Reverse Mortgages: Mainstream Product or Niche Solution?

Despite challenging economic times, a lack of retirement funding options for many baby boomers and a rapidly growing 62+ segment, the market penetration of reverse mortgages seems to have plateaued around 2%. It’s a harsh reality for an industry that saw volume surge from 6,640 units during fiscal year 2000 to 114,692 units in 2009.

As of December 2010, the reverse mortgage industry stands at 2.24% market penetration according to data from Reverse Market Insight. In order to break through that plateau, the industry needs to reach the other 75% of older American households in a meaningful way, says John Lunde, President of RMI.

The environment seems to indicate that more eligible borrowers would seek reverse mortgages for the solution to the growing problem of retiring at home. But, despite 10,000 baby boomers turning 65 each day, a laundry list of challenges including increased regulation, lower home values, principal limit reductions, distrust of those in the mortgage business and others, has led to a volume drop for the first time in almost a decade during 2010.

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As the industry works to fight back from a rough year, many are optimistic about the future and believe it could break the 2% penetration level plateau through several avenues: public perception, regaining lost volume and a big bet on the HECM Saver.

Perception

Industry exits by Bank of America and Financial Freedom sent the industry reeling this year as it not only saw volume declines from two of the largest and steadfast lenders, but also gained widespread press. When a company the size of Bank of America leaves the industry, it doesn’t send the strongest message to the public.

“I think the Bank of American departure is a bigger issue in terms of the perception that we are a mainstream product,” says Jeff Lewis, chairman of Generation Mortgage. “The perception is very important in terms of maintaining investor confidence and growing the business, making people feel comfortable as borrowers in doing the loan.”

While other major institutions like MetLife, Wells Fargo and Genworth remain, other big banks like Chase have stayed on the sideline, posing potential problems for the industry long term.

“If we remain perceived as a niche product, that has a lot of negative implications,” says Lewis. “That is the most important thing about Bank of America leaving; it sends this message that we are still not mainstream.”

Bridging the Gap

Data from the latest American Housing Survey shows that on a national level, roughly 5.2 million senior households have a forward mortgage or a combination of forward and HELOC/Home Equity 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,” says Lunde.

“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,” he says. “It’s the right first step and has the potential to address a sizeable portion of the households that HECM Standard hasn’t.”

“We spend a tremendous amount of time figuring out how we take this industry from 100,000 to 500,000 units,” says Eric DeClercq, national retail leader at MetLife Bank. “We’ve got multiple initiatives and they’re all HECM Saver- and purchase-based.”

Launched in October 2010, the HECM Saver provides borrowers with less in proceeds at a lower cost compared to the HECM Standard. With little upfront cost, the industry finally has the ability to compete with more traditional products like home equity lines of credit.

The latest data from HUD shows that 296 HECM Saver loans were endorsed in February, up 79.4% from the previous month. While the volume alone is nothing to write home about yet, the data is encouraging and shows there is a market for the product.

When asked how the industry grows beyond the current penetration levels, DeClerq needed no time to think about his response.

“The HECM Saver is the answer, it will never happen if we were selling the HECM Standard,” he says. “There always will be the Standards, but the HECM Saver is the future.”

HECM Saver – the Future

If the HECM Saver is the future of the industry as some claim, the reality is that few are having success with the product. Recent data from HUD shows that Wells Fargo and MetLife controlled almost 70% of the HECM Saver market two months after its release. Other lenders are doing one Saver here and there, but there is either a lack of desire to move into a new market or challenges they face reaching a new group of borrowers.

For the industry to break out from this plateau, it must go outside of its comfort zone. Instead of seeing the Saver as a tool that can’t help their customers, lenders need to see it as a way to reach an even larger segment of the population.

But more importantly, the industry faces challenges in the coming months to address public perceptions issues as major institutions have left the industry. The longer others stay on the sidelines and do not offer the product to their customers, the bigger problems the industry faces.

When discussing the Bank of America exit, Lewis rhetorically asked that if a senior comes into a bank branch and takes out a HELOC, does the institution have an obligation to present a HECM as an option? “I think they do,” he says.

The question outlines the challenge the industry faces in terms of breaking through the 2% penetration level it has been stuck at over recent years. Whether the HECM Saver is the product that catapults the product into the mainstream isn’t clear, but several lender are betting big on the product and the industry’s future because of it.

“[HECM Saver] is the answer to migrating our business into the retirement income planning and as a retirement option for older Americans, says DeClerq. “The HECM Saver is the product that is going to get us there.”

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This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.


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  • Perhaps the most interesting and helpful session at the NRMLA Conference in Newport Beach earlier this year was the one on Savers. It was also one of the most disappointing. The panelists did a great job of defining the product and describing the demographics of those who are obtaining Savers. They were excited and positive about its prospects.

    The session was also disappointing. There was no new insight or ideas on how to adjust marketing or selling methods to reach the far greater senior community through Savers. No successful Saver selling or marketing tactics were brought to the forefront.

    There was one exception. Mr. Jim Novack of Genworth presented a retirement investing strategy which seemed to show some signs of promise. It focuses on avoiding the spend-down of retirement plan and portfolio assets in the early days of retirement. The concepts somewhat defy conventional wisdom but they are apparently backed by several prominent professors. Mr. Novack promised that Genworth would be releasing the study and its results in the near future.

    Three things were missing in the presentation. The first was NO in-depth look at how to use Savers to reach out to attorneys, CPAs, and fee based CFPs. The second was no presentation on the use of Savers as effective cash management products and how to adjust our marketing accordingly. The final area was no look at how seniors see the benefits of the product outside of the obvious lower upfront costs. With higher note interest rates, the lower upfront cost advantage could dissipate rather quickly.

    What the session made clear is that we as an industry have a long way to go in understanding why this product appeals to the more affluent and how to demonstrate its use as a unique cash and debt management product.

  • As long as the industry continues to believe that he HECM Saver is the answer, it will not address the salient issues that are destroying the industry. Only 296 were endorsed in February. Not 2000, not 20,000 but 296. The industry better get its head out of the sand and address the real issues holding the program back or one day there will be no demand for any of the HECM products. The only thing there will be is a long unemployment line for those in the reverse mortgage industry.

  • Within the past month, for the first time since the Saver has been released, a few consumers have asked me specifically for Saver quotes. Now I understand why MetLife has a large portion of that market – they have more Saver programs and options then anybody else, and they’re very competitive. I wish my favourite Lender offered a 5.25 fixed too.

  • With the pricing on the Saver products, what we need to charge the borrower in origination fees seem to offset any savings from the lack of upfront MIP. Until the pricing improves, this loan doesn’t seem to make a lot of sense for my borrowers.

    • Michael,

      Did you intend to repeat your complaint about the product? It seems you want to drive your point home.

      I suggest you read what ShariSnoopyFan writes just below. If you are stuck looking at the product, you are not seeing its marketing value. Not to worry many originators are in the same boat.

      You are evaluating it properly but that is not what marketing is about. It is not all about strictly presenting to seniors. Those who broaden their marketing will find the more affluent senior market and those who do not may stumble into it but will not be its primary beneficiaries. Shari is reaching out in her marketing efforts and apparently it is paying off.

      You might find what James writes insightful since he has been in the tax field from what I understand for almost 40 years.

      • Yes, my internet crashed when I posted my comment. Just to be clear, I am not down on the product itself, but when it doesn’t cost less than a standard HECM, I have a hard time marketing it as a lower cost alternative. The question I have when I read about some banks that are originating 4 to 5% saver product is if they are pricing it one way for retail and another price for wholesale so they can get the edge on the product.

  • I for one have given out numerous Saver quotes and have gotten a lot of interest for the product. The fact is, it has given me a great reason to contact all my old referral partners and potential referral partners with this latest and greatest reverse mortgage offering. The referral partners are thrilled with this new offering because of the lower closing costs which was usually their only real beef with reverse mortgages to begin with.
    It doesn’t seem to matter to them or their clients that we end up needing to do a standard product to pay off an existing mortgage in order to get the reverse mortgage done.
    I think the # of closed Savers is a little misleading as an indicator of what the product has done for the “Reverse Mortgage Image”. I haven’t closed very many myself, although I have presented it to lots of potential clients, but it sure has increased the number of referrals that I am getting from my referral partners. They love it, are more on board with reverse mortgage than ever before and will positively result in more closed loans for me this year. Love the Saver !!!

    • ShariSnoopyFan,

      It is this message which was missing from the NRMLA Conference in Newport Beach. We may look down on Savers but actual financial advisors understand the cash needs of their clients and how having a permanent source of cash from a nonrecourse mortgage can meet those needs.

      You are right that once the upfront cost barrier is dealt with, advisers are much more comfortable with the reverse mortgage conversation even if that conversation results in their client incurring the upfront costs of a Standard due to client needs. Your idea of going back to advisers for their referrals is right on point. In fact the Saver is a great way to open the conversation especially if you are conversant on cash and debt management issues. It stimulates the planning instincts of these advisors. Make no mistake about it Savers can be the best reintroduction into the financial planning and legal community we have.

      If I was still practicing accounting today and was overseeing as significant a tax practice as I was during the last two decades of the last millennium, I would want to find out about Savers. Even with its interest rate it is far less expensive than the proprietary products of a few years ago.

      It is and has been my contention that the Saver is designed to penetrate the adviser community, especially attorneys, CPAs, and fee based CFPs. Companies which ignore these business leaders do so at their own detriment. These are exactly the originators who complain about how the product is this and that. They see no potential in its ability to open doors. Those individuals are the ones whom I believe will continue to be very good with financially destitute seniors but will not see the value of the Saver for years to come, after it has helped so many originators get in front of the advisors who will help open doors. This is exactly why the Saver needs a different type of originator to sell it.

      Great insight.

  • The_Inquirer,

    ShariSnoopyFan did a great job of starting that conversation in her comment below. As to the use of the Saver as a means of changing the tone of the conversation with attorneys, CPAs, and CFPs, she is right on point.

    A Saver is a great way to reintroduce yourself back into the community of financial and legal advisors and regain (or gain) their interest. It is also a great way to start a conversation with an advisor whom you have not met. Some people like ShariSnoopyFan are very comfortable working with these individuals.

    Sometimes we believe that just because an attorney, CPA, or CFP understands the “theoretics” of things like nonrecourse, they understand its use. Making that assumption or trying to “teach” very experienced advisors about such matters is a huge mistake unless they ask questions. We, as an industry, need to present illustrations of the appropriate use of a Saver in specific situations. But memorized examples alone can be the undoing of originators who have little experience in such matters in other disciplines; there is no way to gain that experience in our industry. That is why some of us talk about the need two types of originators, those with the strengths needed to sell to our traditional market segment and those who can sell to the greater senior population segments.

    The serious discourse which should be going on between our industry and the gate keeping financial and legal community is nowhere to be found. Like most matters which appear to be intuitively clear, the fact is the nature of this mortgage is not, even to those that we believe it should be. While some are arguing that the Saver gives the ability to compete with HELOCs, others disagree. I find myself somewhere in between believing that the right answer lives in the cash and debt management needs of the customer. It is in those management areas where a discussion should be concentrated but is void.

    Finally, I apologize for not making the interest rate issue clearer. It is not the index which is problematic in discussing adjustable rate Standards versus Savers; it is the difference in margins.

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