Q&A: Reverse Mortgage Trendwatch

While reverse mortgage volume was down 35% in 2010, some see the next year as a major turning point for the industry. John Lunde, president and founder of Reverse Market Insight, is one of those people and in our latest Interview Series he shares some of the trends he’s watching in 2011.

Lunde gives his take on the HECM Saver, proprietary products making a comeback and why industry consolidation is here to stay (at least for now).

RMD: What are you watching most closely in 2011?

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John Lunde: We’re watching applications and HECM Saver volumes. Applications grew consistently from January to October 2010, but leveled off in Q4 at 8,200 per month and declined in January to 7,400. We’re hearing that January might have been weather-related on the east coast, but we still need to see applications get back to 10,000 per month and above to ring the bell that the industry is back from the heart attack of October 2009.

On HECM Saver, we see it as a major turning point for the industry in meeting the challenge of addressing our historical niche with the most need-driven borrowers to the mainstream challenge competing head-on with traditional home equity products. It’s a huge challenge for the industry to adjust marketing message, sales force composition and process, and other core facets of the business. Not to mention the eventual need for product innovation as financial markets recover sufficiently to fund non-government backed deals.

RMD: With consolidation being a major trend in 2010, to what extent do you see it continuing in 2011?

JL: We fully expect consolidation to continue in 2011, although driven more by regulation of compensation and licensing this year, as opposed to last year’s volume declines driving lenders out. We might not see another 35% decline in active lenders, but it won’t be too far below that.

RMD: There are plenty of people doubting the success of the HECM Saver, but you remain bullish, why?

JL: We believe there are many more consumers that could be helped by HECM Saver than have been helped by HECM Standard in the entire 22-year history of our industry. If we look at the 867,000 senior households with just a HELOC outstanding against their home according to the federal census American Housing Survey in 2009, those customers would be better served by HECM Saver than their existing product for many reasons: lower interest rate, guaranteed credit and complete payment flexibility. The problem for us as an industry is about figuring out how to get in front of those customers efficiently enough to make money on a product that has reduced margins compared to HECM Standard. Folks that don’t invest the time and energy to understand how to change for HECM Saver borrowers might be more profitable in 2011 at the expense of being left behind as the traditional industry niche shrinks with lower home values and rising borrower debt.

RMD: What do you see as reasons why the market penetration for reverse mortgages lingers around the 2% mark? Are there signs of this changing?

JL: Again going back to American Housing Survey stats at the national level, there are roughly 5.2 million senior households with a forward mortgage or a combination of forward and HELOC/HE Loan. That’s about 10 times the number that have a reverse mortgage today, and that total group of under 6 million households is really all the industry has targeted thus far (roughly 25% of total 62+ homeowner households). If we think about why consumers in that group haven’t yet or might not in the future take a reverse mortgage, there are a couple main reasons that come to mind:

-Already owe too much on existing debt to have a reverse mortgage work

-Want to pay down mortgage rather than refinancing into reverse (reducing debt is more important than reducing payment)

-Negative product perception

-No pressing need to change their existing situation

Given the above reasons plus a financial/housing market collapse and the difficulty inherent in any new product launch, achieving 10% penetration of the target market is respectable. To re-accelerate overall market penetration (standing at 2.24% as of December 2010 according to our research) we need to get in the other 75% of households in a meaningful way means product innovation. HECM Saver is the first baby step to get there given that it only really changes cost structure in exchange for principal limit, while still depending on a government backed securitization model. It’s the right first step and has the potential to address a sizeable portion of the households that HECM Standard hasn’t.

RMD: There have been rumors of proprietary products making a comeback…What do you think will they look like?

JL: The easiest proprietary product to reintroduce is a jumbo reverse mortgage tailored to borrowers with home values well above the FHA limits. We already have one of those active today, and given how many iterations of that product were around before the market crash in 2008, we can be sure there are many tweaked jumbos waiting to come off the shelf once secondary markets allow non-government backed securitizations again.

So those are the first products to come back, but I think we’ll also see some more interesting ideas around monthly payments to borrowers and other features that try to carve out segments where the HECMs work OK but aren’t optimized for particular needs.

We’re also watching HECM fixed market share very closely. We saw fixed rate peak above 70% of all loans in October, but has dropped down to the low 60% range since then. Given that rates are probably increasing at some point and tomorrow’s borrowers are probably less likely than today’s to want a full draw, we see this as an interesting way to watch how fast the industry is changing.  It was a two-year trend on the way up, and we think we’re probably in for an extended decline in the share of fixed rate volume, although that depends quite a bit on the shape of the yield curve (short term rates vs. longer term rates).

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  • It is great to see John is so optimistic but maybe a reality check is in order.

    1- He is very bullish on the HECM Saver and it can be a great niche product. The one thing he doesn’t address is secondary market issues and the profability of the product which I believe will really determine the numbers.

    2- I believe 2011 is overly optimistic for the return of proprietary products and if any do return the LTV will be very low similiar to BOA’s simple equity or platinum product (approx 25%) which of course is history. I don’t see any of the major players introducing anything in 2011.

    3- I agree that there will be consolidation due to a number of factors. The impending regulation due to T&I defaults, compensation regulation and who knows what else? I believe volume will be down in 2011 from 2010 due to these factors. Did I forget to mention rising interest rates and lower principal limits?

    Of course I am just speculating like everyone else. The proof will be in the pudding come 2012.

  • Congratulations to Elizabeth and John Lunde for an “insightful” article. In many ways John enhances his image as a true industry leader and displays those qualities in this interview. Hype and exaggeration produce false expectations and ultimately collapse when actual results fall far short of expectations. It is a shame prominent industry leaders got so caught up with their desire for better conditions that it caused them to make ridiculous claims with no basis in fact, all resulting in little more than loss of credibility.

    John is right to be concerned about the plateau our application numbers (or better stated, FHA Case Number assignments) are stuck at. While the number of applications from the start of the new fiscal year has been better than last year, it is insufficient to overcome the dreadful number of applications produced during the period of June 1, 2010 through September 30, 2010 which composes the heart of the application season for the HECMs endorsed in the following fiscal year. (Yes, the process from Case Number assignment through endorsement can be thought of in terms of farming.) At their current pace the increased number in applications will have little impact on the exceptionally low endorsement volume trend now seen for this fiscal year. Yet counseling numbers are supposedly up; based on the new obstacle of FIT with its very objectionable and intrusive questions, it is no wonder the increase has not been seen in Case Number assignments and ultimately endorsements. FIT is absolutely objectionable when it comes to the more affluent with their true financial advisors.

    John is right to discuss the ability of (adjustable rate) Savers to compete with HELOCs but as many point out the comparability is not as strong or as deep as many make it out to be. Many claim the lenders who are promoting them are buying them for now rather than turning around and selling them at a profit; it seems there are several reasons for buying them but that is beyond the scope of this comment. Some also find the product of less value as an “equity release” (whatever that means) than HELOCs. This is particularly true when the principal limits are not only depressed because of lower principal limit factors but also because the market is demanding the use of a higher expected interest rate not only through a higher margin but now also through increases to the index.

    Here is where our marketing fails us. Overemphasizing the more and less obvious means we ignore the potential the adjustable rate Saver has. Industry veterans are as lost as novices. Alleged financial planners who support the industry have brought nothing to this discussion except those who are lost in faulty analysis on income tax matters.

    So where is the “secret sauce” and what is its formula? The Saver has the potential of becoming a mainstream middle class answer to cash fluctuations and other cash management needs. Many of these seniors in need of such a product have homes with values near and over our lending limit. In the past incurring over $20K to get an adjustable rate product with a higher principal limit than needed seemed excessive and unnecessary. With the Saver, incurring its additional cost is generally considered far less onerous and with its greater conveniences over other options, it has real potential to be far more than just a quasi competitor to the more or less obvious. BUT for existing registered and licensed MLOs to gain the necessary insight on how to present this aspect to the more affluent and their advisers will take time. The only way around that is recruiting those who already understand the underlying principles of cash (and debt cost) management combined with an open ended mortgage.

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