A reverse mortgage is a mortgage loan backed by a residential property, that allows the borrower to access the unencumbered equity in their home without making monthly payments. The loans are usually offered to senior homeowners. Currently, FHA has endorsed reverse mortgage loans an outstanding balance of 54 billion USD and these are securitized in Ginnie Mae’s HECM pools. This program is available for people age 62 and over.
There are many differences between reverse mortgages and regular (forward) mortgages, particularly that the balance of reverse mortgages tends to grow over time as interest accrues and sometimes payments are made to the homeowner. But in both cases investors face prepayment risk. The HECM loan tape disclosed monthly by Ginnie Mae provides data by many characteristics, including reason for prepayment and the age of the borrower.
All issues have taken a back seat to the onset of the Covid-19 virus. Since this first arose in China at the end of 2019, concern has steadily mounted, leading to unprecedented dislocations in global financial markets. Markets are volatile to a great degree because of uncertainty, not just about the extent and severity of the virus, but also about its economic impact.
In the wake of the economic dislocation that occurred with the onset of the Global Financial Crisis, (GFC), central banks responded with a variety of policy innovations, including Large-Scale Asset Purchases (LSAP’s), also known as Quantitative Easing (QE). Different central banks have implemented these programs in distinct ways, but the Federal Reserve purchased massive amounts of Treasuries and mortgage-backed securities (MBS) to place downward pressure on long-term interest rates. (Chart 1)
A key metric in the decision regarding investment in MBS is prepayment speeds. Investors concerned about lower interest rates naturally find value in lower-prepaying pools. In looking into the drivers of differing prepayments, it’s useful to look into differences in performance for different groups of loans. Chart 1 looks at the prepayment speeds for the entire books of Fannie Mae and Freddie Mac mortgages as measured by the 1-month conditional prepayment speeds (CPR).