Home price appreciation is a vital gauge for reverse mortgage health. The FHFA’s House Price Index, alongside interest rate fluctuations, can reveal market trends. DBRS Morningstar’s recent presentation explored HPI and its impact on the reverse mortgage industry over the last two years.
Analyst Joe Morgenstern stressed the importance of targeting high-value homes due to their better fit with low reverse mortgage loan-to-value ratios, particularly in areas like the West Coast.
Low interest rates prompted a HECM-to-HECM refinance surge in the pandemic, highlighting the need for property appreciation to offset balance accrual. HPI data from Q1 2021 to Q4 2022 showed national changes of 11.7% to 44.6% over two years, but some high-appreciation states saw declines in 2022.
The HPI has shown significant nationwide growth, but focusing on the past six months highlights shifting trends, according to Morgenstern. The East Coast maintains positive growth, but Western states are witnessing notable declines in their HPIs.
The slowing appreciation in Western states could lead to reduced qualification rates in the reverse mortgage sector. Morgenstern suggests this may shift origination volume towards the East Coast in the short term. However, as of July 2023, data from Reverse Market Insight indicates that HECM endorsements in the East haven’t significantly surpassed those in the West.
Apart from a March spike linked to the merger of American Advisors Group and Finance of America Reverse, Western regions consistently surpass Eastern regions in volume. Additionally, interest rates have shown significant shifts from mid-2020 to early 2023, especially for proprietary reverse mortgages.
HECMs saw a substantial spike to over 6%, mirroring trends in the forward mortgage market at the time.
Morningstar also evaluated the performance of reverse mortgage loans by examining conditional prepayment rates (CPRs) for both HECMs and proprietary loans.
Morgenstern noted that they begin by analyzing conditional prepayment rates (CPRs) using data from New View Advisors. It covers both proprietary and HECM markets without a sub-sector breakdown. The CPR decrease from July 2020 to February 2021 likely impacted marketing efficiency in the industry.
The impact was particularly evident in regions with declining CPRs, closely tied to reduced originations in 2017. However, the low-rate pandemic environment led to a shift in borrower behavior. This trend continued until higher interest rates became a dominant factor in the mortgage market in 2022.