Back in October last year, the Department of Housing and Urban Development (HUD) published FR-6551-N-01 Future of the HECM and HMBS Programs and Opportunities for Innovation in Accessing Home Equity, a Request for Information regarding “the market for senior homeowners to access equity in their homes and possible improvements to the Home Equity Conversion Mortgage (HECM) and HECM mortgage-backed securities (HMBS) programs.”
The news was welcomed by participants across the reverse mortgage market; while the previously mooted HMBS 2.0 structure would have helped, many felt that more was needed and this RFI seemed like the regulator was serious about reforming the space.
Comments were originally due on 1st December, before the deadline was pushed back to 5th January; 48 individuals, companies and organisations offered their views before the extension, and another 14 did so afterwards.
That’s plenty of opinions, many from sophisticated, professional investors and their advisors, for HUD to digest and come up with some answers to the question of how to reinvigorate a space where issuance in the primary market is close to all-time lows.
At the time of publishing, HUD has not responded to an email from Longevity and Mortality Investor asking when it will be providing an update to the market.
But investors that like reverse mortgage securitisation exposure in their portfolios aren’t hitting the panic button, because in the first quarter of this year, the proprietary reverse mortgage market in the US – the non-agency-backed part of the space – originated approximately $953m of loans, exceeding its agency-backed, Home Equity Conversion Mortgage (HECM) cousin, which delivered $875m – for the first time.
The HECM loan segment has, historically, been a much larger part of the market, but in the past few years, higher interest rates and the upfront mortgage interest premium – 2% of the value of the home, a figure considered punitive by market participants – caused consumer demand to dampen.
That the proprietary market has been on such a growth spurt is not surprising to some. There are no up-front costs, and it has no limit on the size of the loan – the HECM program has a ‘maximum claim amount’ (MCA) of $1,249,125 – so, as house prices rise, more supply enters the space.
“The non-agency market has been back since 2014 and is growing for four reasons: product design improvements, a lack of reforms to the HECM program, continued demand by investors in the capital markets, and house price appreciation. Non-agency products have continued to adapt to borrower demand, with higher LTVs, lower rates, and other design enhancements,” said Michael McCully, Partner at New View Advisors.
“Over the last 11-12 years, investors have grown increasingly familiar with the asset class, allowing pricing to improve, and this ‘virtuous circle’ of improving execution allows lenders to offer better product features to borrowers, further improving execution to investors. Finally, while the MCA of HECM has grown materially, house price appreciation has outstripped MCA growth, pricing out more and more agency borrowers.”
It’s not all good news for everyone, sadly. Some investors aren’t allowed to invest in non-agency MBS because of the lack of a government guarantee. Others can’t because the capital requirements are too heavy and/or they don’t like the liquidity profile. Lower HECM issuance in recent years means that the outstanding HMBS loan population at the end of Q1 this year was just 242,151, down more than 20% from May 2021 levels.
But for those that can and those that do, there’s a lot to like.
“As with other MBS, agency securities trade tighter than non-agency, so all else being equal, non-agency provides more yield to investors. As a result, investors that take the time to understand reverse mortgage bonds like the additional return non-agency reverse mortgage securities provide. Different funds have different requirements, but for those allowed to buy non-agency securities, current market conditions have investors searching for yield, with plenty of capital to invest. It’s a very good time to be an issuer in the proprietary market,” said McCully.
And recent legislative activity could support additional growth. At the end of April, Tennessee passed the Tennessee Reverse Mortgage Innovation Act (HB 2382/SB 2190), which now allows proprietary reverse mortgage loans to be issued. Tennessee was previously one of a few states that prohibited non-HECM loans and, as the 15th most populous state as of 2024, that means plenty of potential for primary market activity coming from the Volunteer State.
And demographics help as well. Between 2024 and 2027, the “Peak 65” cohort will see over 4.1 million Americans turn 65 each year, more than 11,200 every day.
A big puzzle to solve remains the interest rate one. The 10-year U.S. Treasury (UST) is the primary benchmark for the HECM space and the fact that it hasn’t moved down in line with interest rate reductions in the past 18 months has acted as a drag on the agency space as rates on HECMs have remained higher for longer.
But the proprietary market’s adoption of the Secured Overnight Financing Rate (SOFR) arguably supports consumer demand. Because SOFR is a transparent, market-reflective index for short-term borrowing, proprietary lenders can offer more competitive initial interest rates and, more importantly, higher loan-to-value ratios that are not suppressed by the long-term volatility of the 10-year UST. In a ‘higher-for-longer’ environment where the 10-year UST refuses to move in line with the federal funds rate, the responsiveness of SOFR-indexed pricing can help support activity in the non-agency space.
Whether the proprietary market remains larger than the HECM market remains to be seen; that question will be answered in part by HUD when – if? – it reforms the HECM and HMBS programs. But, taken as an independent asset class, McCully says that the proprietary market should continue to grow.
“All the signs point to the proprietary market continuing its recent trajectory,” he said.
“Demographics, the recent announcement from Tennessee, and demand from institutional capital pools for exposure to non-agency reverse mortgages all point to a growing market.”
