Two years ago, Ginnie Mae announced that it was “exploring development of a new securitization product as part of its efforts to enhance and expand its existing Home Equity Conversion Mortgage (HECM) mortgage-backed securities (HMBS) program” – nicknamed ‘HMBS 2.0’ by the industry.
The main change with the new product would have been the acceptance of HECM loans with balances above 98 percent of FHA’s Maximum Claim Amount (MCA) into it, a concept designed to address liquidity constraints at the primary market lender level – and avoid another RMF-style bankruptcy.
Indeed, Ginnie Mae got as far as producing a term sheet for HMBS 2.0 in June 2024, but after that, the silence was almost deafening. Nothing public came from Ginnie Mae for more than a year, until 2nd October last year, when the US Department of Housing and Urban Development (HUD, Ginnie Mae’s owner) published ‘Future of the HECM and HMBS Programs and Opportunities for Innovation in Accessing Home Equity’, a request for information (RFI) 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.”
Origination volumes in the primary market have been falling for a while due to a multitude of factors – higher interest rates, high up-front (and ongoing charges) through the Mortgage Interest Premium (MIP) fee being two of the main ones. While primary market activity was up in the most recent US government fiscal year, the increase came off of a historically low floor.
Consequently, the HMBS market has also shrunk. Advisory firm New View Advisors said in December last year that the aggregate value of outstanding HMBS decreased $50.4m to just $56.59bn, the 30th decrease in the last 34 months. However, more tellingly, “The decline in HMBS understates the true story in outstanding HMBS and HECMs because negative amortization of underlying HECM loans mitigates dropping HMBS balances. While HMBS balances declined 2.4% and 4.0% over the last one and two years respectively, loan count dropped 7.0% and 13.1% over those same timeframes.”
So, the reset presents a significant opportunity for HUD/Ginnie Mae to make adjustments to both the HECM and HMBS programs to drive growth – something, clearly, that is desperately needed.
But HMBS 2.0 was welcomed in the industry. If enacted, it would have lowered the potential liquidity risk to the primary market lenders and provided investors with a government-backed securitisation product for loans that exceeded the 98% MCA limit. Why not just resurrect it?
“We haven’t changed our minds that the HMBS 2.0 product would be a good idea within the current HECM/HMBS program structure. But it would be necessarily a complex securitization program, a lot of work between concept and execution,” said Joe Kelly, Partner at New View Advisors.
“If there are instead wholesale changes to the program – especially no more 98% MCA buyouts/assignments – then there would be no need for HMBS 2.0., except as an off-ramp for HMBS issued before such a change.”
Indeed, New View Advisors said that the HMBS 2.0 product would have doubled industry volumes. But that would not have helped the primary market, which many commentators say is in need of reform.
And it’s the MIP that the industry has most control over.
The way this charge is structured has been a bone of contention within the market for many years. In its response to HUD, for example, Mutual of Omaha, one of the primary market’s largest lenders, said “the current flat, front-loaded structure creates affordability barriers and unintended risk concentration. The existing model discourages lower-risk borrowers who only need limited access to home equity but face high upfront costs.”
Kelly agrees; New View Advisors’ own response to the RFI said that they think the initial MIP should be based on the initial principal limit and the percentage should be lowered to 1% from the current 2% (or less).
“The reduction in the initial MIP is necessary to grow consumer acceptance,” Kelly said.
In its RFI, HUD also asked about barriers to entry into the reverse mortgage market. Some ‘brand name’ high street banks – Bank of America and Wells Fargo, for example – previously played in the space, but an accounting change in 2011, where banks had to put reverse mortgages back onto their balance sheets – and therefore, hold regulatory capital against them – effectively eliminated their interest in the market.
This is another area where Kelly thinks change could make a difference.
“The program needs to allow for true sale accounting under GAAP when a mortgage loan is securitised. If/when a loan hits the 98% MCA limit, instead of the lender having to take it back, HUD should move it to the FHA without the involvement of the servicer. This is what drove Wells Fargo, Bank of America, and MetLife out of the business, and it prevents banks and other financial institutions from becoming HMBS issuers. Returning to sale accounting would bring back banks and other larger, more established lending institutions, which would support more origination volume,” he said.
The original RFI provided for a 60-day comment period which ended on 1st December. On 10th December, HUD re-opened the comment period until 6th January. HMBS issuers, intermediaries and investors will all be waiting with bated breath for the next announcement but as with many processes where the government is involved, this might take time, and even if it’s quick, getting significant change requires jumping through many hoops.
Waiting, however, is something that the agency-backed reverse mortgage market is used to.
“Many in the industry have been pushing for changes for years,” said Kelly. “We were encouraged by the HMBS 2.0 program, but this reset is arguably a better opportunity to make some of the structural changes that both the HECM and HMBS markets need to grow. The demand for HMBS products is there – there is plenty of capital that wants to be allocated to this space. It’s just that significant change is needed and it’s encouraging that HUD is clearly taking this seriously and looking at the entire industry.”