An annual actuarial review of the finances of the Mutual Mortgage Insurance (MMI) Fund for the Home Equity Conversion Mortgage (HECM) business portfolio includes updated data on borrower use of HECM loans, as well as an outlook longer term on emerging trends related to the use of the product by borrowers. That’s according to the report on the HECM program conducted by actuarial firm Pinnacle Actuarial Resources, released Monday along with the FHA’s annual report to Congress.
While some of the long-standing trends of the HECM program in recent years have remained unchanged or exhibited only moderate movement in FY2021, the events of the past year have caused a number of sudden moves on other trends with regards to HECM. -the refinancing activity of HECM, the active rate index of the HECM program and moderate changes in the market penetration of the HECM for Purchase (H4P) program.
Key pieces of product usage data were also predicted by industry analysts earlier this year, and RMD began reaching out to industry leaders and stakeholders to respond to the latest MMI report. and its implications for the business in 2022.
Types of loans, rate index
A very stable, although accelerating, trend in the industry is for the type of HECM loan most commonly used by borrowers. In data analyzing the types of payment plans most frequently used by borrowers, the line of credit (LOC) option remains by far the preferred, with over 96% usage in FY2021.
“The majority of HECM borrowers choose the line of credit option,” the report says. “This option has represented more than 90% of amendments since fiscal year 2009 and has been increasing since 2017.”
In 2017, the use of credit lines was 93.6%. In the highlighted period, the lowest utilization rate the LOC option ever received was 91.9% in fiscal 2009, according to the report. The seniority payment option stood at just 0.4% in fiscal 2021, unchanged from a year ago.
In terms of the rate index, Pinnacle has documented the popularity of the London Interbank Offered Rate (LIBOR) index. It provides additional context on the effect of impending termination in favor of the Secured Overnight Financing Rate (SOFR) index.
“LIBOR-indexed loans were between 30% and 40% for fiscal years 2009 to 2013,” the report says. “In [FY] 2014, the percentage of LIBOR-indexed loans increased to 81%, with the fixed rate option declining in popularity accordingly. From [FY] 2020, this percentage had risen to over 98%. Monthly adjustable LIBOR loans were more popular in [FY] 2014 and 2015; however, in [FY] From 2016 to 2021, annual adjustable LIBOR loans were significantly more popular.
This was in part because HUD limited the insurability of fixed interest rate mortgages under the HECM program to mortgages with the one-time lump sum payment option in 2014, according to the report. Additionally, while LIBOR was the dominant rate index as recently as last year, the turbulent road to its termination severely curtailed its use for annual Variable Rate Mortgages (ARMs) over the course of the year. fiscal year 2021.
“From 2021, the LIBOR rate has [been] interrupted, ”the report says. “As a result, SOFR will replace LIBOR as an option for an adjustable mortgage index. As a result, the percentage of loans using the LIBOR index has decreased to just over 30%.
Type of product, the use of H4P decreases
Reverse mortgages are far more commonly used by borrowers on existing homes compared to using a HECM for Purchase (H4P) transaction, as has been the case for years. However, codifying the trends observed by industry analysts earlier this year, the actuarial report reveals that H4P use tended to decline in fiscal 2021, even despite the increased volume and increased volume. overall healthier HECM business.
“[T]These HECM for Purchase loans represent a small percentage of HECM riders each year [since FY 2009]”, We read in the report. “The distribution of HECMs for purchase loans increased slowly from 2009 to 2019, but decreased in [FY] 2020 and 2021. In our analysis, both traditional and buyable HECMs are treated the same because the volume of buyable HECMs is low.
According to data shared in the report, H4P usage in fiscal year 2021 was only 4.45% of the total volume share. When looking at the penetration of the H4P market earlier this year, a significant drop from the already low 5.9% figure recorded in FY2020, but reasonably in line with the projections of analysts in the Reverse Market sector. Insight shared with RMD last summer.
According to this RMI data, in 2019 there were 2,305 H4P mentions in one year, with 34,420 overall HECM mentions leading to an H4P penetration rate of 6.7% (slightly lower than Pinnacle’s FY2019 figure of 7.34%).
The following year in 2020, when the reverse mortgage industry saw a noticeable increase in public interest at the start of the COVID-19 coronavirus pandemic, the overall number of HECM approvals increased by around 10,000 loans. , but only experienced a marginal increase in H4P levels. endorsements. Out of 44,418 HECM riders in 2020, 2,493 of them were H4P loans, a penetration rate of 5.6%, or a drop of more than a percentage point even though the raw figures were higher.
At the time, RMI Chairman John Lunde attributed the low use of H4P numbers to the dominant reverse mortgage industry trend tied to HECM refinancings to HECM.
“The industry clearly tends to decline in terms of the share of H4P approvals,” said John Lunde, president of RMI. “But that’s mainly because other areas of the industry are growing much faster than H4P, especially refinancings.”
While slight fluctuations in the year 2021 data for H4P are likely, substantial differences will likely escape the product this year. Find the actuarial report at HUD.