January 30, 2007 5:00 PM ET
By Tim ZawackiOptions Toolbox
Ginnie Mae President Robert Couch called on lenders to consider adding reverse mortgages to their product suites as a combination of factors converge to make the market increasingly attractive.
Reverse mortgages "are on the verge of explosive growth," said Couch, speaking Jan. 30 at the American Securitization Forum's ASF 2007 in Las Vegas. Couch said that originations of the product increased by about 80% in 2006, following several years of triple-digit percentage growth.
"The stars are coming into alignment," Couch said, making reference to the "hockey stick growth" of originations combined with demographic changes in the United States. Also, Ginnie Mae is in the process of putting together the first Home Equity Conversion Mortgage (HECM) MBS issuance, which will allow approved issuers to securitize and sell FHA-insured reverse mortgages in the form of a Ginnie Mae security. The transaction is expected to take place by the end of Ginnie Mae's fiscal year on Sept. 30. If successful, Couch said, it will "give the business some turbo-thrusters" through the addition of secondary-market execution.
As with many new products in the secondary markets, the Ginnie Mae HECM deal has not been met with universal enthusiasm since its introduction in October 2006, Couch admitted. Servicing the product can be "somewhat complex," he said, and it differs significantly in a number of respects from traditional first-lien products.
Ginnie Mae's HECM transaction is structured so as to provide simplicity to investors, but Couch said that it comes at the cost of more complexity to the servicer. He admits that the transaction has garnered mixed reviews from servicers and that "it will take some changes to the systems that exist today." But Couch added, "We don't believe it is overwhelming complexity."
For instance, the HECMs start off with large initial draws and no principal-and-interest payments are made by borrowers until a so-called "termination event," such as death or entry into an assisted-living facility. In addition, the product could produce concerns associated with draw-down rates and mortality. And there's much less data associated with the product's performance over time relative to more established asset classes.
But, Couch said, "The Street and the rating agencies are getting much better at this."
Couch's comments came days after IndyMac Bancorp Inc. reported strong top- and bottom-line growth for 2006 at its reverse mortgage unit, Financial Freedom Senior Funding Corp. For the full year, Financial Freedom's production climbed by 71% to $5.02 billion while net earnings more than doubled, to $54.2 million from $24.8 million in 2005.
But it would appear that competing lenders might be heeding Couch's advice: IndyMac cautioned in its fourth-quarter earnings release that short-term growth could be tempered by new entrants to the reverse mortgage market. Financial Freedom ranks as the nation's largest reverse mortgage originator, with market share of approximately 50%.