HECMs: Everything You Need to Know - Performance · PDF fileHECMs: Everything You Need to Know...

HECMs:

Everything You Need to Know

Adam Buresh, Director

Tim McCrary, Associate

Chicago | June 9, 2016

HECMs:

Everything You Need to Know

A Look-Back® on HECM performance

How reverse mortgages help borrowers

HECM program rules, loan types, and pools

Investor risk and reward

Non-economic features of HECMs

© 2016 Performance Trust. All Rights Reserved. GNMA Reverse Mortgages 3

We’ve recommended HECMs on The Level Playing Field® for years

HECM Look-Back®



HECM Look-Back®


We’ve recommended HECMs on The Level Playing Field® for years.

The Look-Forward® numbers are great. Let’s look back.

HECM Look-Back®


HECM Look-Back®

2011–2014 3-Yr Look-Back® HECM Projected and Actual Returns

3.99%

1.24%

3.27%2.97%

0.92%

2.08%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

HECM Standard Fixed Pool High Utilization HECM ARM Pool Seasoned Fixed HECM Pool

Actual Projected

We’ve recommended HECMs on The Level Playing Field® for years.


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HECM SECTOR


HECM Look-Back®

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Seasoned FixedHECM Pool

HECM StandardFixed Pool

High UtilizationHECM ARM Pool

Low CouponHECM ARM

Actual Projected

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HECM SECTOR





3-Yr Horizon Total Returns

HECM Look-Back®

HECMs have been and still are a strong risk/reward

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-300 bps -150 bps 0 +150 bps +300 bps

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RATE SHIFT SCENARIO

New Issue Fixed HECM 6yr Agency







HECMs: Everything You Need to Know


Who Reverse Mortgages Are Designed to Help

Hank is 62 and about to retire.

His monthly income will go down when he stops

getting a paycheck.

He doesn’t have much saved besides the equity

in his house but doesn’t want to sell and move.

He’s worried he won’t have enough money if he

lives a long time.

HANK


Hank’s Reverse Mortgage

Hank

A convenient way for borrowers aged

62 and older to access a portion of

their available home equity while

maintaining homeownership.



Hank Home

Mortgage

Equity



Hank Home

Lender

Mortgage

Lump Sum

Equity


Pay Off Existing

Mortgage


Hank Home

Lender

Lump Sum



Hank Home

Lender

Reverse

Mortgage

Equity



Hank Home

Lender

Reverse

Mortgage

Equity

Non-Cash

Income



Hank Home

Lender

Reverse

Mortgage

EquityPrincipal and

Interest

Landlord

Rent

Non-Cash

Income



Hank Home

Lender

Reverse

Mortgage

Optional Payments

Equity

Non-Cash

Income


Repayment


Home

Lender

Reverse

Mortgage Equity

Hank’s

Estate

Equity


If Hank’s loan ends early, his “insurance” never pays off and his

HECM has been more expensive than other mortgages.

If Hank stays in his home a long time, his insurance pays off since he

never has to pay back all the interest above the value of the home.


Reverse

Mortgage

Hank Home


Whom Reverse Mortgages Are Designed to Help

HANK

He doesn’t have much saved besides the equity

in his house but doesn’t want to sell and move.

His monthly income will go down

when he stops getting a paycheck.

He’s worried he won’t have enough

money if he lives a long time.



Whom Reverse Mortgages Are Designed to Help

HANK

His reverse mortgage allows him to borrow

against the equity in his home.

He doesn’t pay rent or principal and interest.

His “insurance” pays out if he stays long

enough that the loan is underwater.



Some spouses were kicked out when loans ended

Now spouses can stay but initial LTVs lower

Some borrowers couldn’t pay taxes and insurance

More strict underwriting introduced, and some initial proceeds

are set aside if needed

Borrower balances restricted for first year to amount needed to

pay off prior mortgage

Changes Have Addressed Issues with the Product


The FHA owns the risk that loans go underwater

Maximum initial LTVs are set based on age and rate

HECM Program Rules

Rate/Age 5% 5.125% 5.25%

62 52.4 50.8 49.1

63 53.0 51.4 49.8

64 53.6 52.0 50.4




HECM Program Rules

Age LTV

62 52.4

63 53.0

64 53.6




HECM Program Rules

Age LTV

62 52.4

63 53.0

64 53.6

88 72.9

89 73.9

90 75.0


HECM Program Loan Types

Fixed-rate loans only allow upfront lump sum

Floating-rate HECMs can have some

upfront cash, a line of credit, and

monthly automatic draws

HANK


Initial Age 75

Initial LTV 61.4

Issuers must buy out loans at 98% of initial appraisal

HECM Pools


Initial Age 75

Initial LTV 61.4

1 Year 65.3

2 Years 69.6

3 Years 74.0

4 Years 78.8

5 Years 83.9

6 Years 89.2

7 Years 95.0

8 Years paid


HECM Pools


Initial Age 75 90

Initial LTV 61.4 75.0

1 Year 65.3 79.8

2 Years 69.6 85.0

3 Years 74.0 90.4

4 Years 78.8 96.2

5 Years 83.9 paid

6 Years 89.2 paid

7 Years 95.0 paid

8 Years paid paid


HECM Pools


Initial Age 62 75 90

Initial LTV 52.4 61.4 75.0

1 Year 55.8 65.3 79.8

2 Years 59.4 69.6 85.0

3 Years 63.2 74.0 90.4

4 Years 67.2 78.8 96.2

5 Years 71.6 83.9 paid



8 Years 86.3 paid paid




HECM Pools


Borrower data includes birth dates and genders

HECM Pools

Loan

Number

Current

Balance

Total

Rate

MCA

(Initial Appraisal)

Closing

DateState Birth Date Gender

(Hank) 200,000 6.25 300,000 3/21/16 IL 4/1/1954 M


HECM Pools

Concentration Risk

Actuarial Risk

Cash Flow

Parameters


High loan counts mitigate concentration risk

HECM Pools


Borrower ages and genders affect when loans end

HECM Pools


Total current loan balance to MCA tracks 98% buyouts

HECM Pools


HECM Pools


GNMA guarantee removes credit risk from loans

Cash flow uncertainty limited by 98% buyout

There are years of data on when loans pay off early

Cash Flow Uncertainty is the Biggest Fundamental Risk


Historically, loans have paid off before 98% buyout

due to borrower health, causing an “actuarial” event:

Mortality, when each borrower passes away

Mobility, when borrowers move due to health

Default when borrowers don’t pay taxes or insurance




Largely, actuarial speeds are slow and uncorrelated versus traditional

mortgage rate refi-driven speeds

Non-Claim Terminations (Prepays) by Vintage

Source: HUD, Barclays Capital



The PPC vector has been too fast, so we built the

Modified HECM Prepayment (MHP) curve.

Standard Fixed HECM Pool Prepayment Speeds


Standard Fixed HECM Pool Prepayment Speeds


Speeds on seasoned fixed pools have stayed in

a narrow range from 75-125% MHP


Borrower health, causing an “actuarial” event

Mortality, when each borrower passes away

Mobility, when borrowers move due to health

Default when borrowers don’t pay taxes or insurance

Refinancing to get a higher LTV and pull out more cash

Older loan LTVs have grown so refinancing rare

New loans need a program change to higher LTVs

Historically, loans have paid off before 98% buyout due to:



Fixed HECM Pool Prepayment Speeds


We use different MHP curves for 2013 and 2014 pools that have had

some refinancing activity



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0 1 2 3 4 5 6 7 8 9 10 11

Principal Interest

New Issue Fixed-Rate HECM Cash Flows at 0 CPR

At 0 CPR, cash flows only come from 98% buyout



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Principal Interest

New Issue Fixed-Rate HECM Cash Flows at 100 MHP

With speeds added in, cash flow still back-loaded


Shape Management® Summarizes Risk and Reward

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-300 bps -150 bps 0 +150 bps +300 bps

Seasoned HECM ARM Seasoned Fixed HECM New Issue Fixed HECM

Three Year Horizon Total Returns

HECMs can be both offensive and defensive


New Fixed HECMs are Intermediate Bullet Subs

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-300 bps -150 bps 0 +150 bps +300 bps

New Issue Fixed HECM 6yr Agency


Fixed HECM cash flows don’t change with rates


Seasoned Fixed HECMs Are Defensive

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-300 bps -150 bps 0 +150 bps +300 bps

Seasoned Fixed HECM 2yr Agency


Reinvestment drives strong rates up returns


HECM ARMs Reset Monthly with High Caps

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3.0%

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-300 bps -150 bps 0 +150 bps +300 bps

Seasoned HECM ARM Agency CMO Floater


High quality of shape due to uncorrelated prepays


HECM Accounting

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0 1 2 3 4 5 6 7 8 9 10 11

Principal Interest

New Issue Fixed-Rate HECM Cash Flows at 100 MHP

Pool balances can grow, especially early on


Cash flow paid first to interest, then principal

HECM Accounting

Month Interest Principal Cash Flow Balance

0 1,000,000

1 3,858 -2,723 1,135 1,002,723

2 3,869 -2,518 1,351 1,005,241

3 3,878 -2,310 1,568 1,007,551

4 3,887 -2,101 1,786 1,009,652

5 3,896 -1,846 2,050 1,011,498

6 3,903 -1,195 2,708 1,012,693

7 3,907 266 4,173 1,012,427

8 3,906 1,498 5,404 1,010,929


Straight line amortization if provider doesn’t know HECMs

Level yield if you use Bond Trust™ who do know HECMs

Premium amortization depends on accounting provider:

HECM Accounting


HECM Legal Final

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0 1 2 3 4 5 6 7 8 9 10 11

Principal Interest

New Issue Fixed-Rate HECM Cash Flows at 0 CPR

50-Yr final ignores 98% buyout and is very unlikely


The HECM market is about $54 billion in size

We regularly get bids from dealers on customer bonds

Small pieces tend to trade closer to big ones than in agency CMOs

HECM Market Liquidity

0 100 200 300 400 500 600 700 800 900 1000

TOTAL OUTSTANDING BALANCE (MM)

SBA 7(a) Floaters HECMs Agency RMBS CMOs




A Look-Back ® on HECM performance

0.0%

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Seasoned FixedHECM Pool

HECM StandardFixed Pool

High UtilizationHECM ARM Pool

Low CouponHECM ARM

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HECM SECTOR

Actual Projected





HANK






Initial LTV 75.0

1 Year 79.8

2 Years 85.0

3 Years 90.4

4 Years 96.2

5 Years paid







-1.0%

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0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

-300 -150 0 +150 +300

New Issue Fixed HECM

6yr Agency

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

-300 -150 0 +150 +300

Seasoned Fixed HECM

2yr Agency

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0.0%

0.5%

1.0%

1.5%

2.0%

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-300 -150 0 +150 +300

Seasoned HECM ARM

Agency CMO Floater








Come talk to us!



-1.0%

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-300 bps -150 bps 0 +150 bps +300 bps

Seasoned HECM ARM Seasoned Fixed HECM New Issue Fixed HECM


HECMs are a strong risk/reward in our analysis

© 2016 Performance Trust Capital Partners, LLC (which, along with its affiliates, is referred to

as “Performance Trust”). All Rights Reserved. This material is for your internal use only and may

not be disclosed to third parties. The content is the proprietary and confidential material of

Performance Trust and so designated pursuant to a confidentiality agreement between the

intended recipient and Performance Trust. The research and other information provided herein has

been prepared for informational purposes only and is not an offer or solicitation to purchase or sell

securities. Performance Trust may make a market, or have a position in the securities discussed

herein and may purchase or sell the same on a principal basis or as an agent. Investing involves

risks, including the potential for principal loss. There is no guarantee that the strategies and services

will be successful or outperform other strategies and services. Certain assumptions may have been

made in connection with the analysis presented herein, and changes to the assumptions may have

a material impact on the analysis or results. Past performance is no guarantee of future results.

The investments discussed herein may be unsuitable for investors depending on their specific

investment objectives and financial position. Investors should independently evaluate each

investment discussed in the context of their own objectives, risk profile and circumstances.

The information contained herein has been obtained from sources considered to be reliable,

and is subject to change without notice. Performance Trust does not guarantee its accuracy,

adequacy or completeness and is not responsible for any errors or omissions or for the results

obtained from the use of such information. FOR INSTITUTIONAL USE ONLY.

HECMs: Everything You Need to Know - Performance · PDF fileHECMs: Everything You Need to Know...

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