Layla Zulfa
September marked a period of considerable contraction within the market for federally insured reverse mortgages, characterized by a notable decrease in both Home Equity Conversion Mortgage (HECM) endorsements and HECM Mortgage-Backed Securities (HMBS) issuance. Data released by Reverse Market Insight (RMI) revealed a 6.7% drop in HECM endorsements compared to August, bringing the total for September to 1,790. This figure represents the lowest monthly endorsement volume since April 2020, a stark indicator of the prevailing market conditions. Concurrently, HMBS issuance experienced a more substantial decline of 17% from the previous month, underscoring a broader slowdown in the securitization of these financial products.
The decline in HECM endorsements follows a period of relative stability. RMI’s analysis indicated that case numbers, which serve as a proxy for submitted applications for new HECM loans, had remained consistently strong, averaging around 3,000 per month from May through July. However, a significant attrition rate among these applicants emerged in subsequent months, leading to the diminished number of closed-loan endorsements. This suggests a disconnect between initial interest and the finalization of loan agreements, potentially influenced by evolving market dynamics, borrower considerations, or lender pipeline management.
Analyzing the lender landscape for September, Finance of America (FOA) emerged as the leading originator of HECM loans, with 408 endorsements. Mutual of Omaha Mortgage followed with 366 endorsements, and Longbridge Financial secured the third position with 342. Fairway Home Mortgage and South River Mortgage rounded out the top five, recording 65 and 63 endorsements, respectively.
Looking at the year-to-date performance through the first three quarters, Finance of America continued to solidify its market leadership, accumulating 3,838 endorsements. Mutual of Omaha ranked second with 3,709, followed by Longbridge Financial at 3,151. Goodlife and South River Mortgage occupied the fourth and fifth positions with 806 and 634 endorsements, respectively. A comparative analysis of the first nine months of the year against the same period in the prior year revealed nuanced performance among the top lenders. Longbridge Financial and South River Mortgage demonstrated marginal growth in endorsements, increasing by 1% and 5% respectively. In contrast, the other top-five lenders experienced declines ranging from 6% to 24%, signaling a challenging environment for many established players.
The consolidated market share of the top three HECM lenders—Finance of America, Mutual of Omaha, and Longbridge Financial—stood at 59.1% through the first three quarters of the year. This represents an increase from 55.9% during the corresponding period in the previous year, indicating a trend of market concentration among the largest originators.
Further down the rankings, some lenders showed positive momentum in September. Movement Mortgage, for instance, significantly boosted its production, doubling its output from 17 loans in August to 35 in September. Plaza Home Mortgage also reported an increase in endorsements, rising from 28 to 41 during the month. These gains, while smaller in absolute terms compared to the leading institutions, suggest pockets of growth and resilience within the broader market contraction.
Economic Factors Influencing the Reverse Mortgage Market
The prevailing economic conditions, particularly inflation and mortgage interest rates, continue to exert a significant influence on the reverse mortgage sector. Dan Ribler, vice president of capital markets and strategy at Longbridge Financial, addressed these dynamics in his "Ribler on Rates" video series. He highlighted the implications of the August Personal Consumption Expenditures (PCE) index, which indicated annual inflation of 3.4%, or 3% when excluding volatile food and energy prices.
Ribler noted that the bond market’s reaction to this inflation data pointed towards a "bull steepener" in the yield curve. Specifically, he observed a decline in yields at the front end of the curve, with 10-year yields remaining relatively flat. This phenomenon is directly linked to market expectations regarding the Federal Reserve’s monetary policy. "That makes perfect sense," Ribler stated, "because on the front end of the curve, cooler inflation data means there’s a lower probability that the Fed will hike rates next time they meet." This suggests that the market is anticipating a pause or even a potential pivot in interest rate policy, which can have downstream effects on mortgage pricing and borrower demand.
A New Perspective on HMBS Issuance
In parallel with RMI’s HECM data, New View Advisors released its analysis of HMBS issuance for September, drawing upon data from Ginnie Mae and private sources. The report confirmed the overall downturn, with HMBS volume for September totaling $446 million, a decrease of $91 million, or 17%, from August. Despite the decline in total volume, the number of HMBS pools issued saw a slight increase, rising from 65 in August to 70 in September. This suggests that while the overall dollar amount of securitized loans decreased, the number of distinct securitization transactions remained relatively stable or even grew slightly.
Finance of America led all issuers in September with $175 million in HMBS issuance, though this was a decrease from its August figure of $257 million. Longbridge Financial and Mutual of Omaha experienced more modest declines, issuing $134 million and $92 million, respectively. These figures underscore the continued dominance of these three institutions in the HMBS market.
First-participation pool production, which represents the securitization of newly originated HECM loans, experienced a notable drop. In September, this segment totaled $266 million, down from $309 million in August and $313 million in September of the previous year. New View Advisors issued a cautionary note regarding the sustainability of current production levels, stating, "issuers will struggle to maintain this rate of production with the 10-year Treasury yield at its highest level since 2002." This observation highlights the sensitivity of HMBS issuance to broader interest rate movements and the attractiveness of alternative investment vehicles.
Year-to-date data through the first three quarters paints a clearer picture of the first-participation pool market. Finance of America led with $917 million in issuance, followed by Longbridge Financial at $790 million and Mutual of Omaha at $546 million. Onity Mortgage Corp. ranked fourth with $151 million, though it did not issue any first-participation pools in September, having completed a sale of its reverse mortgage servicing rights to FOA over the summer.
The composition of HMBS pools issued in September also warrants attention. Of the 70 pools, 17 were first-participation pools, 50 were tail pools, and three included both. Tail pools, which do not involve new loans but represent additional disbursements from existing HECMs, saw a decline in volume from $227 million in August to $179 million in September. This trend may reflect a reduced propensity for borrowers to access additional funds from their reverse mortgages or a shift in lender strategies.
When considering all types of pool participation, Finance of America remained the dominant issuer through the first nine months of the year, with $1.561 billion across 215 pools. Longbridge Financial followed with $1.184 billion, and Mutual of Omaha with $817 million. Onity and Goodlife also contributed to the overall issuance figures.
A notable development highlighted by New View Advisors is the increasing utilization of Ginnie Mae’s provision allowing for the issuance of HMBS pools as small as $250,000. In September, 23 pools were issued with an aggregate pool size below $1 million, representing approximately $12.7 million in unpaid principal balance that might not have been securitized under previous limitations. This flexibility can be crucial for smaller originators or for securitizing loans with lower balances, potentially enhancing liquidity for a broader segment of the market.
Secondary Market Functionality and Origination Challenges
Michael McCully, a partner at New View Advisors, recently commented on the state of the reverse mortgage secondary market. He described it as "functioning extremely well," but emphasized that the scarcity of new issuance is intrinsically linked to the low volume of originations. McCully articulated a key challenge facing the HECM product: "The problem is that the HECM product has become so safe – it’s a belt-and-suspenders product now – and that’s causing origination to stall."
This observation suggests that while the HECM product offers robust consumer protections and financial security, its perceived safety and potentially complex structure may be acting as a deterrent to a wider adoption by eligible homeowners. The "belt-and-suspenders" analogy implies a high degree of caution and perhaps a lack of straightforward appeal for some borrowers, contributing to the current slowdown in originations. The implication is that while the underlying financial mechanisms for securitization are sound, the primary constraint lies in generating sufficient new loan volume.
The interplay between economic conditions, lender performance, and product perception creates a complex environment for the federally insured reverse mortgage market. The declining endorsement and issuance figures for September underscore these challenges, while the analysis of market concentration and the impact of interest rates provide crucial context for understanding the current trajectory of this vital financial tool for older homeowners. The industry’s ability to navigate these headwinds will likely depend on a combination of favorable economic shifts, strategic adaptations by lenders, and potentially, innovations in product design or borrower outreach to address the perceived barriers to origination.
