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Reverse mortgage industry executives see a growing role for proprietary products despite persistent challenges in the secondary market. But they also agree on one thing — the Home Equity Conversion Mortgage (HECM) and its related mortgage-backed securities (HMBS) programs remain critical pillars of the business.
Their comments came during the National Reverse Mortgage Lenders Association (NRMLA)’s Annual Meeting in Minneapolis last week, not long after the U.S. Department of Housing and Urban Development (HUD) announced it’s seeking public input on possible improvements to the HECM and HMBS programs.
“They observed that HECM endorsements have declined by 69% since 2022,” Caroline Jensen, counsel at Mayer Brown’s banking and finance practice, said during a session at the event. “We have a pretty significant decline coming at a time when you would expect the opposite, because we have an aging population and more home equity.”
Through a recent request for information, HUD — along with the Federal Housing Administration (FHA) and Ginnie Mae — are assessing potential regulatory and administrative changes to strengthen the HECM program, remove entry barriers for lenders and gauge investor demand. Comments are due by Dec. 1.
Balanced approach
Tim Wilkinson, vice president of capital markets at Longbridge Financial, said HUD’s questions touch on the government’s role as proprietary reverse mortgage products are gaining ground. But, he added, the argument is not that there’s no role for the HECM program.
“The HECM program — obviously there’s criticism — is very well defined. It’s an intelligent solution, very low cost in some ways,” Wilkinson said. Still, there are pain points, including upfront mortgage insurance premiums that require borrowers to pay 2% of their property value, he added.
Jeremy Prahm, chief investment officer at Finance of America, added that while the HECM program is “critical” to the industry, proprietary products can expand liquidity and access to home equity. These products allow “increased flexibility on draws and ability to access that over time more efficiently.”
Although proprietary loans can lower upfront costs and origination fees, they remain unavailable in certain states due to local restrictions or lengthy approval processes, executives noted.
Investor appetite
According to David Ferguson, head of capital markets at Performance Trust Capital Partners, programmatic changes to the HECM program can be slow and complex. “It’s really hard to articulate, if you get consensus, why and how that should ultimately be rolled out,” he said.
In contrast, private products depend heavily on what investors are “ready to digest.”
“It all comes down to the investor universe that can understand that product that facilitates the originators to go create that with confidence,” Ferguson said. “The amount of investors that are actively engaged in HECM pools dwarfs in comparison the amount of investors who are up to speed on these private products.”
Key obstacles
The private-label reverse mortgage securitization market last saw momentum between 2016 and 2018, Ferguson said, but higher interest rates and the bankruptcy of Reverse Mortgage Funding (RMF) — once a top-five lender — sharply reduced activity. Now, amid more stable rates, some new and first-time issuers are returning to the market.
“There’s plenty of products to go around,” Ferguson said. “There’s not an issue that if the solution gets more commoditized, or if there are more market participants, then all the economics are going away, and the product sort of tantalizes itself. The industry as a whole benefits from having more securitizers, more issuers. And you started to see that happening.”
Insurance companies and banks could step in and provide a different type of liquidity source, executives said. But there needs to be more education in the investor base. Another challenge is to originate volume that justifies some big asset management firms to invest in proprietary products.
Ferguson said he has been working with banks and credit unions that have less than $15 billion in total assets.
Similarities and differences
Industry executives said the HECM and proprietary programs share similar mechanics and underwriting guidelines, although there are some differences in appraisal requirements and liquidity.
Most proprietary products are still brokered — even by lenders active in the HECM space — largely because developers want tighter control over underwriting and because liquidity is more limited.
“The HECM and HMBS market is quite liquid. People are quite comfortable lending against that because they know that it’s an easy out,” Wilkinson said. “Proprietary products are sold via private-label securitizations; you need a critical mass, work with rating agencies and law firms. There’s a significant fixed cost to do so, so you need to be able to get scale.”
