Roughly one month ago, Ginnie Mae released a term sheet for a highly anticipated new development for the reverse mortgage industry: a new Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) product referred to as HMBS 2.0.
The new term sheet detailed several differences from the existing HMBS program, including a reduction in the HMBS pool size to 95% of the loan’s total unpaid principal balance (UPB). This is a move designed to “create an additional economic incentive to protect Ginnie Mae and taxpayers against a decline in collateral value,” Ginnie Mae explained when announcing the proposal.
Leo Wong, partner and head of loan strategy at Waterfall Asset Management, previously outlined for HousingWire’s Reverse Mortgage Daily (RMD) what he sees as the biggest potential benefits the new program will bring to the reverse mortgage industry. In this second part of the interview, Wong opines on the current liquidity environment, the co-existence of two HMBS programs at Ginnie Mae and the work that remains to be done.
Current liquidity
When asked about where liquidity in the market stands compared to this time in 2023, Wong said that it has certainly improved, but that’s largely due to other market players.
“It has improved from this point a year ago, evidenced by the private-label securitization markets,” Wong said. “But I believe that to be largely due to broader market liquidity. Triple-A bonds and non-QM, fix-and-flip, second liens have even been met with a decent amount of liquidity. So, I wouldn’t necessarily attribute that to the reverse mortgage sector.”
Still a developed private-label structure has managed to withstand a lot of market distress, he said.
“So, I think, as a whole, bond buyers on the private-label side, who will now be crossing over into the HMBS 2.0 side, will have some confidence in how the asset itself performs over time. I think that is something that’s observable.”
Complementary programs
As Ginnie Mae acting president Sam Valverde and his predecessor, Alanna McCargo, have said when initially announcing the development of HMBS 2.0, the new program is not designed to replace the existing option but to complement it.
“In the mid to long term, I guess there have been two forms of securitizations: There’s HMBS 1, through Ginnie Mae and also a private-label securitization program that is rated,” Wong explained.
“The HMBS program is extremely critical for originations and to fund growth for issuers. The private-label securitization market will likely become a complement to the HMBS 2.0 program over time.”
But that existing technology could also pivot over to other programs, including those for proprietary reverse mortgages that are not bound to the Federal Housing Administration (FHA)’s HECM program, Wong said.
“It’s not going to go away from the government-insured HMBS program,” he said. “It can be the HMBS 2.0 program predominantly.”
Looking at potential risks
A catalyst to the development of HMBS 2.0 was the collapse of Reverse Mortgage Funding (RMF) in late 2022, which continues to have sweeping ramifications for the entire reverse mortgage industry. When asked about HMBS 2.0’s potential for avoiding a similar occurrence in the future, Wong felt Ginnie Mae was being “extremely proactive.”
“It’s observable that they have spent a lot of time observing risk and some of the thresholds on 148 MCA,“ he said. “These are areas that we have observed they have spent a lot of time reviewing and doing a decent amount of work, working with NRMLA and the industry to make sure these areas will not lead to an RMF-type situation.”
When asked if there are any other pieces of essential information about the prospects of HMBS 2.0, Wong said that determining any operational speed bumps will be essential ahead of the ultimate rollout of the program.
“I do think the operational side — organizations like servicers and the FHA — will all be leaning in to figure out all the operational mousetraps to get over the finish line,” he said. “So, the timing is something that we will all be observing as to when that implementation happens. It’s been messaged verbally for the end of the year, but that will definitely take continued collaboration among the industry to make sure it’s seamless and efficient.”