Article by Andrew Casey

Key investors are pouring into the HECM MBS markets seeking to capitalize on the demand among seniors for equity-conversion loans. Hear what David Fonantilla had to say about the demand from investors at the American Securitization Forum earlier this month.

If you’ve ever wondered just how much the reverse mortgage industry has grown in the last decade, the short answer is exuberantly. And as for longer answer? Let’s consider the demand for mortgage-backed securities from investors: if they’re willing to bet on the popularity of reverse mortgages, that’s a powerful testimony.

Recently, reverse mortgage MBS have been as popular as commercial real estate MBS. During 2010, private label commercial mortgage-backed security originations totaled about .9 billion, just a hair more than reverse mortgage originations that totaled .7 billion.

Now that’s incredible growth, especially considering that in 2009, only about billion worth of home equity conversion mortgages (HECM), the more formal name for a reverse mortgage, were issued. It’s seems increasingly possible that within a year or two, HECM mortgage-backed securities could hit the secondary private markets as a popular alternative to commercial mortgage loans.

Earlier this month David Fontanilla, the director of Knight Capital Markets made that very point at the American Securitization Forum in Orlando, Florida. The ASF is the securitization industry’s largest annual conference, bringing together hundreds of issuers and lending professionals from all over the country.

In pointing out the equivalencies between the HECM MBS market and the commercial MBS market, Fontanilla said “It gives you an idea of the growth in our market.” That very growth has been largely driven by everything from the increase in demand for Medigap insurance for a retiring couple to increased lifespan expectancies, to simply a largely collective absence of proper retirement planning.

Fontanilla made his points to a captive audience at the ASF. The demand for HECM MBS drove the market value from around billion in 2005 to more than billion in 2009 as new investors poured new money into the secondary markets. And the funds are coming in from established firms, including bond behemoth PIMCO and online broker/dealer Fidelity Investments, not to mention armies of insurance companies and home loan banks of all sizes and shapes.

“Everyone is starting to get involved. It seems like insurance companies have been active”, said Fontanilla. The insurance company’s involvement pushes up the current yield, which Fontanilla says is around 4% now.

According to securitization industry reports, the HECM MBS market is seeing about three times the typical amount of volume trading. “We bought two mortgage originators and got into reverse mortgages for the ‘demographic play’,” Fontanilla said while explaining how his firm Knight Capital Markets was introduced to HECM MBS.

And this is only the beginning, according to many listeners at the ASF. Rising costs in insurance and from health care providers and hospitals will continue to fuel the demand for supplementary cash among seniors entering their Golden Years during the next 20 years. Couple that with rising costs in prescription drugs, deflated home prices, and one of the most pervasive recessions in our nation’s history, and it seems private investors are convinced of the explosive growth of reverse mortgages.

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Image Mortgage signed by Hugh Smith Thompson by Special Collections at Wofford College