Is a Reverse Mortgage Double Dip in Store?

report this week from Reverse Market Insight identifies a plateau in application data for the first months of 2011, with a question as to whether endorsement data will amount to a double dip for reverse mortgages through May of this year.

“Endorsement volumes are pointing downward again for the past two months, showing an eerie resemblance to the trend-line last year at this same time,” RMI said in an email report.

May endorsements fell 15.3% from April, and were at the second lowest level since December 2005, despite posting a near 14% increase over May 2010.

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Source: Reverse Market Insight

While the endorsement data paints an unsettling picture, RMI says, the application trends must be considered in order to get a full view on where the industry may be headed.

Accounting for seasonal trends by using data on applications per business day, RMI finds applications plateauing, due in part to Bank of America and Financial Freedom’s recent exits from the business. The report also notes a decline in pull-through trends, with May endorsements equating to 70% of January applications. While RMI expects the rate to improve back to more normal levels of 75-80%, it says the trend is worth watching.

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View the full report.

Written by Elizabeth Ecker

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  • The approach RMI uses this month to provide conversion trend information can be very useful if month by month trend analysis does not drive one to the point of frenzy.  However, it is neither wrong nor inaccurate; in fact it needs to be presented.  But its overemphasis on seasonality needs to be muted and tempered if one is to see things from a longer-term point of view.   Using the raw data from the FHA Single Family Outlook reports and a four month lag principle, let us look at longer-term trends.  All conversion information reflects an estimate of the percentage of HECM applications which have assigned FHA Case Numbers which will be endorsed. For example, the estimated conversion rate over the last 39 months is 73.8%.  The conversion rate for the endorsement fiscal year ended September 30, 2009 is 73.1% and for last fiscal year, 73.0%.  For the 12 month period ended May 31, 2011, the conversion rate has dropped to 71.4%.  One should not be overly concerned since the 12 month rolling conversion rate for the same time last year was only 70.4%. The fiscal year conversion rate is very meaningful since there is normally little seasonality at the end of May in the way of FHA Case Number assignment activity and at the end of September, in the way of endorsement activity.  As to the need for long-term information it is unfortunately the Outlook report only began showing application information for HECMs in November 2007.  The per business day analysis is very helpful.  However, applications totals for the eleven month period ended April 30, 2011 is 10,770 case number assignments short of the total assignments for the twelve month period ended May 31, 2010.  That means that unless the conversion rate for the fiscal year ended September 30, 2011 is significantly up or this May was an unusually good month for case number assignments, there is only a remote chance we will see more endorsements during this fiscal year than last.  In any case that means for the last 24 months we have reached a plateau we have been unsuccessful getting off. There is no question the loss of B of A and Financial Freedom have taken a toll but the creation of the Saver has helped blunt a portion of that loss.  Then there is also increased growth in marketing through social media and reaching out to financial professionals.  Case Number Assignments during this month will begin forming a picture of how many endorsements will occur during the next fiscal year.  That’s right chances are the case numbers assigned today and yesterday will most likely not be endorsed until the next fiscal year.

  • The approach RMI uses this month to provide conversion trend information can be very useful if one does not allow month by month trend analysis to drive one to the point of frenzy.  However, it is neither wrong nor inaccurate; in fact it needs to be presented.  But it also needs to be tempered. 
     
    Using the raw data from the FHA Single Family Outlook reports and a four month lag principle, let us look at longer-term trends.  All conversion information reflects an estimate of the percentage of HECM applications which have assigned FHA Case Numbers which will be endorsed.
     
    For example, the estimated conversion rate over the last 39 months is 73.8%.  The conversion rate for the endorsement fiscal year ended September 30, 2009 is 73.1% and for last fiscal year, 73.0%.  For the 12 month period ended May 31, 2011, the conversion rate has dropped to 71.4%.  One should not be overly concerned since the 12 month rolling conversion rate for the same time last year was only 70.4%.
     
    Muting seasonality is important in gaining a long-term view in trend analysis.  Unfortunately the Outlook report only began showing application information for HECMs in November 2007.  The fiscal year conversion rate is very meaningful since there is little change in the way of seasonality at the end of May in the way of FHA Case Number assignments and at the end of each September, in the way of endorsement.
     
    The per business day analysis is very helpful.  However, applications totals for June 1, 2010 through April 30, 2011 is 10,770 case number assignments less than the twelve month period ended May 31, 2010.  That means that unless the conversion rate for the fiscal year ended September 30, 2011 is up or this May was an unusually good month for case number assignments, there is only a remote chance we will see more endorsements this fiscal year than last.  In any case that means for the last 24 months we have reached a plateau we cannot get off.

    • Mr. Mastromatto,

      If discounting is a solely a matter of competition, the answer is no.  Even if it is a matter of application at a discount or no application for anyone, a little.  It could have lowered case number issuance a little but the rule has only been in effect since April 1.  The low case number volume may have more to do with the reshuffling of origination staff related to B of A and others.  

      I apologize but I do not know what “Do you think it has to do with the high now…” means.  Can you please expound?

  • Lance,

    Zorro, here. 

    Are you saying that the impact was felt before April 1?  I agree with the idea of marginal volume but what do you think that impact is?

    It seems that broker impact on our industry is much lower than at any time in the last six years at least.  For example, the Top Ten produced over 70% of the endorsements for May, 2011.  Even if 25% of the business for other lenders was lost, that is only 7.5% of the total.  Quite frankly I doubt if lost industry business from that source alone totaled 1% of all HECM volume.  What I mean by lost business is that borrowers will NOT get the loan unless they get the discounts from the past.  I do not mean that a broker lost the origination but a banker got it instead.  In this context that is not lost industry business.

  • Mr. Lunde,
     
    Thank you for your reply.
     
    It is interesting to note that at no time after June 2009 has the industry wide conversion rate on a 12 month rolling basis ever been greater than 75% but there was a 67.5% low in that time period for January 2010.  Based on the 39 month conversion rate and the fiscal year rates, it is my conclusion that the conversion rate is 73%.
     
    The reason why I put such reliance on that number is for two reasons: 
     
    1.  The fiscal year end of HUD.  There are many reasons a business wants to close out their work load at year end.  There are audits to consider and actuarial studies.  HUD wants its endorsement backlog as low as possible by September 30 of each year.
     
    2.  The rolling 12 month conversion rate over the last 24 months has seen 2 months at the 75% rate and 1 month at the 67.5%.  The remaining 21 months have ranged between 70% and 74%.  Using only single months in ratio computation and a four month lag principle results in much greater variations; however, there is no assurance that even the majority of loans receiving case number assignments in June will necessarily be endorsed in October.  In fact it is doubtful that any in the last one-third of June will be.
      
    While the conversion rate for some lenders may fall in the 75% to 80% range, most probably do not.  The primary reason for the drop in conversion rates over what they were just three years ago seems to be appraisals lower than “guestimated” values.  The conversion rates industry wide back three years ago appear to have been in the range you discuss; however, that conclusion is based on some rather sketchy trend analysis due to limited reliable information sources.  To have a rolling 12 month conversion rate higher than 76% in each of the last six months is a rather remarkable achievement for any lender.  Once again the conversation rate under discussion is the percentage ratio of endorsed HECMs divided by applications receiving FHA Case Numbers using a four month lag principle and 12 month rolling totals.

    • Fair enough, I think we’d both agree on two points:

      1) We’re in a ‘normal’ part of the conversion rate range
      2) The application to endorsement conversion rates are a bit muddy (especially lately) and trend matters more than month-to-month volatility

      • Mr. Lunde,
         
        I most emphatically agree with those conclusions.  I appreciate your frankness and candor.  You are one individual who makes this industry a more interesting place to work.
         
        The CPA firm from which I retired provides detailed analysis of radio industry sales even identifying the amount of money entities as diverse as BMW, Gillette, and Planned Parenthood spend on advertising each and every month, radio market by radio market.  Radio stations and radio groups find this data invaluable.  Not only did it result in reallocation and redistribution of advertising dollars in radio but it also allowed markets to more rationally and intelligently compete among themselves and obtain more advertising dollars for the industry as a whole.
         
        I appreciate the information you provide the industry monthly even though we may disagree from time to time on its meaning.  You provide a valuable and valued service.  

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