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?
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).