Reverse Mortgage Origination Volume Likely to Increase Sharply says Barclays

NewImage.jpgWhile reverse mortgage origination volume has slowed down over the last few months, changing population trends and increased borrower awareness of the product suggest origination levels are likely to increase sharply over the coming years according to a new report released by Barclays Capital.

From the demand side, Barclays said demographics remain very favorable and is one of the reasons it expects to see strong growth in the product.  The US population is aging rapidly and the number of eligible borrowers is set to increase sharply as the baby boomers retire and life expectancy continues to increase.  Data from the US Census Bureau estimates there will be 85 million seniors above the age of 62 by 2025 and 112 million by 2050.

While the demand looks to be there, the supply picture is more uncertain since the market is almost exclusively dominated by government-backed issuance.  “Absence of widespread information on this product has led to a limited, albeit dedicated investor base. However, that picture is likely to change as this is a very stable and attractive product. With significant growth opportunities, it is likely that this sector will continue to see greater investor interest.”

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An industry reliant on Fannie Mae as its sole investor over the years, interest from institutional investors is starting to grow through Ginnie Mae’s HMBS product.  While Fannie Mae’s market share dropped to approximately 5% during the 4Q of 2009, issuance of the HMBS product grew to $8.538 billion during 2009, an increase of over 500% from 2008.

Industry leaders expect HMBS growth to continue as investor appetite has increased dramatically over the last 6 months, leading to better execution for issuers and lower costs for consumers.  “At the moment, there isn’t enough supply to satisfy the amount of investor demand,” said Joe Demarkey, Assistant Vice President of Strategic Business Development for MetLife during a panel at the Mortgage Bankers Association Conference last week.

Additionally, in terms of cash flows relative to traditional mortgages, Barclays said HMBS provide unique and extremely stable cash flows to investors.  They expect prepayment trends to remain stable and is unlikely they will change to much in the future due to the fact that prepayments have historically been mostly a function of mortality.

“Given the rapid increase in HECM loan endorsements, it is likely that issuance will increase in the future,” notes Barclays Capital ABS analysts in the report. “Over the past 10 years, this product has gained a foothold with seniors across the country. It looks to expand further as population demographics continue to shift.”

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  • While the report sounds rosy, at least two important factors were ignored, home values and Congressional support. Until home values return and there is sufficient Congressional support for adequate appropriations, any significant increase in endorsements may be years in coming. It would be nice if all that was required were the desire of seniors and investor interest in fixed rate HECMs.

  • What is frequently over looked in the reverse mortgage financial instrument is the fact that if a line of credit is selected or a lump sum withdrawnal, the home owner can lock in their present day property value as appraised and insured by FHA today. It seems as long as the home owner stays within the terms of the reverse mortgage, his or her home value is insured and theoretically they can't lose any more of their property value and can expect their home value to increase as property values start to rise.

    • A.L. Reynolds III,

      Why is it that you believe that property values as appraised and insured by FHA are locked in? Homeowners can certainly lose property value.

      For example, right now we are working on a home appraised at $400,000. The borrower will receive just a little over $220,000 in a lump sum. If the HECM terminates when the balance due is $312,000 and the home worth $360,000, the homeowner is provided no protections in loss in value. Let’s say that the selling costs are $20,000 so that sales proceeds after selling costs are $340,000. The homeowner will receive $28,000.

      Right now the theoretical appraised equity is $180,000. At termination $92,000 of “today’s appraised equity” would be eaten up in interest, MIP, upfront costs, and fees due to the HECM. $20,000 would be lost in selling expenses, and $40,000 is loss in the home’s value that nothing protects. The borrower will suffer a real loss in value of $40,000. FHA does not insure this $40,000 loss.

      Please explain what you mean.

    • A.L. Reynolds III,

      I apologize but I do not understand what you are saying FHA insurance actually protects. Are you saying it is the appraised value of the security that is insured by and locked in? Homeowners can certainly suffer a loss on property value with a HECM. FHA does not insure homeowners against such losses.

      For example, right now we are working on a home appraised at $400,000. The borrower will receive just a little over $220,000 in a lump sum. Say the HECM terminates when the balance due is $312,000 and the home sells for a gross selling price of $360,000. Let’s say further that the selling costs are $20,000 so that sales proceeds after all selling costs are $340,000. Of the net proceeds, the investors (and Ginnie Mae) will receive $312,000 and the homeowner just $28,000.

      Right now the theoretical appraised equity immediately following funding will be $180,000. At the termination of the HECM in the example, $92,000 of “today’s appraised equity” will be eaten up in interest, MIP, upfront costs, and/or fees; $20,000 will be lost in selling expenses and $40,000 will be lost because the gross selling price is below today’s appraised value. At termination the borrower would suffer a real loss in value of $40,000. All the homeowner would receive is $28,000 in cash.

      Please explain why you believe the borrower in the example above will not suffer the $40,000 loss in value (and $20,000 in selling expenses) indicated but will receive $88,000 ($400,000 – $312,000) between the sale ($28,000) and FHA ($60,000) because to the best of my knowledge FHA has never paid a HECM borrower one cent for any losses incurred as a result of the termination of a HECM. The only potential beneficiary at termination is the holder/owner of the note, i.e., the investor (which in some rare cases turns out to be the lender).

      • I am thinking that A.L. Reynolds does not understand the program as a whole OR has a major misconception of how it works.

      • 2545,

        Like you it appears either A.L. Reynolds III does not understand the program or does not know how to express what he knows.

        A.L. might be trying to say that nonrecourse means that the lump sum now becomes the minimum value of the home to the homeowner, i.e., the minimum amount of cash the homeowner will receive related to the home. If A.L. meant that, he certainly did not state it well.

  • Barclays has the demographics projected correctly and we've heard this prediction for years, but they don't seem to understand how the HECM is managed by HUD, OMB, and Congress. I wouldn't classify the FHA HECM as being a stable product any more. Stagnant home values, an increase in ongoing MIP, and a decrease in PLFs for the coming fiscal year could limit HECM endorsements to well under 100K. I just don't see highly leveraged Boomers buying in when the Oct. 1st offering is likely to be 15% off of it's pre-Oct. '09 peak. The hope I continue to have revolves around the low closing cost fixed rate product that is currently dominating the market.

    • Mr. Newmeyer,
      You state “The hope I continue to have revolves around the low closing cost fixed rate product that is currently dominating the market.”
      That is not much to hang your career on. I completely agree with you and have startetd looking at alternatives until (hopefully) our HECM recovers. Although, when the day comes that interest rates go up the low closing costs will disappear because the backend won't be as appealing…I believe. I am thinking they could just always have our rates above the typical market (as they are now) and hopefully continue the lower cost HECM. Regardless, come Oct when MIP is increased and PL are reduced our business is not going to get any better and that is for sure. Good luck!

      • 2545,

        It is good to see you once again active on RMD. It was rumored that the market had caused you to look elsewhere, it is disappointing to read it confirmed on RMD. You are right the outlook for the next fiscal year is not rosy. Per several analysts, market appreciation may be very low for several years to come.

        I like others believe that the result of the current trend in upfront cost reductions may be permanent with two distinct types of fixed rate HECMs surviving, one with higher upfront costs and lower interest rates and one with lower upfront costs but higher interest rates.

        I am also hopeful that one day early next year we will see a HECM mini or HECM II in both a fixed rate and adjustable rate product. This will provide lower costs to those who will not need the entire amount of the principal limit. Such products should open the door for more borrowers.

        Call me an eternal optimist but I also hope to see a wide spread return of the annual adjusting rate HECM.

        Take care and I hope to see your quick return to the industry.

      • thanks Critic. Seems as though you believe you know the true identity of 2545 : )

        Dont forget when interest rates go up the impact to the figures. At this time, it looks like interest rates are going to stay low for some time because of the economy and the jobless figures. Although, once they do go up there will not be a need for a HECM mini because the HECM will become a mini! Interest rates (as you know) play a large roll in the funds available. I do believe like you that additional changes/options will become available but the market as a whole is not going to be the same…possibly ever.

      • 2545,

        The idea of the HECM II or HECM Mini is to create a product that has principal limits which adjust so that they will always be somewhat lower than those currently being offered through other HEMC products. Because its principal limits will be lower, it can be structured in a separate pool where MIP can be lowered to say 30% – 50% of its rates on other HECM products. If structured properly, it could run so that any projected profits from this venture could offset any projected deficit from the other HECM products. Thus it would be a win-win for the senior and for the program.

        The HECMs II or HECM Mini would meet the needs of seniors who need a much smaller amount of proceeds than current principal limits. Since risk of loss on these products would be de minimis, most of the MIP should be available to offset losses. The potential demand for HECMs II or HECMs Mini could be very high.

      • critic,
        Not sure I agree. At this time I and many that I speak with are having a hard enough time qualifying those seniors interested. Maybe I am talking to the wrong seniors but most want the most available or need the most available to qualify. Although, maybe lower fees would change their outlook. If it did work we would have to stop originators from selling “the HECM-mini” to then next month hit the senior with a HECM-HECM refi with the larger “regular HECM”.

      • 2545,

        I have worked with several. One was an older woman who liked the product, wanted the security of the line of credit, but needed less cash than the total of the upfront costs plus the servicing fee set aside. Another was a husband and wife on a larger parcel who needed the cash to build a mother-in-law addition. There are others. The one thing all of these seniors had in common were either homes completely paid off or with a very low balance due existing mortgage. As I understand it, the idea behind the HECM Mini was to provide the product to these types of individuals.

        Please identify the type of senior and situation you believe HECM Minis are to be designed for.

        Take care.

      • Critic,
        I would agree with your examples of who would benefit from the HECM mini. In the end, its always nice to have options. As we all know we use to have only one option, as things progress its always beneficial to have several options to be able to better fit ALL clients needs.

  • The Barclay’s almost quixotic outlook for our industry is one we all hope comes true. The opinion of the authors seems founded on a fairly “glossy photograph” of our industry plus a very common view of future demographics and the alleged increase in consumer demand for our products which is presumed to come with a better educated public. The prior comments dealt with several of the “flaws glossed over” by the authors but there is one fundamental underpinning that should be questioned.

    Most originators have the outlook that if the expected interest rate of the adjustable rate products suddenly become more attractive as to Principal Limits than the interest rates on fixed rate HECMs, the industry would “turn on a dime” and adjustable rate HECMs would dominate our market. Unfortunately there is a very questionable assumption in that scenario. Who will the investor be?

    In the past our industry had an investor with what seemed to be a never ending voracious appetite when it came to adjustable rate HECMs, Fannie Mae. One day not long ago, we all woke up to the fact that the expected interest rate for the adjustable rate products was not as “locked in” as we once believed. While there appears to be no problem “locking in” the selected index portion of the expected interest rate between the dates of origination and closing, it suddenly became clear that the margin portion of the expected interest rate was not subject to that same lock.

    Most of us had explained to borrowers upon the signing of the origination documents that principal limits were locked until closing on all adjustable HECMs because the expected interest rate was locked. We had documents disclosing what we believed was exactly that concept. The rude reality was much different. For months the RMD comments were riddled with complaints about the situation.

    So now the question becomes, can the industry absorb a sudden switch to adjustable rate HECMs? Who will the investor be and how volatile will the swings in principal limits on these products be between origination and closing? With little demand for adjustable rate HECMs, the situation seems stable. But the question remains how stable will the expected rate become if demand suddenly shifts? Where will the investor or investors come from if there is a substantial increase in supply?

    Don't misunderstand I like the Barclay's outlook and hope it will quickly come to pass.

  • Critic,rnI would agree with your examples of who would benefit from the HECM mini. In the end, its always nice to have options. As we all know we use to have only one option, as things progress its always beneficial to have several options to be able to better fit ALL clients needs.

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