Another financial year is now in the books for the US Government, and therefore, the US Department of Housing and Urban Development (HUD), which, through the Federal Housing Administration (FHA), oversees the federally insured Home Equity Conversion Mortgage (HECM) program.
HUD publishes monthly data showing the number of HECM endorsements on its website, and, for the first time since 2022, the market has grown.
The increase from 25,962 endorsements in FY2024 to 28,172 in FY2025 is 8.5%. While a bull would argue that rate of growth is solid, a bear would point out that the increase comes off of an historic, all-time low, arguably making excitement and optimism difficult for even the most evangelical of industry participants.
The naysayers who would claim that the data is disappointing would point to the reduction in the US interest rate in the home stretch of last year. Cuts of half a percentage point in mid-September, 25 basis points in November, and another 25 basis points in December made for a full percentage point rate cut over the period of just four months, but these cuts ultimately had little impact on the HECM market, because the yield on the 10-Year CMT (Constant Maturity Treasury) index, which underpins the space, actually rose in the fourth quarter of 2024 and has remained stubbornly above 4% since the beginning of this year.
“It doesn’t matter if the Fed cuts rates if the 10-Year CMT index doesn’t move down,” said Michael McCully, Partner at New View Advisors.
“So, from that point of view, the HECM origination numbers maybe shouldn’t be much of a surprise.”
While interest rates are the main driver of consumer demand, the Mortgage Interest Premium (MIP) charge hardly helps. American seniors taking out a HECM reverse mortgage are charged 2% of the home value at closing for the initial Mortgage Insurance Premium (MIP) – and then 0.5% annually thereafter. Someone taking out a $100,000 loan on a $500,000 home therefore has to pay $10,000 at the start and 0.50% per annum on the Unpaid Principal Balance after that; so, at least $500 in the first year in this example, but increasing in subsequent years because of the balance roll-up due to negative amortization and draws. That all rolls up into the final bill.
There is no such charge in the proprietary market, but they tend to carry higher interest rates, so while the cost structure looks different, the end result is often similar.
There are other, albeit less impactful, contributors to the historically low levels of origination activity of recent years. Home equity Lines of Credit (HELOCs), and now home equity investment products both vie for a chunk of the equity release market stateside and have benefits to the consumer that HECM reverse mortgages do not.
That said, many boxes that would seemingly need ticking in order to support a healthy reverse mortgage origination market in the US are indeed ticked.
“There is plenty of capital, especially from the big players like Mutual of Omaha and Onity, and because of anaemic volume, lenders have been loosening criteria, so the funding is there. And at this point, most homeowners are familiar with the product, so it’s not an awareness issue,” said McCully.
The current situation is arguably frustrating for credit investors who like agency-backed securitised reverse mortgage pools in their credit portfolios.
Credit investors like HMBS because the FHA guarantee minimises credit risk, offering safety akin to that of government-backed bonds. At the same time, these securities often provide higher yields than US Treasuries, making HMBS an appealing blend of security and attractive income for credit buyers.
According to New View Advisors, outstanding HMBS decreased in August for the 27th time in the past 31 months, leaving the outstanding aggregate balance at just $56.9bn.
The frustration is real, and the bigger picture, more pronounced.
“We have heard complaints from broker dealers about this and the resulting problem of shrinking float. The decline in the aggregate outstanding HMBS dollars understates the true story because negative amortisation of underlying HECM loans mitigates dropping HMBS balances. While HMBS balances declined 1.86% and 3.5% over the last one and two years respectively, loan count dropped 6.6% and 12.6% over those same timeframes,” said McCully.
The investor cohort is – was? – still eagerly awaiting the implementation of HMBS 2.0, which is a carrot that has now been dangled in front of the market for more than 18 months now. First mooted in January 2024, the program would benefit investors because it would enhance liquidity access for HMBS issuers by allowing the re-pooling of active and non-active buyouts into new custom, single-Issuer pools. The initiative could almost double HMBS volume.
Except that Ginnie Mae has removed some press releases relating to HMBS 2.0 from its website, leaving only the original announcement at the time of publishing; the agency had gotten as far as finalising the term sheet for the new program towards the end of last year (Ginnie Mae did not reply to an emailed request for comment at the time of publishing).
On 2nd October, however, HUD published ‘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.”
So, it would seem that investors will have to wait a little longer until any notable changes are made to the regulatory infrastructure of either the agency primary market or the agency securitised market.
But the US reverse mortgage market is still going to need a decent amount of fresh blood at some point, and the current levels of primary market origination need to rise. And the reality is that there is one specific Sword of Damocles hanging over this entire industry that needs to change for the market to deliver significant increases in primary market origination.
“If you removed every single obstacle that is currently impeding growth in the primary US reverse mortgage market apart from higher interest rates, there would of course be upward movement in HECM origination and in the proprietary market,” said McCully.
“But the single biggest contributor is the US 10-year CMT index. There seems to be anticipation that the Fed will cut rates in the coming months, but for the 10 Year CMT to also fall, there needs to be more certainty around inflation expectations, jobs and the broader macroeconomic environment. It’s difficult to judge what the CMT rate will look like in 6-12 months and it’s therefore difficult to judge whether this new fiscal year will deliver any kind of significant growth in primary market origination.”