The trend in reverse mortgage origination in the US in the past decade or so has been down, down, down. According to the National Reverse Mortgage Lenders Association, fiscal year 2024 – which, for the Department of Housing and Urban Development (HUD), ended on 30th September last year – delivered just 26,521 HECM mortgages, the lowest number since 2003 (18,097).
The story in the securitisation market has not been quite so negative, however. Tail issuance and growing loan balances over time provide additional capital that can be securitised to maintain healthy activity in the market. Indeed, HMBS issuance data from Ginnie Mae shows that December saw $575m worth of activity, the third best month since 2023.
“Over time, the HMBS market has expanded, despite lackluster HECM origination volume,” said Michael McCully, Partner at New View Advisors, “with the notable exception to that trend during the pandemic.”
“Because of agency – and particularly Ginnie Mae – liquidity in the secondary markets, lower volume has not proven to affect the depth of the market, trading, or pricing in HMBS. Low volume was a fear in 2010 when FHA made its first (and most dramatic) PLF reductions, but it proved not to be true.”
Then, in November, the market received a very welcome shot in the arm, as Ginnie Mae announced the terms for ‘HMBS 2.0’, the agency’s attempt at providing additional liquidity to the market.
First mooted more than a year ago, HMBS 2.0 notably increases the mandatory buyout threshold to 150% of the maximum claim amount (MCA, up from 98%), which, in aggregate, will provide significantly more flexibility to HMBS issuers before mandatory buyouts are required.
The impact of this on the availability of HMBS products for investors could be significant.
“Based on the final HMBS 2.0 term sheet, up to $431m per month of buyouts would have been eligible for HMBS 2.0 in 2024. That almost doubles HMBS volume, which was $6bn last year,” said McCully.
Other benefits of this development accrue to the institutional investor. The repurchase of loans at the original 98% MCA threshold leads to an acceleration of prepayments within the HMBS pool, so investors receive their principal back sooner than anticipated, which can affect the expected yield of the security. Additionally, early loan buyouts can disrupt the anticipated cash flows to investors, potentially leading to reinvestment risk, and by repurchasing the loans, issuers assume the associated credit risks until the loans are either assigned to HUD or otherwise resolved.
So, an encouraging development for capital allocators. But 2024 did not only deliver good news from the US market. Last July, the Australian market saw its first securitisation of reverse mortgages in many years when non-bank lender Household Capital issued securitised product rated by Moody’s. Joshua Funder, CEO at Household Capital, says that this is just the beginning.
“We expect to return to the securitisation market annually for the foreseeable future with increasing volumes of high quality, rated Australian variable rate reverse mortgage portfolios,” he said.
An interesting difference between the US and Australian markets is that the latter does not enjoy the benefits of having a federal backstop, something which provides great comfort to those with exposure to the US HMBS market.
That doesn’t mean that the risk profile of Australian product is significantly lower, however.
The passing of the Consumer Credit Legislation Amendment (Enhancements) Bill in 2012 by the country’s lawmakers provided a swath of consumer protections which, for the country’s reverse mortgage market, meant Australia has among the lowest loan-to-value reverse mortgage ratios in the world.
In 2018, the market received an additional boost as the Australian Securities and Investment Commission’s review of the performance of these regulations found no material breach, but it is not only the regulatory environment that supports risk management in the space.
“Australian reverse mortgages are variable rate, and those variable rates are correlated with long-term property price appreciation. This provides additional risk reduction for negative equity, equity erosion and bequest reduction,” said Funder.
“Additionally, Australian equity release customers tend to discharge voluntarily around 12% per annum, making the average weighted life around 8-9 years and de-coupling discharge from mortality alone and break fees.”
It is not just Funder who appears bullish on the market; an article in the November 2024 issue of the Australian Securitisation Journal by Moody’s says that the firm “expects Australian reverse mortgage and other equity release securitisation issuance to grow over time”.
The news story of the past few years in the primary equity release/reverse mortgages market has indeed been falling numbers of origination, as higher interest rates made these products more expensive for the consumer.
But now, things are looking up. Stateside, the Federal Reserve cut the Federal Funds Rate by 100bps in total in 2024, which should, other things being equal, drive demand; activity is pacing to deliver an increase this year. In the UK, green shoots appeared in the fourth quarter of last year.
And they are certainly looking up for the securitisation market, at least, in theory. US President Donald Trump’s federal hiring freeze, along with a raft of potential retirements, could delay the implementation of HMBS 2.0. But when it is finally implemented, institutional investors will have a larger menu from which to choose.
“As I said, we could see a doubling of HMBS volume thanks to the changes made by Ginnie Mae,” said McCully.
“More securitisation issuance provides more options to more investors. That, coupled with the expected increase in activity in the primary market, means that the next few years could see activity in the securitisation market reach new highs.”
