says. Fannie Mae eventually accumulated a HECM portfolio of more than $50 billion. Private-sector broker dealers followed up with efforts to securitize HECMs in 2006 to 2007, thinking they could do better than Fannie Mae, McCully says. But their efforts did not gain traction. Fannie Mae, though, eventually decided to back off buying HECMs and started to exit the market in 2008. Fortunately, a team of bankers from the former Lehman Brothers, including Joe Kelly, who is now a partner at New View Advisors, had proposed to Ginnie Mae in 2004 several program improvements, including fixed-rate HECMs and the HMBS securitization structure. They persuaded the Government National Mortgage Association (Ginnie Mae) to provide a government-backed guarantee for HECMs. The move gave investors confidence in securities backed by the loans, McCully says. “The Ginnie Mae wrap further validated the HECM program,” he adds. The shift also led to growth in fixed-rate HECMs, since Fannie Mae had only been interested in adjustable-rate products. The next step in the market’s evolution came about with standardized pricing assumptions for HMBS, McCully says. “Sellers would have a pool of loans to bid out to broker-dealers and each bidder used a different set of assumptions to determine value.” Among the breakthroughs was an agreement on a benchmark prepayment curve reflecting the expected speed at which HECMs would prepay, he says. “That was a big milestone for our industry.” Over time, the pool of investors in HMBS has deepened, McCully adds. It now includes banks and thrifts, insurance companies, hedge funds and other money market funds, state and local authorities—essentially any investor that buys AAA-rated securities is a possible investor. “The market has become larger. It’s more recognized. And there’s a standard set of benchmarks that were established over time to improve liquidity,” McCully says. The market also has grown more efficient with the introduction of an additional layer of securitization known as a HMBS real estate mortgage investment conduit, or HREMIC, McCully says. “HREMICs are relatively simple structures that further optimize the value of the underlying HECMs to suit investor needs,” McCully says. “Approximately 90 percent of all HECMs end up as collateral in HREMICs.” The result has been greater liquidity and better prices in the market, which translates into more proceeds for borrowers and improved profitability for lenders, McCully says. But because the secondary market for reverse loans is smaller than the forward market, the impact of bond buyers can be greater, says McCloskey. Buyers are influenced by interest rates, as they are in any bond market, she notes. But they also react to regulatory changes to the HECM program, such as the 2017 modifications to principal limit factors. Known as PLFs, they determine the cash proceeds available from a HECM. Other major tweaks include the introduction of financial assessments for potential borrowers. “Those changes do affect the appetite of the end buyer,” she says. The changes in the market can impact the prices paid to originators, even after they have originated a HECM and lined up a buyer, given the time it takes to close a loan, she says. Where It’s Going The other turning point for the secondary market in reverse mortgages is the return of private-label reverse loans. Non-agency reverse mortgages were relaunched in 2014, but it took three years to accumulate enough loans for a securitization, McCully says. Thus, the first securitized pool of new-issue private-label reverse mortgages was sold in 2017. There had been a small number of seasoned pools securitized. Market volume of private-label reverse mortgages receded in 2020 due to the COVID-19 pandemic and the sharp drop in interest rates, which made HECMs more attractive, McCully says. The drop in rates also spurred growth in HECM-to-HECM refinancings, which boosted prepayment speeds and distorted projected returns for investors. Nonetheless, there have been more than two dozen securitizations of private-label reverse mortgage loans since the program’s re-emergence, he says. The private-sector nature of the market makes data on volume harder to come by, but, McCully says, “It’s doing extremely well. Just as with HMBS, investors have taken the time to understand the collateral and the many positive attributes and benefits reverse mortgage securities offer.” REVERSE MORTGAGE / JANUARY-FEBRUARY 2022 25
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