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.
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.
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.”
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.