“Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.” — Unknown Author
As the population ages and retirement savings are strained, assuming property values rise or are stable, home equity loans will continue to be in the press. The FHA runs the Home Equity Conversion Mortgage Program (HECM) whose purpose is to provide income to house-rich but cash-poor seniors. The HECM market constitutes over 90% of the entire US reverse mortgage market. Just like the bulk of FHA and VA loans are placed into GNMA (Ginnie Mae) securities, these loans can collateralize a HMBS (HECM Mortgage Backed Security) which is backed by our government. Each HMBS pool is from a single originator and contains exclusively fixed or adjustable rate loans.
Home Equity loan amounts are essentially based upon the borrower’s current home equity and age. A reverse mortgage does not have to be repaid until the borrower no longer occupies the property and the house is sold, which is the key difference between a HELOC and a reverse mortgage as the reverse mortgage allows the home owner to extract equity without ever incurring any loan payments. Since the borrower is not required to make monthly payments, the loan balance simply grows with the accretion of interest, service charges, insurance fees and draws. The loan pays off when the house is sold and the proceeds are then used to pay off the accreted loan balance. At maturity, GNMA will make up any shortfall between the accreted HECM loan balance and the home sale proceeds.
For investors, research has shown that GNMA reverse mortgage loans “terminate at a fairly consistent multiple to mortality rates.” A research piece from Cantor Fitzgerald mentions that mortality and age are highly correlated (is that surprising?) and every pool has each loan’s borrower age information. But since it is impractical to apply a separate age dependent prepay curve to each loan within a pool, a base, pool level, prepayment curve was devised. This base prepayment curve applied to GNMA reverse mortgage pools attempts to capture the two age related termination features of these loans, mortality and mobility.
What moved interest rates yesterday? It was not entirely the fault of the Conference Board’s Consumer Confidence number, which unexpectedly dipped from 54.3 in November to 52.5 in December. Nor the October S&P/Case-Shiller Home Price Indices (used, along with a few dozen other home price metrics to track the price path of typical single-family homes located in each metropolitan area provided). According to the index, prices in October declined 0.8% year-over-year for the 20-City Composite Index versus an expectation of unchanged, while the 10-City Composite rose 0.2%. It was not the fault of the blizzard which impacted Monday’s trading, as many Wall Street folks managed to hire people to dig themselves out of the snow and head into work. (Volumes were still very light.) But the 10-year Treasury note plunged about a point and the yield finished at 3.48% primarily due to a weak 5-year note auction. MBS prices dropped 1 point on lower coupons and about .75 on 4.5 securities (which contain 4.75-5.125% mortgages).
Unfortunately the lower supply and cheaper prices in mortgages did not entice many mortgage security buyers. Supply has been relatively light over the past few sessions – averaging about $1.5 billion per day. Originators continue to deal with higher mortgage rates (than a month ago), along with tight credit conditions, capacity constraints, poor housing values, etc., which are all limiting supply. On the demand side, banks are expected to be buyers with the need for yield, amidst weak loan demand and possibly declining prepayment speeds.
There are no economic releases or Fed appearances scheduled for today. In fact, usually the MBA comes out with its weekly mortgage application survey, but it is closed this week and the survey for the week ending December 24 will be released next week. The only event is the $29 billion 7-year note auction at 1:00PM EST, along with the usual Fed POMO purchases. Currently the yield on the 10-yr is still sitting at 3.49% and MBS prices are roughly unchanged