HMBS June 2018 Part II: Supply Grows Slowly, Despite Large Seasoned Issuance

HMBS supply rose in June by a scant $128 million, despite a large issuance of highly seasoned new pools.

We noted in previous blogs that reverse mortgage lenders face a long winter of reduced volume, primarily due to the new lower Principal Limit Factors (“PLFs”) for Home Equity Conversion Mortgages (“HECMs”) effective this fiscal year. The total for new pools backed by new loans in June was a measly $353 million; overall new supply was $964 million, and tail issuance remained strong. Without the additional $356 million in highly seasoned new pools, supply would have shrunk sharply, as was the case in May.

We estimate that negative amortization of outstanding pools totaled $204 million. Total estimated payoffs topped $1 billion for the fourth month in a row. Most of the payoffs were once again due to mandatory buyouts, in which the issuer buys out HMBS participations backed by HECM loans whose balances have reached 98% of their Maximum Claim Amount. Our friends at Recursion show about $672 million of the payoffs resulting from Mandatory Buyouts, the fourth highest total ever. This wave of buyouts is an echo of the very large issuance from 2009 through the first half of 2013, especially pools backed by fixed rate HECMs with higher interest rates and higher initial PLFs. The second and third quarter of 2018 may prove to be “Peak Buyout,” followed by a decline in Mandatory Buyouts in the fourth quarter and beyond.

New View Advisors compiled this data from publicly available Ginnie Mae data as well as private sources.