"Reverse mortgages are primed for massive growth"
The long running television show that I watched in re-runs as kid showed a successful middle class world where all problems could be solved in thirty minutes and the future always looked bright. Well, it has been over forty years since the last episode was filmed and most, if not all, of the original viewers including the real Theodore “Beaver” Cleaver are now old enough to qualify for a HECM loan.
The late 1950’s world and the expectations these people had were likely quite different than the economic situation they may find themselves in today. Reread the title of this piece and you will understand the driving reason coupled with a graying population as to why reverse mortgages are primed for massive world growth. The Leave it to Beaver world is dead and we are now fully into The Five Phases of Market Growth.
The Five Phases of Growth
Accounts often ask how I see this market developing. In the past, clients who asked this question were often trapped in a conference room with me and were then forced to endure a rambling dissertation meandering between past and future potential. I have now put my thoughts down on paper in order to increase future listeners’ attention span and solidify my own coherency.
1. In the Beginning
Eighteen years after the FHA HECM program began, we witnessed the first issuance and sale of a HMBS security. For the next few years, HMBS pools traded primarily as a one-off asset crossing through broker-dealer agency CMO desks and placed with a handful of very large investors. The accounts buying this paper were already familiar with the product from doing the analytical work on reverse mortgages when the product traded exclusively as non-agency whole loan deals prior to 2007.
Over the next two years, a few more investors entered the market and a few more broker-dealers occasionally placed paper but there was little push to develop the market into anything more than an esoteric side trade for most players.
2. The Future is Now
As 2010 approached, Wall Street broker-dealers began setting up dedicated reverse mortgage trading desks. This caused a fundamental change in the market growth and velocity. No longer were these dedicated desks satisfied with doing an occasional trade but now had to go out and build the market in order to justify their existence.
Many of the original buy-side investors who supported the market began stepping back as the year wore on. While they had all acquired paper at very wide relative spreads, the pickup in investor demand many had anticipated did not meet their expectations. This fueled the need for broker-dealers to bring in more investors by telling the HECM story to an even wider audience as liquidity tended to be very choppy.
Overtime, an increased number of relatively smaller investors began looking into and buying the asset. This included hedge funds, credit unions, banks, insurance companies and all sizes of money managers.
3. Liquidity
The markets have just begun to evolve towards the liquidity phase. I view this as the most important stage as it will be when HECMs lose the novel asset class moniker and become a core account holding. This phase will be defined by a very high degree of liquidity and anticipate the following events will occur:
Perceptions that there are extreme liquidity issues between HECM pools and HECM CMOs will no longer exist. Secondary trading and bid lists will be a very frequent occurrence and dealer HECM inventories will also be available. Domestic players will range in all sizes which will drive in the pricing differential between large and small pools. We will also have a handful of large foreign money managers regularly trading paper.
HECMs will be viewed and traded thru a relative value frame work. CRA, SBA, CMO, GNMA project loan, and agency debenture buyers will traffic regularly in the HECM world. Rarely will HECM markets be affected by technical trading issues confined exclusively to reverse mortgages. Additionally, like all other capital debt markets, there will be annual conferences where originators, dealers and investors will be in regular attendance.
4. Globalization
This period will mark the change from primarily a domestically traded asset to a global investment vehicle. Strong participation from multiple European and Asian accounts will become a regular occurrence. We will also witness multiple US based broker-dealers trading in foreign country originated reverse mortgages. Initially trades may be done as whole loan transactions but a securitization market will inevitably develop along the lines of the US HECM market.
5. Standard Practice
It will be hard to imagine they were ever considered a niche product as reverse mortgages will trade all over the world. Relative value pricing will float somewhere between agency debentures and well structured GNMA CMOs. Bid-ask spreads will have decreased tremendously and structural creativity and pool customization will become standard practice.
Jeff Traister is the Managing Director for the Mortgage Securities Group at Cantor Fitzgerald, a global financial services firm and capital markets investment bank.
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