It has been more than five years since Ginnie Mae entered the reverse mortgage market with its Home Equity Conversion Mortgage mortgage-backed security (HMBS). The Ginnie Mae HMBS program has had a significant impact on our industry by generating liquidity and a long-term option for secondary market execution. In addition to enhancing liquidity, our goal in creating the program was to lower interest rates for borrowers, thus helping Ginnie Mae fulfill its mission of providing affordable housing opportunities. Since October 2007, Ginnie Mae has guaranteed more than $30 billion in HMBS securities, providing a safe, secure secondary market for the Federal Housing Administration’s HECM program.
In recent years Ginnie Mae has clearly dominated the secondary market in reverse mortgage financing. Fannie Mae, at one point the only investor purchasing HECMs, has stepped away from the reverse mortgage market. Fannie Mae’s share of the total market of outstanding reverse mortgage loans was approximately 90 percent in December 2008. However, by September 2009, that had fallen to 10 percent. Fannie Mae’s change in pricing strategy in early 2009, coupled with changes in market conditions, played a significant part in its decreasing role. In addition, reverse mortgage lenders started issuing securities through Ginnie Mae’s HMBS program.
The Ginnie Mae HMBS program began slowly after its announcement in 2006. The first loans were not securitized until November of the following year by Goldman Sachs. This delay was caused by the intensive Ginnie Mae HMBS issuer approval processes and the necessity to provide issuers enough time to understand and learn our program. The program continued to move slowly, averaging less than $136 million per month in securitizations until May 2009 when issuance hit $262 million, and consistently continued to show growth. By that time the economic upheaval was well under way. The single-family and multifamily housing markets were beginning to feel the impact of the credit crunch; homes were rapidly losing value, and even credit-worthy borrowers had trouble securing loans.
Similar stresses were occurring in the reverse mortgage market. Many older Americans were beginning to lose much of their retirement savings in the economic collapse, and the only viable vehicle to obtain funds was through the equity in their homes. HECM originations began to dramatically increase in 2009, which translated into soaring securitization volume for Ginnie Mae’s program. Ginnie Mae’s yearly HMBS volume increased from $1.36 billion in 2008 to $8.54 billion in 2009. For the first time in the program’s history, HMBS volume crossed the $1 billion threshold in just one month’s time, hitting a program high in December 2009 with nearly $1.6 billion in securities. The momentum continued: 2010 was a record year, with nearly $11 billion in securitized MBS. HMBS volume in 2011 was down slightly, finishing just under $10 billion for the year.
Although the Ginnie Mae program has existed for only a few years, it has significantly changed the dynamics of the reverse mortgage industry and has been successful in providing a viable secondary market alternative to Fannie Mae. The reasons for the success of the Ginnie Mae HMBS are clear. It is an attractive investment opportunity that carries the full faith and credit guarantee of the United States government, the same as any other Ginnie Mae MBS. The HMBS enjoys the superior liquidity and execution of the Ginnie Mae securitization program, and the security is insulated from the risk of tax and insurance defaults—risks that are borne by the HMBS issuer.
The Current Landscape
After years of slow but steady progress, the reverse mortgage market is beginning to experience some challenges. Two of the industry’s leading lenders, Bank of America and Wells Fargo, have withdrawn; borrower delinquencies are hitting new heights; and Ginnie Mae issuers are now faced with new net worth requirements.
Bank of America and Wells Fargo were responsible for more than 40 percent of reverse mortgage originations before they left the market in 2011, according to Reverse Market Insight. The two were also responsible for nearly 25 percent of Ginnie Mae’s HMBS issuances. Wells Fargo, the largest provider, left after citing the inability to assess borrowers’ financial health, and Bank of America said that declining home values made fewer people eligible for reverse mortgages. Although there are signs that other lenders are stepping into the void, the long-term impact of their exits is yet to be determined.
The top three issuers in November 2010 were Bank of America ($246 million), Wells Fargo ($229 million) and Reverse Mortgage Solutions ($135 million). According to quarterly data reported in November 2011, the three Ginnie Mae issuers with the highest original principal balance were Urban Financial ($178 million), MetLife ($136 million) and Reverse Mortgage Solutions ($117 million). Although volume is clearly decreasing—in the wake the Bank of America and Wells Fargo exits (from $610 million to $431 million), other Ginnie Mae issuers are working to fill the void. And, despite the relatively steady volume, it is clear that reverse mortgage loans have become increasingly risky propositions for lenders.
There are a number of unique features about the HECM program, one of which is that it does not require escrows. Homeowners with reverse mortgages do not have to make monthly payments on the reverse mortgage loans; however, they must continue to make tax and insurance payments. A
growing number of borrowers are becoming delinquent on their reverse mortgage loans because they have stopped making property tax and home insurance payments. As a result, banks are seeing a rise in “technical defaults,” when homeowners fall behind on their taxes or homeowner’s insurance, both of which are required to avoid foreclosure. According to Reverse Market Insight, about 4 to 5 percent of active reverse mortgages, or 25,000 to 30,000 borrowers, are in default on at least one of those items.
At the same time, borrowers have been taking the maximum amount of money available, often using it to pay off any remaining money owed on the home. Adding to the risk profile of HMBS loans, home prices continue to slide.
The Impact on Ginnie Mae’s HMBS Program
Given the rapidly changing housing finance market, Ginnie Mae had to adjust its program to protect the American taxpayer. To that end, we recently made several critical changes to the standards for financial institutions that participate in the HMBS program.
The changes to our standards require
issuers to increase their net worth, liquid assets and capital asset requirements to participate in our program. The net worth requirements increased from $1 million base net worth to $5 million. Existing issuers were required to meet these requirements October 1, 2011. We also instituted a new liquid asset requirement, stipulating that HMBS issuers have liquid assets of 20 percent of the agency’s net worth requirement. The new liquid asset requirement will help ensure funds are available when there is a need for cash to fund borrower advances, loan buyouts and/or potential indemnification requests from insuring agents. And we adopted institution-wide capital requirements.
Capital requirements provide better assurance that issuers have sufficient capital to cover their financial risks on an institution-wide basis. Regulated banks and thrifts must maintain 5 percent of Tier 1 capital/total assets, 6 percent of Tier 1 capital/risk-based assets and 10 percent of total capital/risk-based assets. Nonbanks, credit unions and subsidiaries are required to maintain a minimum 6 percent of total equity/total assets. We firmly believe that issuers who retain more capital and liquidity are better positioned to absorb losses and advance principal and interest payments on delinquent mortgage loans.
Our goal was to ensure that all issuers of Ginnie Mae HMBS have adequate capital and liquidity to protect the program and taxpayers from unnecessary risk. These HMBS requirements provide a critical layer of safety for our program and reflect the significant capital and liquidity required to manage an HMBS portfolio in a financially sound manner. These changes will make the Ginnie Mae HMBS program stronger and, in turn, better ensure that our issuers are well equipped to handle challenges.
The Secondary Market Appetite for Reverse Mortgages
The secondary market for reverse mortgages has been unpredictable in recent years, but trends show investor demand is increasing and execution continues to improve, largely due to Ginnie Mae’s guarantee of full faith and credit of the U.S. government. Private label HECM securitizations never got off the ground due to the collapse of the non-agency securitization market, so the Ginnie Mae HMBS program was the logical outlet. This, coupled with the zero percent risk weighting on securities for domestic banks, makes Ginnie Mae’s HMBS an appealing securitization vehicle.
The appetite for the HMBS in the secondary market has been centered on the Ginnie Mae fixed-rate product, leading to a much higher premium paid to lenders on these loans when compared to LIBOR-based adjustable rate mortgages. This interest is most likely due to the fact that there are fewer variables to analyze compared with adjustable rate HMBS. Joe Kelly, a partner at New View Advisors, a Wall Street boutique specializing in reverse mortgages, has described Ginnie Mae’s HMBS as the “holy grail” of fixed-income securities, “one of the most important developments in the U.S. fixed-income markets in the past couple of years.” However, that could change. Some analysts say that as demand continues to build in the fixed product, some investors will start looking at adjustable reverse mortgage products. But it’s impossible to tell if pricing currently available to lenders and consumers will last forever.
The Future of the HMBS Market
The ongoing financial crisis will no doubt continue to increase the appeal of reverse mortgages, as many elderly homeowners are still reeling from losses suffered in their retirement accounts. Ginnie Mae’s HMBS program is the only source of liquidity for reverse mortgages. Our HMBS program offers attractive investment opportunities for fixed-income investors. They enjoy the same full faith and credit guarantee of the United States government as any other Ginnie Mae MBS and have superior prepayment characteristics.
The Ginnie Mae HMBS program has made a positive impact on the reverse mortgage industry by generating liquidity and a long-term option for secondary market execution. At the same time, it does require a higher level of interaction, as well as integration across servicing operations, information technology, investor accounting and secondary marketing. Lenders must fully analyze and understand the balance between reward and risk that comes with participation in the HMBS program.
It is obvious, however, that there are lenders willing to step up and enter the program. There are several new lenders already in Ginnie Mae’s HMBS approval pipeline, and there are a few already approved Ginnie Mae single-family issuers that are active in the forward market and interested in expanding their status by also becoming HMBS issuers. The reverse mortgage market is dynamic and changing, with lenders leaving and entering, but there is one clear message: Older Americans will need to tap into equity in their home to supplement retirement savings and Social Security. The capacity is there. And in order for lenders to continue originating reverse mortgages, the market needs to be liquid. For that liquidity, you need Ginnie Mae.
