Major reverse mortgage companies like Finance of America (FOA) and Ellington Financial — the parent of reverse lender Longbridge Financial — recently released their third-quarter 2024 earnings results. FOA, in particular, posted strong numbers while Ellington continued to tout the versatility of Longbridge in its overall portfolio.
Recently, HousingWire’s Reverse Mortgage Daily (RMD) sat down with UBS analyst Douglas Harter to take a closer look at investors attitudes toward these companies in the current climate. When looking ahead at the future, there are some unsettled questions regarding the outlook of certain details within the Home Equity Conversion Mortgage (HECM) program, as well as other recent priorities in both the public and private sectors.
Past issues shaping future response
In regard to the 2022 collapse of top-five reverse mortgage lender Reverse Mortgage Funding (RMF) and the resulting liquidity crisis that followed, Harter was asked whether something like that can trigger investor pessimism, or if it could spark confidence due to the government’s response to it.
Ultimately, it depends, he explained.
“I think, initially, it leans toward concern over the near-term impact on liquidity and potential contagion to other areas,” he said. “There’s also the question of how existing players will be impacted. But as these issues are addressed and potential government actions like HMBS 2.0 improve industry dynamics, it can create new opportunities.”
That’s because a similar event could signal how entities like Ginnie Mae might approach their work with other liquidity providers, which could be a source of optimism. But investors need time to absorb and assess the impacts.
“These kinds of questions tend to arise after the initial aftermath, once the market begins to see how stakeholders and investors are responding,” he said.
But it’s also likely that investors could see what the lenders are seeing — which is additional product viability for their proprietary reverse mortgage offerings. FOA and Ellington both emphasized the strength of their proprietary products in their recent earnings calls.
“When looking at the proprietary side, there’s clear potential for growth and efficiency, especially with jumbo loans,” Harter said. “If you can reduce origination costs through scale, that can be beneficial. This fits well with Ellington’s strategy, as they’re a balance sheet-heavy business focused on creating long-term investments to support their dividend.”
There’s more potential volatility at FOA, since that company aims “to be less capital intensive than Longbridge or Ellington,” Harter said. “This has historically caused more fluctuations in their financial reports, with market adjustments playing a significant role — positive this quarter but negative in previous ones.”
But as FOA’s originations business scales, this volatility could diminish. The key will lie in the company’s ability to find long-term investors, he said.
Impending changes
Since a large segment of the reverse mortgage industry is intertwined with the Federal Housing Administration (FHA)’s HECM program, the impending transfer of power in the federal government does have some implications on the viability of the space. It’s unknown what kinds of policies the next HUD secretary, Ginnie Mae president or FHA commissioner will choose to pursue.
As of now, Ginnie Mae is pursuing a final term sheet for HMBS 2.0, a complementary reverse mortgage securities program first telegraphed by Ginnie Mae at the beginning of this year. An initial term sheet was released over the summer, with a final term sheet expected sometime in the near future, according to a timeline offered by Ginnie Mae acting president Sam Valverde in an interview with RMD.
But with the impending change of administrations — and the insistence from some congressional allies of president-elect Donald Trump for the Biden administration to cease policymaking activity until the transfer of power takes place — it remains to be seen how things will progress. As far as investors are concerned, HMBS 2.0 and proprietary product performance could play a role in their outlooks on the reverse mortgage business.
“I think the resolution of HMBS 2.0, and assessing the potential ongoing balance sheet or liquidity benefits that might come from it, is definitely something people are watching,” he said. “As we discussed earlier, the success of proprietary products or the HomeSafe Second are other key areas of interest. People are looking for indications of whether the market can grow. Of course, interest rates will fluctuate, which is largely beyond anyone’s control.”
As for whether investors have a stake in the specifics of the actual transfer of power, Harter said it does not command much time in the conversations he has had with investors.
“It doesn’t seem like people have a strong view yet on what might actually change,” he explained. “On the forward side, there’s more focus on considering the potential impact of ending conservatorship for Fannie Mae and Freddie Mac. That seems to be where the current conversations are centered.
“No one really knows what that would mean yet, or how much can be accomplished with or without Congress, and what could get through Congress. It’s definitely on people’s minds, but there isn’t a clear sense yet of what it would look like.”
