Will Large Lender Exits Rain on the HECM Saver Parade?

With relatively small volume overall and monthly numbers that have begun to slow in 2011, the HECM Saver hasn’t made too many waves. But market share for the Federal Housing Administration’s new HECM product has actually increased steadily since its release in October 2010.

Department of Housing and Urban Development data shows the share of HECMs versus standard reverse mortgages has risen from 2.55% in January to more than 7% in May (see chart).

Chart: HECM Saver Market Share 2011

Tags: HECM Saver Market Share 2011

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Seven percent is still a far cry from the 20% HUD has set as a benchmark for offsetting costs of the HECM Standard product, but the loss of Wells Fargo could present an opportunity for MetLife, the second-largest originator of HECM Saver loans.

“In our retail channel we’ve been seeing HECM Saver account for anywhere between 15% to 20% of unit volume for applications coming in,” says Joe DeMarkey, assistant vice president of strategic business development for MetLife Bank.

In the first five months of 2011, MetLife and and Wells Fargo controlled 66% of the HECM Saver market, with 22% and 44% respectively.

With Wells Fargo’s recent decision to leave the industry, MetLife becomes the largest originator of HECM Saver loans, without much competition.

“It’s been tough for others to compete with Wells Fargo and MetLife pricing on ARM products,” says John Lunde, president of Reverse Market Insight, noting that almost all Savers are adjustable rate loans.

“I think the key question here is what MetLife wants to do with their ARM pricing in the absence of Wells Fargo—whether they want to dominate ARM in the HMBS market, or raise their pricing a little bit. If the latter, that would allow other HMBS issuers to become competitive with them on ARM.”

In recent months, Wells Fargo and MetLife have chosen to waive origination fees on ARMs, making it difficult for others to compete profitably.

“We offer the saver despite the fact that we don’t make much money on it,” says John Mitchell, founder of Reverse Mortgage USA. “And if that’s really the best product for the person’s needs, we will sell it to them.”

“It’s very hard for an institution that doesn’t have guaranteed access to liquidity (like a bank) to take on ARM products that are sold through HMBS structure,” says Lunde.

But for those in a more needs-based scenario, Mitchell says, the reality is that most people want to get the most money possible from a reverse mortgage, making the Saver less attractive.

For MetLife, the HECM Saver has reached a different type of borrower and supplements its “standard” business rather than competing with it.

“There are very distinct differences in our Saver borrower profile,” says DeMarkey, who notes that the approximate average maximum claim amount for the Saver is roughly 40% higher than what MetLife sees on the Standard side. “It’s starting to tell us that it feels like it’s a more sophisticated borrower, if you believe that property value is correlated.”

Further, DeMarkey notes, the vast majority of Saver volume is adjustable rate, which indicates that the borrowers need fewer proceeds upfront—another suggestion that the Saver borrower is using the reverse mortgage as a different kind of tool than the average Standard borrower. DeMarkey estimates that 80-90% of MetLife’s Saver business comprises ARMs.

While the industry can’t predict the impact of Wells Fargo’s exit and the loss of its 44% of the HECM Saver market, Metlife says it’s business as usual.

“We were probably one of the early adopters and we believe the HECM Saver provides that niche of the market—probably in our view the biggest growth opportunity in the industry.”

Written by Elizabeth Ecker

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  • To be clear the number of Saver endorsements have been dropping the last few months but so has the overall endorsement volume.  It is the ratio of Saver endorsements to total endorsements which is on the rise.  That is an important and significant trend.
     
    Steady growth seems far more preferable over sudden growth.  There are many dreams about sudden acceptance of a new financial product only to be greatly disappointed.  HECMs for purchase are a case in point. 
     
    Mr. John Lunde has estimated that the loss of the branch referral systems at Wells and B of A will result in about a 50% loss of their endorsement volume market share.  Using that standard, that means 22% of the current Saver market would simply go away.  Based on May 2011 volume and a 22% drop, the ratio of Saver endorsements to total endorsements would be about 5.6%.
     
    Even 5.6% of the endorsement base is helpful.  But it must be emphasized that the percentage was rising and there is little reason to believe that trend will not continue especially under the enthusiastic guidance at MetLife of Joe DeMarkey and Craig Corn.
     
    HUD and some industry leaders may be disappointed by the endorsement numbers but we need to give it time.  While MetLife loves this incremental business, it may be awhile before MetLife will have another peer like Wells Fargo to help it expand this product.

  • Based upon Joe Demarkey’s comment:  “It’s starting to tell us that it feels like it’s a more sophisticated borrower, if you believe that property value is correlated.”

    What is going to happen to the Saver market if we go back to the 417K limit? I believe it will definitely take a big hit.  

    • treverse,
       
      This article is the result of research I completed and discussed with John Yedinak about a month ago.  As part of that project I reached out to Mr. DeMarkey and discussed that very issue.
       
      Mr. DeMarkey believes the lowering of the lending limit even to $417,000 will have minimal, if any, impact on the origination numbers on Savers at MetLife.  While surprised to hear that reaction, what it did make clear was MetLife is actually reaching the more affluent senior community.
       
      In the Long Beach, CA area, MetLife has definitely stepped up its reverse mortgage advertising on cable stations which cater to the more affluent.  For example, it, like Urban, is actively advertising on CNBC during normal working hours.
       
      What many in the industry do not understand are the dominant demographics and borrowing characteristics of the more affluent senior community.  They are much different than those of the traditional HECM borrower.  Most originators have little experience with these individuals when it comes to HECMs and have yet to develop the necessary knowledge and empathy to succeed in that segment.  Two decades of minimal penetration into that community clearly speak to that conclusion.

      The Saver has provided the means for MetLife to have remarkable success with the more affluent.  It would be interesting to hear from Wells if their success was based on the same senior segment.  It would be unlikely if that were not the case.

  • James:

    Thanks for your response. I sure hope Mr. Demarkey is right but I guess only time will tell if the limit does go back to 417K which seems highly likely.

    A 70 y.o. borrower with a home value of 625K or more will receive approximately $110K less on the fixed and approximately 95K less on the ARM at the 417K limit. How can this not affect the number of Saver endorsements in the areas with higher home values?    

    Working with financial planners and using the Saver as a financial planning tool is definitely a big part of my strategy. I believe a significant part of the need based market will disappear with the upcoming financial assessments due to T&I defaults.

    I also firmly believe those who do not change their marketing strategies will not survive. Although, reverting back to the 417K limit will not help this plan at least in more affluent markets.

     

    • treverse,

      Please don’t misunderstand.  Mr. DeMarkey and I only discussed Savers not Standards.

      I wish you the best on your new marketing strategy.  I hope you are with a lender who will rewards you the despite not charging an origination fee on the Saver.

    • treverse,

      Please don’t misunderstand.  Mr. DeMarkey and I only discussed Savers not Standards.

      I wish you the best on your new marketing strategy.  I hope you are with a lender who will rewards you the despite not charging an origination fee on the Saver.

  • James:

    Thanks for your response. I sure hope Mr. Demarkey is right but I guess only time will tell if the limit does go back to 417K which seems highly likely.

    A 70 y.o. borrower with a home value of 625K or more will receive approximately $110K less on the fixed and approximately 95K less on the ARM at the 417K limit. How can this not affect the number of Saver endorsements in the areas with higher home values?    

    Working with financial planners and using the Saver as a financial planning tool is definitely a big part of my strategy. I believe a significant part of the need based market will disappear with the upcoming financial assessments due to T&I defaults.

    I also firmly believe those who do not change their marketing strategies will not survive. Although, reverting back to the 417K limit will not help this plan at least in more affluent markets.

     

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