This most recent US government financial year, which ended on 30th September, delivered just 24,182 HECM endorsements, the lowest number since 2003.
Issuance in the agency-backed reverse mortgage market has been on a generally downward trajectory for many years. The issues with the product are well-discussed; the yield on the 10-year CMT (Constant Maturity Treasury index) being stubbornly high (it’s hardly moved below 4% in the past two years) and the punitive mortgage insurance premium (MIP) charge both being cited by market participants as being significant drags on market activity.
The former is the biggest issue: the Department of Housing and Urban Development (HUD) uses the 10-year CMT as the benchmark for the ‘expected rate’, which in turn is used to calculate the initial principal limit of a HECM loan; the higher the rate, the less a borrower can borrow because the debt rolls up faster in a higher rate environment.
But many agree that reform is needed, including HUD itself, apparently, which issued Future of the HECM and HMBS Programs and Opportunities for Innovation in Accessing Home Equity, a request for information that “aims to gather market feedback on opportunities to enhance the HECM and HMBS programs and the appropriate role of these programs in facilitating access to home equity for senior homeowners.”
The thing is, the RFI was issued more than a year ago, on 2nd October last year. And since then, there’s been nothing forthcoming – at least, publicly, at the time of writing – from HUD with regards to next steps. But, that the RFI was even issued was a source of frustration, as is the waiting game for an update.
“After much effort the previous two years getting HMBS 2.0 to the goal line, market participants were disappointed to see the RFI at all. It felt like a 100% reset, with no explanation,” said Michael McCully, Partner at New View Advisors.
“The federal government can take a long time to implement meaningful change. When Lehman Brothers proposed the original HMBS construct to Ginnie Mae in 2004, it took them three years to launch. Having said that, the market would like to get feedback from HUD on last year’s RFI responses as soon as possible.”
HUD didn’t answer directly a question from Longevity and Mortality Investor with regards to when a public follow-up to the RFI might be published, but a spokesperson did say in an emailed statement that “HUD appreciates the public input received in response to the RFI. HUD continues to monitor the HECM and HMBS programs and evaluate opportunities to support the programs’ long-term effectiveness and sustainability.”
But while investors that like to have exposure to reverse mortgages in their portfolios face a dwindling opportunity set – for now – in the agency space, they do have a ready-made replacement in the proprietary reverse mortgage market, which has delivered more than $3.5bn in aggregate issuance in the first three quarters of the year, compared to approximately $2.7bn in the HECM space.
The proprietary market is free from some of the shackles of the restrictions imposed by the HECM structure in the sense that there is no MIP, and there is no IPL (initial principal limit, the gross maximum dollar amount a borrower is eligible to borrow from their home equity at loan closing), making the product arguably more straightforward and easier to understand for the consumer.
While interest rates tend to be higher in the proprietary market, given that a third of Americans that take out a reverse mortgage do so to pay off their forward mortgage, it becomes clear that when more people have access to more cash, more of them will enter into a reverse mortgage transaction to settle their existing debt and enjoy the freedom that not having a monthly mortgage payment brings.
But both sides of the US reverse mortgage market were dealt a setback in September when the US Federal Reserve raised interest rates for the first time since July 2023, and while recent comments by Federal Reserve Bank of New York President John Williams suggest that the upcoming October meeting might not result in another increase, traders are pricing in a movement at December’s meeting, which would mean a 50 basis point increase in just three months, which would likely put further upward pressure on the 10-year CMT.
But while HUD can’t do much about interest rates, it can do a lot about some of the other issues facing the HECM part of the space.
The National Reverse Mortgage Lenders Association, for example, in its response to HUD, said that it would like to see the FHA shift HECM loan interest rate benchmarks from the CMT index to SOFR. Because secondary market securities already use SOFR, aligning loan rates eliminates index mismatch risk for investors. For the primary market, this alignment lowers hedging costs and boosts security prices for lenders. Consequently, lenders can pass these savings directly to senior borrowers through lower upfront fees, better interest rate margins, and higher available borrowing limits.
New View Advisors says that returning to true sale accounting methods would bring back some of the banks and other larger, more established lending institutions, which it says would further facilitate liquidity and origination volume.
Mutual of Omaha said that a tiered, risk-based MIP structure that aligns pricing with utilization
and borrower risk would expand access to lower-risk borrowers, strengthen MMIF sustainability, improve HMBS market confidence and enhance affordability for line-of-credit users.
Some of the other responses to the RFI are rather quite punchy indeed, including one suggestion that the HECM and HMBS programs be eliminated altogether.
Whether HUD takes such drastic steps remains to be seen. But while there are some good months of steady HMBS issuance figures – August 2026 was the ‘best’ month this year – that volume is based heavily on compounding interest, subsequent line-of-credit draws, and legacy pool tail securitisations.
But unless – until? – HUD reforms the agency space, the downward trend of recent years is likely to continue. And if interest rates don’t come down soon, there could be an impact in the proprietary market, even if it is expected to provide some support overall.
“Overall HMBS was down again in September, with first participation production totalling just $266m, so we are already seeing material decline. As long as the 10-year treasury remains above 5%, volume will continue to fall. Total HMBS outstanding will shrink even faster as HECMs from the larger Covid-era origination years begin to pay off due to the 98% assignment threshold. Since peaking at $60bn in January 2023, the HMBS float has been falling by $1bn per year,” said McCully.
“Non-agency proprietary reverse mortgage lenders have tightened margins to keep product interest rates to borrowers below 10%, but that may not be sustainable. If rates to the consumer do go north of 10%, non-agency origination volume may fall as well. However, overall proprietary volume has held up more than HECM and now has an approximate 60% share of all reverse mortgage origination. We predict proprietary market share will continue to increase, and HECM market share will continue to decrease, even if combined dollar volume declines.”
