The reverse mortgage market in the US has had a tough time of it in recent years. The volume of HECM loans in the primary market has been steadily falling over time, from more than 100,000 mortgages annually in the market’s heyday of 2007-2009, to approximately 33,000 in HUD’s fiscal year 2023.
The rising interest rate environment of the past two years has been a contributing factor in the dampening of demand, which, should rates start to come down again in the next year or so, could pick up. But other events have hurt the industry of late. In the autumn of 2022, for example, Ginnie Mae took over a portfolio of HMBS from Reverse Mortgage Funding, a large player in the market that filed for Chapter 11 bankruptcy.
Those in the space looking for some good news have now received it. On 16th January, Ginnie Mae announced that it is: “Exploring development of a new securitisation product as part of its efforts to enhance and expand its existing Home Equity Conversion Mortgage (HECM) mortgage-backed securities (HMBS) program”.
Key to the new product is that it would accept HECM loans with balances above 98 percent of FHA’s Maximum Claim Amount (MCA). According to Michael McCully, Partner at advisory firm, New View Advisors, that’s a win.
“The original program – where a reverse mortgage can be assigned to HUD once the loan balance reaches 98% of the original appraisal or MCA limit – functioned fairly well, until it didn’t. As rates rose, the volume of loans passing the 98% trigger overwhelmed warehouse lenders, sharply increasing buyout financing costs.
“Having a new Ginnie Mae wrap (HMBS II) that securitizes HECM loans with balances above 98% of the MCA will reduce negative carry, stabilise the securitisation market, and improve liquidity,” McCully said.
As in many other markets, the securitisation market in the reverse mortgage industry is critical to the success of the industry at large. Unlike the UK, where the funding model involves life insurers issuing mortgages and holding them to maturity on their own balance sheet, the US market has specialist lenders operating in much the same way as the main mortgage market.
Consequently, a rising interest rate environment decreases liquidity and profitability, almost forcing the regulator to act. Those in the market rejoicing at the mid-January announcement shouldn’t get too excited yet, however.
“Ginnie Mae doesn’t want another lender to go bankrupt,” says McCully. “It’s a strong signal to the markets Ginnie Mae was willing to announce publicly they are working on the new program. But, the timeline for a new product launch will be measured in months, not weeks. Ginnie Mae has only 140 employees, responsible for a $2.2 trillion portfolio. It’s going to take time.”
At the time of publication, specific details of the new product were not publicly available. But for the reverse mortgage market to get back to the halcyon days of 2007-2009, more needs to be done.
“The industry needs two silver bullets,” said Joe Kelly, also a Partner at New View Advisors.
“First is HMBS II, second is a restructuring of the mortgage insurance premium (MIP). The Initial MIP is 2% of the appraised value or MCA, which is way too front loaded. It’s killing volume. FHA should reduce the upfront MIP, change the basis for the initial MIP from the home value to the loan balance, and increase the ongoing monthly MIP. They can maintain the present value of the total MIP charged over time but fix it so that it’s less of a hit to the consumer at the start.”
The change to which Kelly refers is feasible, in the sense that the regulator has the power to alter that structure. But even if that were to happen, the golden goose for the industry would be a scenario where the big banks decided to re-enter the market.
“The industry will be challenged to grow materially unless big banks re-enter the market. Years ago, potential borrowers could go into a local bank branch, and see leaflets for reverse mortgages. That customer is gone. It is very difficult for private credit investors to fill that void; consumers want to borrow from a recognised brand,” says McCully.
Still, beggars can’t be choosers, and Ginnie Mae’s recent announcement will have to suffice as the industry’s piece of good news du jour. Assuming lenders have no other new products with which to work, that’s good enough – for now.
“Despite current challenges facing the market, this news is still to be welcomed,” said Kelly. “It’s in everyone’s interest for these issues to be solved. If the industry has an HMBS II program, a restructured HECM MIP, and assuming interest rates cooperate, the outlook for the US reverse mortgage industry will be much improved.”