How falling home values will bring down inflation

James E. Veale, MBT

September 27, 2022 at 1:12 am

The earliest one can know trends in HECMs is in CNA (HECM Case Number Assignment) data reported by FHA by the month of assignment. It is only provided on a national basis and, therefore, does not provide insights into where the hottest markets are for application purposes. It’s one benefit is to show very early in the process how many CNAs were issued in a month and a single breakdown of those CNAs into H4Ps, HECM Refis, and Traditional HECMs. This information is also somewhat misleading since concurrently only about 75% of these applications turn into endorsed HECMs. Yet the information provides us with trend information on an industry wide basis months before the related applications are converted into endorsed HECMs.

What is of note is that the latest CNA data is for July 2022 and shows that July 2022 is the fourth straight month of loss in total CNAs. Worse the CNAs reported for July 2022 are lower than the HECM endorsements reported for July 2022. Why is this significant? Simply because only around 75% (or less) of those CNAs will turn into endorsed HECMs. Total CNAs for July 2022 are only 52.5% of that same total for March 2022. What may not be obvious is that HECM Refis are rapidly dropping and may already be resulting in less than 1,000 endorsed HECMs per month; the conversion rate on HECM Refis could drop drastically depending greatly on the period that the expected rate can be locked.

Despite all of the talk about growth in H4Ps and Traditional HECMs once the focus is no longer on HECM Refis, as of yet any increase in CNAs is in “the talk,” and not reflected in CNA data. The best that can be said about H4P and Traditional HECM CNAs is that they are holding steady. Yet as of now (9-27-2022 at1:30 AM PST) the latest data we have is almost between two and three months old. It is expected that the August 2022 may not be posted until sometime in October and September’s CNA data as late as mid November. There are just 3 plus days left in HUD’s 2022 fiscal year which ends on 9/30/2022. Now just imagine how long ago, the detailed HECM endorsement data being reported by RMI (through no fault of RMI) actually is. The case numbers assigned to the vast majority of those endorsed HECMs are most likely between five and seven months old. Do you really believe that the indications of hot and cold markets are all that relevant by the time that RMI provides their data?

While endorsement data provides us with the most detailed information about applications that become endorsed HECMs, endorsement generally occurs two to three months following HECM closings and we all know that HECM case numbers were assigned many times months before closing occurs. RMI emphasizes endorsement data provided by FHA because that drives its detailed marketing data. As to understanding trends by units smaller than the nation as a whole, one can only use endorsement data (unless one has access to HMBS data but that data is structured on what interests HMBS investors, not necessarily lenders or originators).

What we already know is that the total endorsements for this fiscal year will exceed 10 such totals before it since through 11 months of this fiscal year total endorsements already exceed total endorsements for the 10 fiscal years that precede it. Yet the deserved joy that should come from such an achievement is greatly dampened by the prospects of what lies before us in fiscal 2023 and beyond.

To the optimist the foregoing seems pessimistic but to the pessimist, it seems optimistic. As a retired CPA, my goal is to be a realistic skeptic. By industry anecdote one would conclude that the industry was doing close to 80,000 to 90,000 HECM endorsements per year. As to the available HECM summary endorsement data provided to us by FHA, HECM endorsements are just 61,257 through August 31, 2022.

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James E. Veale, MBT
September 27, 2022 at 1:12 am
The earliest one can know trends in HECMs is in CNA (HECM Case Number Assignment) data reported by FHA by the month of assignment. It is only provided on a national basis and, therefore, does not provide insights into where the hottest markets are for application purposes. It’s one benefit is to show very early in the process how many CNAs were issued in a month and a single breakdown of those CNAs into H4Ps, HECM Refis, and Traditional HECMs. This information is also somewhat misleading since concurrently only about 75% of these applications turn into endorsed HECMs. Yet the information provides us with trend information on an industry wide basis months before the related applications are converted into endorsed HECMs.

What is of note is that the latest CNA data is for July 2022 and shows that July 2022 is the fourth straight month of loss in total CNAs. Worse the CNAs reported for July 2022 are lower than the HECM endorsements reported for July 2022. Why is this significant? Simply because only around 75% (or less) of those CNAs will turn into endorsed HECMs. Total CNAs for July 2022 are only 52.5% of that same total for March 2022. What may not be obvious is that HECM Refis are rapidly dropping and may already be resulting in less than 1,000 endorsed HECMs per month; the conversion rate on HECM Refis could drop drastically depending greatly on the period that the expected rate can be locked.

Despite all of the talk about growth in H4Ps and Traditional HECMs once the focus is no longer on HECM Refis, as of yet any increase in CNAs is in “the talk,” and not reflected in CNA data. The best that can be said about H4P and Traditional HECM CNAs is that they are holding steady. Yet as of now (9-27-2022 at1:30 AM PST) the latest data we have is almost between two and three months old. It is expected that the August 2022 may not be posted until sometime in October and September’s CNA data as late as mid November. There are just 3 plus days left in HUD’s 2022 fiscal year which ends on 9/30/2022. Now just imagine how long ago, the detailed HECM endorsement data being reported by RMI (through no fault of RMI) actually is. The case numbers assigned to the vast majority of those endorsed HECMs are most likely between five and seven months old. Do you really believe that the indications of hot and cold markets are all that relevant by the time that RMI provides their data?

While endorsement data provides us with the most detailed information about applications that become endorsed HECMs, endorsement generally occurs two to three months following HECM closings and we all know that HECM case numbers were assigned many times months before closing occurs. RMI emphasizes endorsement data provided by FHA because that drives its detailed marketing data. As to understanding trends by units smaller than the nation as a whole, one can only use endorsement data (unless one has access to HMBS data but that data is structured on what interests HMBS investors, not necessarily lenders or originators).

What we already know is that the total endorsements for this fiscal year will exceed 10 such totals before it since through 11 months of this fiscal year total endorsements already exceed total endorsements for the 10 fiscal years that precede it. Yet the deserved joy that should come from such an achievement is greatly dampened by the prospects of what lies before us in fiscal 2023 and beyond.

To the optimist the foregoing seems pessimistic but to the pessimist, it seems optimistic. As a retired CPA, my goal is to be a realistic skeptic. By industry anecdote one would conclude that the industry was doing close to 80,000 to 90,000 HECM endorsements per year. As to the available HECM summary endorsement data provided to us by FHA, HECM endorsements are just 61,257 through August 31, 2022.
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