Only a few months after the release of the HECM Saver in October 2010, the new product is gaining traction with some lenders, while others are just starting to turn their attention to the low cost reverse mortgage product.
Different than the Federal Housing Administration’s HECM Standard, the Saver provides consumers access to a reverse mortgage product without the traditional upfront costs associated with the loans. Dubbed by some in the industry as the “HECM Savior”, many hope it could help reach a new group of borrowers – consumers without mortgage balances – and compete directly with a traditional home equity line of credit.
Four months after the release, judging the success of the product has been difficult due to limited endorsement and application data from Department of Housing and Urban Development. The first batch of data released shows that 19 HECM Saver loans were endorsed in November and 75 units in December.
It was the first encouraging sign the HECM Saver was starting to catch on and RMD soon learned that other lenders like Genworth Home Equity Access are having success with the product as well. The Rancho Cordova, CA based lender told RMD it has seen the share of HECM Saver applications increase from 8% in December 2010, to 19% of retail applications for January.
“We see the HECM Saver as a great opportunity to reach new customers who may not have considered a reverse mortgage before due to its fee structure,” said Pete Engelken, President of Genworth’s reverse mortgage division. “We’re also seeing more interest in the HECM Saver from HELOC consumers as HELOCs are more difficult to obtain these days.”
While larger lenders are having success out of the gate, brokers aren’t having the same results.
“I see it being a benefit in the product mix, but I’m not sure if it will be a huge boost to the industry, especially with the appraised values that we are seeing,” said Jack Belles, President of Reverse Mortgage of New England. The company hasn’t closed a HECM Saver yet, but they’re not alone. Live Well Financial, a wholesale reverse mortgage lender told RMD it’s seeing the HECM Saver slowly catch on with brokers.
“Since the closing costs are greatly reduced, this product is likely to be the first step at cracking the adoption challenge for 62 and older homeowners with no mortgage existing mortgage,” said Brett Ludden, Senior VP of Live Well Financial. “My primary concern is the risk that there will be attempts to quickly refinance HECM Savers into HECM Standard.”
It’s a concern shared by many investors and is part of the reason pricing is so different from the HECM Standard. Due to the lack of performance data on the product, interest rates on the HECM Saver remain higher and back end premiums are small or non-existent for many. Therefore, brokers will need to move back to an upfront origination fee based model and considering the challenging marketplace, it’s not something many are interested in doing right now.
“The economics of offering the HECM Saver is different and brokers need to realize that if the secondary market execution is lower, they’re going to need to change their model,” said Jason Levy, Guardian First Funding Group. “Lenders will need to re-write their sales process and re-educate their loan originators.”
If execution in the secondary market remains weak, brokers will need to generate additional volume in order to make it a legitimate business. Companies like Guardian — which runs a call center based model for retail — seem to be a good fit but Levy said the company hasn’t started to promote the HECM Saver through the Robert Wagner brand yet.
“It’s very hard to target one product to the mass media which is why we have to deliver a message that we’re going to educate the consumer on reverse mortgages and give them options.”
One challenge for brokers is that many banks and large lenders are offering the HECM Saver without an origination fee. “Brokers can compete if there is some type of draw,” said Cliff Auerswald, loan originator at All Reverse Mortgage Company (ARMC). The company has closed three HECM Saver loans so far and has another two in progress.
If most of the HECM Saver loans are adjustable rate with a line of credit —like it’s reported to be— there isn’t much they can do if there is no draw taken at closing. “It’s difficult for a broker to compete when the banks can originate those scenarios at zero origination fees,” he said.
When banks hold onto the loans, they can make money on future draws, something brokers don’t have the ability to do. “We do include the Saver when we educate our customers and have found some for whom it makes sense and for whom we could offer competitive scenarios,” said Auerswald.
But it isn’t stopping wholesalers from educating brokers on how to be successful offering the product. Genworth told RMD it’s starting to train brokers on the benefits of the product and provide insight into how to effectively target consumers.
“Because the HECM Saver compares very favorably with a HELOC, we have developed a side by side comparison that brokers can use in presentations with their customers,” said Engelken. “In the coming months, we expect to launch additional sales and marketing tools for brokers exclusively focused on the HECM Saver.”
While it’s still too early to judge whether the HECM Saver has been a success, initial results from lenders show it’s starting to catch on and that’s encouraging news for the industry. Why? Because the program plays in important role from a budget standpoint as well.
Last year, HUD requested $250 million from Congress to offset projected losses in the HECM program. Without that money, HUD would’ve be forced to significantly cut the principal limits for the second year in a row. Instead, HUD worked with the industry to develop the HECM Saver, which not only offers a low cost product to consumers, but was also designed to help offset the risks associated with the HECM Standard.
The agency has been very vocal about the need for the HECM Saver to be successful to ensure no additional cuts to the HECM Standard are necessary.
“Your ability to operate the HECM Saver and use it as much as you possibly can will enable us to keep the Standard alive and thriving,” said David Stevens, FHA Commissioner during a speech last year at the National Reverse Mortgage Lenders Association’s annual trade show.
During an interview with RMD, Stevens said the more successful the HECM Saver becomes, the less likely it’s that the HECM program will need additional support from Congress.
“With more fiscally conservative views coming out of Congress, we need to be very careful and make sure the HECM Saver gets up and running, because it will be much harder to receive government subsidies for mortgage products,” he said.