As an attendee of the National Reverse Mortgage Lenders Conference in Newport Beach, I noticed that many new wholesalers and large investors from the REIT world and Wall Street were perusing the grounds. Of course the 800 pound gorilla was there and a handful of new entrants with some big pockets backing those entrants along with some traditional, national mortgage lenders starting Reverse Mortgage divisions. It was eerily reminiscent of the “birth” of the subprime industry in the mid to late 90s when the money was there to deploy but the delivery mechanism (brokers) were still being educated and taught about the new products and how to sell them. Besides the 800 pound gorilla and the few step children that have been around for a number of years that have existing relationships, its seems as though an asset & relationship grab is underway with everyone trying to accumulate as many assets as possible and each wholesaler being slightly different from the next. The simple truth is there is short supply and high demand right now for any Reverse Mortgage product.
It seems that with the rapidly declining subprime and real estate market, Wall Street is looking elsewhere for higher yields than traditional conventional paper and has found that Reverse Mortgages not only carry higher yields, they carry Insurance AND an equity cushion! At first blush, it sounds too good to be true but to have an asset that generally does not prepay (based on data from its short historical life) within 5 to 6 years, an adjustable rate yield resetting annually or monthly and the ability to take a monthly servicing fee off of the top means there is some substantial intrinsic value. You can just see those Fixed Income traders salivating over the characteristics and how much money they can sell the asset for to their institutional investors in a rush to higher quality with slightly less yield than their current non-prime offerings.
Currently, the above characteristics represent the current FHA HECM product and the new variant with a sliding scale on the giving the originator the ability to price their fees according to the borrower’s desires. In less than one month, the industry went from one fixed origination fee to having the ability to vary its upfront fees based upon compensation being placed on the back end like a traditional forward yield spread premium. One year ago, the mention of a back-side premium was blasphemous.
With new products, such as fixed and prime-plus rates, debuting every week this spring, I believe that this innovation will add some confusion initially to the marketplace. I believe that while the industry prides itself on innovation and catering to a Senior’s needs and desires, the plethora of options from different wholesalers is turning the Reverse market into a subset of the Forward market which is a morass of products and options, most of which even the most sophisticated borrowers never fully understand. The amount of time to educate the originators and provide them with the right sales tools will slow the deployment of some of these new products and it maybe 6-8 months before the true benefit of these products is passed onto the consumer.
One of the most beautiful aspects of the HECM is its simplicity, much in the way of the traditional 30 year fixed. Many years after its inception, we still see the 30 year fixed as a consistent staple that has evolved under agency regulation and guidance to continue to be a viable product along with the occasional investor variation. While there is no question that the current HECM product will adapt, how will other “prime” entrants bring a competitor to the HECM into the market and how will it be insured? Will the current HECM turn into the 30 year with all its flavors and subtle add-ons with a splash of Private Mortgage Insurance?
There are lots of new cooks in the kitchen working out their new recipes and providing limited samples to originators and let’s hope that the recipes for the new products are as good as the press releases and the hype that they’ve generated. While the HECM maybe the steak and potatoes, I’m looking forward to some filet mignon and lobster tail, just don’t overcook my food.
This is a commentary by M.B. Tackle