More private capital for proprietary products predicted, eventually

The growing competition between government and the private sector, seen often now from health care to financial reform to environmental issues, has spawned a derivative discussion in the reverse mortgage sector where professionals differ on how much influence each will exert in coming years.

Pertinent to funding this niche product, one view holds that the 20-year-old HECM is a durable standard, destined for its own senior longevity, while an opposing view posits that proprietary reverse mortgage product backers need to get involved for any meaningful growth to occur.

Arguing the proprietary side, Bart Johnson, president/CEO, Life Stages Financial Inc., says “events have conspired that begin to invite private products back into the market.” However, Johnson concedes that “the percentage of home value available to borrowers under the HECM product is effectively higher than the LTV curves that private investors can offer with proprietary products (thus borrowers receive more dollars with HECMs than with private products).”

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HECM headwinds are blowing stronger, though, and Johnson notes several occurrences that will propel proprietary products forward in years to come, especially as demand exceeds government appetite (and budget). They include Fannie Mae’s mandated reduction to its balance sheet; and several steps recently taken by the FHA – such as reduction of principal limit factors and an increase mortgage insurance premiums – portending further restriction of government financing.

One industry watcher, with a penchant for statistical analyses, expresses “optimism about a reduced HECM role” and suggests that it will “eventually be a positive for the industry,” but not before some pain. “I very much believe we’ll have major upheaval in the short-term,” he predicts. “My guess would be at least one major lender will leave the business, and possibly half of all brokers will be eliminated with volume shrinking back to 50 percent to 60 percent of its 2008 peak, before getting better.”

Written by Neil Morse

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  • In late 2006 and early 2007, industry leaders at several NRMLA meetings predicted that by this time over 50% of all reverse mortgages would be proprietary. There is an old song that goes: “wishin' and hopin'.”

    No doubt proprietary will return but probably not for a while and most likely they will never be competitive with HECMs. The sooner they come the better but I am not holding my breath.

  • I have always felt that whenever a door closes, a window of opportunity opens. The reverse mortgage product has way too much long-term upside potential (just look at the pricing on GNMA deals) to allow it to to shrink.

    Private money will be coming, it's just a matter of time. I don't know if it's Wall Street, insurance companies, foreign money, or from wherever. Reverse mortgages fill a need, albeit a relatively small niche, but it serves both the needs of borrowers as well as those of the investors.

    As long as Fannie Mae remains semi-irrelevant, and HUD keeps limiting available funds to needy seniors, someone will fill that need and I say the sooner the better!

  • The proprietary product even with lower LTV's would be a great niche product. I come across many seniors who were turned down for a home equity loan and are only looking for a smaller fixed amount to do home repairs etc.
    The proprietary product with no MIP reduces the upfront costs and could be a great alternative for these instances.
    I know there was talk of the HECM mini?

  • Jumbo programs won't make sense and will offer minimal value unless they provide a reasonable equity to cash conversion ratio. Before the mortgage crash, a 62 year old could receive 30% and an 82 year old would be approximately 50% while a 92 year old was at 60%. Today, the two Jumbo programs left only offer 10-30%, and that's not enough. I've spoken with hundreds of homeowners who need a Jumbo Reverse Mortgage, and have to tell them “sorry”, because they only have 50% equity.

    Last month I quoted a beautiful 5M property that's located right on the beach in Newport Beach. The homeownes are in their mid-60's and owe 770k, but the program had a shortfall of 68k. A 15% conversion ratio is just plain ridiculous.

    • rainmand,

      I guess there are a few details you are leaving out. At 15%, the cash out should have been $750,000 based on the info you provide. That would only leave them $20K short. What is the difference, fees?

  • Yes – we definitely need privatization to compete with rising mortgage insurance requirements and to initiate jumbo reverse financing. With all of the equity the seniors bring to the table – this would appear to be a profitable enterprise for the enterprising financial entrepreneur.

    • rainmand,

      Your example calls attention to the fact that lenders will be more cautious (maybe a little too cautious?) than they were when they mushroomed — at least at first. While Congress and HUD can ignore some significant risk factors and change the program with little concern over its outcome, lenders cannot afford to do the same with proprietary products.

      One of the biggest problems about the proprietary products was that at first they ignored local real estate market conditions and tried to emulate the HECM using national criteria. As they began to realize that not all real estate markets are the same, they fought to stay by addressing individual real estate market conditions but by then it was too late. These lenders seemed to be oblivious to the national character of the housing downturn. Then when they woke up to the national problem, they all disappeared within weeks of each other. It seemed they were always reacting a little too late. It was an odd experience and how several of them closed down, left a bad taste in the mouths of originators and more importantly those of seniors.

      I hope how the proprietary reverse mortgage lenders went out, they will come back. If they ignore local real estate market risks, they will go out as quickly as they come back.

      The three basic rules for the proprietary market should be based on risk and are the same basic three rules as used in real estate investment: location, location, and location. Of course lenders must address redlining and other illegal and unethical practices but they also must be concerned about risk. It will be interesting to watch them test the waters and to see how much risk they are willing to “swim out into”.

      It would be instructive to see what kind of losses the proprietary reverse mortgage lenders anticipate incurring on the proprietary reverse mortgages they have created to date presented by cohorts based on the calendar quarter in which they originated and real estate markets in which the related homes are located.

  • rainmand,rnrnYour example calls attention to the fact that lenders will be more cautious (maybe a little too cautious?) than they were when they mushroomed — at least at first. While Congress and HUD can ignore some significant risk factors and change the program with little concern over its outcome, lenders cannot afford to do the same with proprietary products. rnrnOne of the biggest problems about the proprietary products was that at first they ignored local real estate market conditions and tried to emulate the HECM using national criteria. As they began to realize that not all real estate markets are the same, they fought to stay by addressing individual real estate market conditions but by then it was too late. These lenders seemed to be oblivious to the national character of the housing downturn. Then when they woke up to the national problem, they all disappeared within weeks of each other. It seemed they were always reacting a little too late. It was an odd experience and how several of them closed down, left a bad taste in the mouths of originators and more importantly those of seniors.rnrnI hope how the proprietary reverse mortgage lenders went out, they will come back. If they ignore local real estate market risks, they will go out as quickly as they come back.rnrnThe three basic rules for the proprietary market should be based on risk and are the same basic three rules as used in real estate investment: location, location, and location. Of course lenders must address redlining and other illegal and unethical practices but they also must be concerned about risk. It will be interesting to watch them test the waters and to see how much risk they are willing to “swim out into”.rnrnIt would be instructive to see what kind of losses the proprietary reverse mortgage lenders anticipate incurring on the proprietary reverse mortgages they have created to date presented by cohorts based on the calendar quarter in which they originated and real estate markets in which the related homes are located.

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