Over the past several weeks, Ginnie Mae reverse mortgage backed securities (GNMA MBS) have performed well across the fixedand floating-rate product. Generic fixed-rate spreads have tightened on the order of 45 basis points during 2012, with
rates trading in a tight range (slightly lower). Directionally, floating rate HMBS initially lagged behind their fixed counterparts, but spreads have rallied by 20 basis points in the past few weeks. HECM Interest Only (IO) demand has remained robust, with an appetite for a lot more than what is being created. There’s also been several hundred million dollars of secondary flow in the past couple of weeks as investors have gotten very strong liquidity and have taken capital gains. Most of the agency MBS universe remains between negative and 30 Libor Option Adjusted Spread (LOAS), so even with the recent tightening, there’s a case for more of the gap between forward and reverse MBS to close in the very short term.
With Yieldbook (YB) on board now (kinks are still being ironed out), we expect YB Option Adjusted Spreads for HECMs to be close or through the nominal spread at 100 HECM Prepayment Curve (HPC), although this depends on base case speed assumptions.
HECM Saver production still trades behind Standard production, but there’s been a notable tightening of the gap recently. For production levels to increase meaningfully, originators need to better market the Saver to this class of borrowers. Given recent price performance, wholesale and correspondent pricing should increase and help create supply. Nonagency HECM MBS remain at historical wides and may deteriorate further due to higher than expected losses for bondholders. These 2006 and 2007 securitized deals experienced substantial price depreciation throughout 2011, and this trend will likely continue, barring materially better servicing performance. February HMBS volume ended up at roughly $760 million with the top five GNMA issuers split between MetLife at 33 percent market share, Knight/Urban at 28 percent, RMS at 20 percent, Generation at 10 percent and Sunwest at 4 percent. In regard to securitized transactions, there’s been $325 million of HECM Collateralized Mortgage Obligations done in the first two months of the year; expect another three or four transactions in March.
Prepayments dipped 18 percent month over month after a similar increase the month before. 2009 fixed rates came in at roughly 50 percent of HPC with floating rate coming in at roughly 35 percent. There may be some scheduled prepayments mixed into these numbers, so involuntary speeds are likely a few percentage points below the numbers quoted. 2010 fixed rates came in slower at 36 percent of HPC as a whole, with floaters at 66 percent of HPC. It’s no mystery why these bonds have been have bid well in the secondary market—speeds are much slower than originally expected and lower prices create a neat cash flow profile with the 98 percent buyouts dominating future cash flows.
2011 fixed speeds have begun to slow down after paying 70 percent to 75 percent of the ramp throughout the year. In terms of the macro landscape, higher gas prices, Middle East tensions, Greece’s economic problems, gridlock and uncertainty in D.C., and the continued decline of home prices should keep growth challenged and rates bid well in the five-year point of the curve.
