Private Products: Return Inevitable, Impact Unknown

Once an industry that thrived on the development of private products to meet the needs of senior homeowners, the reverse mortgage industry of today is almost entirely comprised of a single government product.

Prior to the financial crisis, there were several lenders offering a variety of proprietary products and no one would’ve argued about the important role they would play in the future growth of the industry. But almost five years later, the markets are starting to rebuild and it remains to be seen exactly what type of role the private market will play in the future of the industry.

Housing: A New Reality

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At the peak of reverse mortgage activity in 2007, the proportion was as high as 16% of total value* according to data gathered by Reverse Market Insight.

Today, the proportion is much smaller. With the decline of Lehman Brothers—formerly the largest issuer of private reverse mortgage securities—in 2008, the products became scarce. Non-HECM reverse mortgages comprised just 2% of reverse mortgage volume in 2010.

Whether private products will overcome the challenges necessary in order to rebound remains to be seen, but many believe that resurgence could be the key to growing the industry.

“The body of homes that were in the pool as prospective borrowers was enormous,” says Jeff Lewis, Generation Mortgage chairman, of recent years when private products were more mainstream.

“A million dollar house was a dime a dozen; $800,000 or $900,000 would be in the sweet spot of jumbo. There were a lot of those before,” he says. Generation has been known for its Generation Plus loan, which is offered to borrowers higher home values in the $1 million to $6 million range.

Today, post-housing bubble, the peak-to-current home value index shows a 32% decline, according to the most recent data from the S&P/Case-Shiller Home Price Indices. Nationally, some areas are still seeing declines and the few gains in some regions have been modest.

While the market was previously poised for such independent products with a secondary market that was receptive to the loans, the economic climate today is a major deterrent.

Steps to Recovery

The stabilization of home values is just one of several challenges facing private reverse mortgage products, says David Fontanilla, director for Knight Capital Americas, owner of top-5 reverse mortgage lender Urban Financial Group.

“The thing I think that holds it back today is that the securities market hasn’t returned. Property values are still uncertain. The economy is mixed. All that combined, when you’re dealing with a product that doesn’t have government insurance. It’s a different risk profile for investors,” he says.

“The required yields are too high to be competitive with HECMs, especially at the higher loan limits. It will be interesting to see if loan limits normalize, [whether] we’ll see more,” says Fontanilla.

Until conditions turn around, Knight’s Fontanilla doesn’t see it happening. Pending a rebound, however, the outlook for private products should be brighter.

With one active jumbo product today and the number that were around before the market crash, says John Lunde, president of Reverse Market Insight, “we can be sure there are many tweaked jumbos waiting to come off the shelf once secondary markets allow non-government backed securitizations again.”

Since the financial crisis of 2008, there has been little private-label mortgage securitization. Redwood Trust is the only company to have closed any private jumbo securitizations since the market crashed in 2008; first in a $237.8 million deal in early 2010, and more recently in its second deal totaling $290 million. Until the securities market gains steam, the likelihood of private securitization for reverse mortgages is slim.

“Effectively, it will return on pace or a little behind other products returning. I can’t necessarily see it’s an environment that warrants that yet,” says Fontanilla.

“There might be some balance sheet lending in advance of securitization becoming available, but that’s a relatively small supply of lending capacity compared to securitization potential for these products,” says Lunde.

The Future of Private Products

While the time frame is unknown, some industry veterans are certain the products will come back with time. The question is, will they be as good as they once were?

“Three or four years ago, the product was way too good,” says Lewis. “Growth rates were too good.”

Bart Johnson, CEO of new broker roll-up entity National Senior Home Equity says the comeback of proprietary products will be essential to expansion of the industry. The company is currently focusing on rolling up HECM production, but does not see the industry as being limited to government backed loans.

“Just having HECM in the industry puts us at the point where we’re always goign to be at 2%, and it will take the proprietary market coming back to get higher. We ought to have 8-10% market penetration based on needs and longevity.”

“[We] might not have recovered from the shock of the last recession, but it’s inevitable that the private sector will happen,” says Johnson. “It’s too big and lucrative to ignore.”

*Editor’s note: A previous version of this article reported in error that 16% of volume, rather than value, was attributed to private products. RMD regrets the error.

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  • “A dime a dozen” may be a slight exaggeration but in many parts of the country back in 2006 and 2007, it was not unusual to find valued priced homes with substantial equity. What was not addressed in this article is the huge difference between the jumbo products of yesteryear and the sole proprietary product of today – credit qualification.

    If the same FICO requirement had existed four years ago as exists on our lonely proprietary product of today, it is very doubtful if the volume would have come near to what it was back then. Of all of the jumbos in the last half decade, this is the first to have a minimum FICO score.

    Unfortunately reading through the article, some of the same themes of yesteryear are rooted in the opinions expressed now. Demonstrating the vitality of jumbos by using relative values is hardly reasonable. The HECM lending limits were terribly suppressed back in 2006 through most of 2008. It is volume which has meaning, not a ratio that is skewed by a few high valued homes.

    While it is only a little over 3 years since the demise of the proprietary market and not the 5 as stated in the article, it may take 5 years before any semblance of the prior housing market will emerge. It has taken over 3 years just to get this far. Most prognosticators are looking to the end of this decade for the return of a vibrant housing market nationwide close to the way it was mid last decade..

    It is not that I hope it takes 8 years to initially recover but there are many signs that do not give much hope. Like I stated to John Lunde, I would love to be as proven wrong about this opinion as about reaching more than 100,000 HECM endorsements for this fiscal year or even next. It seems better to have steady, stable growth than a sudden but short lived followed by an abrupt and dramatic drop.

  • There is a very strong attraction in our industry to proprietary products. But it may be more like the candle to the moth than a reward. The closer we get to the “prize”, the more likely it is we will be singed.

    Starting about 4 years ago, there was a lot of talk about how the HECM would be still needed by 2010 but it would take a back seat to proprietary products. Some were estimating HECMs would be quickly only be about 25% of all new originations with others declaring that the number would be much closer to 10%.

    In listening to the one-upmanship, it reminded me of a Rabbi who proudly announced to an older Rabbi that he had just quoted the entire Torah to a well recognized Jewish religious leader. The older Rabbi turned and said: “My son, you have just added many words to the air.”

    Until the home market turns around, we need HECMs at their current lending limit. If in between proprietary products return, that will be great. What I would hate to see is the exaggerated expectations of 2007 and 2008 return to the industry any time in the near future. We need an united front to fight for the $625,500 HECM lending limit in the near term or we might as well write off most of that segment of our market.

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