this production has already been repurchased by the issuers or repaid by borrowers. Each month fewer and fewer of these peak issuance HECMs remain, so fewer reach their buyout threshold, equal to 98% of their Maximum Claim Amount (“MCA”). Peak Buyout is long gone.

Our friends at Recursion broke down the prepayment numbers further: the 98% MCA mandatory purchases totaled $305 million, yet another 5-year low. This continues the downward trend from the buyout peak in the third quarter of 2018, which averaged over $750 million in Mandatory Purchases per month.

HMBS July 2020 Part 1: Fireworks Go Boom

HMBS issuance totaled $1.42 billion in July 2020, nearly a record month and the highest since February 2018. Strong new production and a large seasoned pool led the way. Helped by a continuing recovery in the capital markets and low interest rates, HMBS issuers easily surpassed June’s totals. 77 pools were issued in July.

Reverse mortgage lenders weathered a long period of reduced new origination volume, primarily due to the new lower PLFs for Home Equity Conversion Mortgages (“HECMs”) in effect since the beginning of FY2018. But HECM production steadily recovered, and now new production of HMBS exceeds its long-term average range of $500 – $600 million. Combined with the dramatic fall in default rates and the reemergence of proprietary loans, the reverse mortgage market is stronger than ever. However, this strength may still be challenged by changes in future economic conditions and the transition out of LIBOR.

The HMBS market totaled about $8.3 billion for calendar year 2019, down from $9.6 billion in 2018 and $10.5 billion in 2017. However, securitization of private reverse mortgages is a much bigger factor now. As a result, we estimate that the total issuance of reverse mortgage securities backed by new collateral in 2019 was about the same as 2018. All private reverse mortgage lenders who had suspended their program have resumed lending.

July production of original new loan pools was about $691 million, compared to $593 million in June, $586 million in May, $470 million in April, $455 million in March, $501 million in February, $550 million in January, and a mere $321 million in July 2019.

Last month’s tail pool issuances totaled $175 million, below the typical $200-$250 million range.
July issuance divided into 37 first-participation or original pools and 40 tail pools. Original pools are those HMBS pools backed by first participations in previously uncertificated HECM loans. Tail HMBS issuances are HMBS pools consisting of subsequent participations. Tails are not from new loans, but they do represent new amounts lent. Tail HMBS issuance is essential for HMBS issuers to finance their monthly advances, such as borrower draws, FHA mortgage insurance premiums, etc.

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