Major Lender Exits to Bring Down Reverse Mortgage Volume in 2011

NewImageIn the wake of the housing crash and exits from three of the largest reverse mortgage lenders, the industry is headed toward its third straight year of loan volume decline reports Reuters.

Last year, volume was down 37% from its peak in 2008 and this year it’s expected to fall again according to John Lunde, president of Reverse Market Insight. What’s driving the downward trend?

The exits from Bank of America, Wells Fargo, and Financial Freedom, which together accounted for about 35% of the market, says Lunde.

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“We’ve noticed a down trend since Bank of America stopped taking applications,” he told Reuters. Wells Fargo’s departure was announced in June, so it’s too difficult to say how it will impact the number of loans originated.

If the lenders hadn’t exited the business, volume would’ve likely grown during 2011 says Lunde.

“The industry was on pace to grow before the exits. This year’s decline will be all about these companies leaving the market.”

 

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  • There is no independent evidence that if the three lenders had stayed in the industry, endorsement totals for this fiscal year would be greater than the prior fiscal year.  That argument has no foundation in fact.  At no point did Case Number assignments between June 1, 2010 and May 31, 2011 indicate otherwise.
     
    At the point when at least one industry leader was declaring at the NRMLA convention in New Orleans that endorsements for this fiscal year would be at least 100,000 (and he was not alone in that assessment), we had Case Number assignment totals through September 30, 2010.  At that point Case Number assignments for the four months ended September 30, 2010 were already running at 20% behind the same total for the four months ended September 30, 2009.  So not only did we need 21,000 more endorsements in this fiscal year but that 27% plus increase in endorsement volume needed to be accomplished with 11,500 fewer case number assignments from which to start.  With home values still in the doldrums, how could that ever be accomplished?
     
    Using conversion rates to get 21,000 more endorsements would require that Case Number assignments between June 1, 2010 and May 31, 2011 increase by at least 28,500 over that generated in the prior fiscal year.  Add to that another 11,500 off in beginning inventory, one would need 40,000 more case number assignments during the eight month period beginning on October 1, 2010 and ending May 31, 2011 over the eight month period ended May 31, 2010.  If one ignores principles of reasonable estimates, anything seems possible but that difference would require a 70% increase in Case Number assignment production in the eight month period ended May 31, 2011 when compared to the eight month period ended May 31, 2010.  With little hope for improvement in home values by late spring where were all of these applications going to come from?
     
    Now imagine how bad things would have been without the Saver.  As one industry leader has said, “Each Saver endorsement we get, we look at as if a HECM we would not otherwise have gotten.” 
     
    Most prognosticators have retreated from their predictions.  Most now retreat even further to talking about the calendar year since 72,638 endorsements for the calendar year 2010 seem like a lot easier benchmark to reach and beat than the total endorsements of 79,150 for the fiscal year ended September 30, 2010.  In the absence of the three lenders based on the slightly better trends for the calendar year 2011 gives it a little better rational for not meeting benchmarks from last year, but not when it comes to predicting 100,000 endorsements.

    It will surprising if anyone predicts endorsements for next fiscal year will be greater than those for this one.  The same holds true for endorsement totals for the calendar year 2012. 

  • There is no independent evidence that if the three lenders had stayed in the industry, endorsement totals for this fiscal year would be greater than the prior fiscal year.  That argument has no foundation in fact.  At no point did Case Number assignments between June 1, 2010 and May 31, 2011 indicate otherwise.
     
    At the point when at least one industry leader was declaring at the NRMLA convention in New Orleans that endorsements for this fiscal year would be at least 100,000 (and he was not alone in that assessment), we had Case Number assignment totals through September 30, 2010.  At that point Case Number assignments for the four months ended September 30, 2010 were already running at 20% behind the same total for the four months ended September 30, 2009.  So not only did we need 21,000 more endorsements in this fiscal year but that 27% plus increase in endorsement volume needed to be accomplished with 11,500 fewer case number assignments from which to start.  With home values still in the doldrums, how could that ever be accomplished?
     
    Using conversion rates to get 21,000 more endorsements would require that Case Number assignments between June 1, 2010 and May 31, 2011 increase by at least 28,500 over that generated in the prior fiscal year.  Add to that another 11,500 off in beginning inventory, one would need 40,000 more case number assignments during the eight month period beginning on October 1, 2010 and ending May 31, 2011 over the eight month period ended May 31, 2010.  If one ignores principles of reasonable estimates, anything seems possible but that difference would require a 70% increase in Case Number assignment production in the eight month period ended May 31, 2011 when compared to the eight month period ended May 31, 2010.  With little hope for improvement in home values by late spring where were all of these applications going to come from?
     
    Now imagine how bad things would have been without the Saver.  As one industry leader has said, “Each Saver endorsement we get, we look at as if a HECM we would not otherwise have gotten.” 
     
    Most prognosticators have retreated from their predictions.  Most now retreat even further to talking about the calendar year since 72,638 endorsements for the calendar year 2010 seem like a lot easier benchmark to reach and beat than the total endorsements of 79,150 for the fiscal year ended September 30, 2010.  In the absence of the three lenders based on the slightly better trends for the calendar year 2011 gives it a little better rational for not meeting benchmarks from last year, but not when it comes to predicting 100,000 endorsements.

    It will surprising if anyone predicts endorsements for next fiscal year will be greater than those for this one.  The same holds true for endorsement totals for the calendar year 2012. 

    • James,

      Let’s assume your last estimate of HECM endorsements is correct at 77,000.  If one assumes 5,000 will be savers than 72,000 will be Standards.  Many thought the Saver production could be one-quarter of the total for the year.

      Based on 72,000 Standards as three-quarters of the total, the total would be 96,000 which is close to 100,000.  So with Saver results much lower than proportionately expected, endorsement totals are significantly smaller than anticipated. 

      Why Saver production was so low seems to be a factor of failing to understand its appeal and perhaps to some degree not understanding how or to whom to market the product but percentages are growing.  Further, there were problems in acceptance in the investor community.  Finally the financial structure at some lenders is better suited to provide the product at a much lower cost than others; some lenders did not offer the product until recently and some may have yet to offer it at all.  For awhile Saver production may drop with the loss of the industry leader in Saver production, Wells Fargo at around 40%. 

      Some have stated that HUD was hoping Saver endorsement production would have been at least 20% of the total for the fiscal year; that would have beem close to 90,000 total endorsements. 

      Some believed the environment for increased home values would have been better as well.

      In two months, we will find out how close your endorsement total is.

       

      • The_Cynic,
         
        You have hit on one of the root causes for the numbers we saw thrown around.  What is interesting is that no truly new HECM product has ever had much acceptance in its initial introduction.  It was that way with the introduction of the HECM, the HECM for Purchase, and now Savers.
         
        HECMs for Purchase have a much more limited market segment appeal within the traditional marketplace than HECM Refis and HECMs for Purchas have more complications.  Saver has less appeal to the traditional HECM market and most originators were ill prepared to market to more affluent seniors.  Saver has found some resistance in the investment community and thus most originate it with a slightly higher interest rate.
         
        One might point to Fixed Rate Standard HECMs but even they took a little while to get off the ground but they are in most ways a simplification of the Adjustable Rate Standard HECM; i.e., the interest rate became fixed and payout and credit line options were eliminated.  It basically appeals to the same traditional market, it had strong pent up demand, it is simpler to understand than adjustable rate HECMs, the secondary market embraced it, and thus it did not have the same barriers to overcome as the Saver.  The Fixed Rate was a Standard HECM in a more popular flavor.
         
        Many of us were excited by Savers from their start but we were by no means the majority of originators..  Most prognosticators like you and Mr. Lunde had great predictions about its acceptance.  Unfortunately they did not pan out.
         
        However, that is not to say, the Saver is not growing in popularity.  Unfortunately again, just as it was beginning to show growth, the biggest single retail originator of Savers left the industry.  That will no doubt result in a set back in endorsement production within months.

    • It would be surprising if anyone predicts that endorsement ever again. Without a major bank footprint within our market any longer it’s going to make 100K a real long shot. I believe many don’t realize what BofA and Wells did to bring awareness to “main street”. Reverse mortgage endorsements are going to become even smaller over the next several years.

    • My comment in Reuters article that calendar 2011 would have been up from calendar 2010 in absence of lender exits refers to the uptrend in applications/endorsements since the trough following Oct 09 principal limit reductions.

      Relevant charts showing this uptrend can be found here: http://www.rminsight.net/reverseiq-newsletter/2011/08/second-half-swoon-retail-leaders-july-2011/

      I would also agree with the comments here and elsewhere that Saver endorsements have been significantly lower than expected, which also pulled down our forecast considerably.  The two factors combined (lender exits and Saver underperformance) are the vast majority of difference from our original forecast, with ongoing HECM standard production by remaining lenders only slightly different from our expectation.

      Even thoughtful projections are wrong most of the time, unfortunately.  In this case, subsequent events made the original projection very wrong on a bottom line basis.

      • Mr. Lunde,
         
        Fundamentally, you, The_Cynic, and I are in agreement about the impact of Savers on prognostications.  Their “endorsement enhancement” perception took their toll.  Even as a skeptic, they seemed like a sure winner.  Now moving on to the impact of the Big Three on projected endorsements for this fiscal year, we may also find some areas of agreement and no doubt disagreement.
         
        As a CPA, using month to month totals (even comparing that information to other years) only provides information about seasonality, short term trends, conversion times from assignment of case numbers through endorsement, and similar information.  Annual trends are much better understood by using things like 12 month rolling totals on a month to month basis.  But that is a matter of education, training, emphasis, and opinion on how to provide information to users.
         
        As someone who has had to deal with inventory not only in regard to tangible assets but also intangibles (such as unbilled fees based on hours worked), the inventory of applications with case numbers assigned is a critical part of analysis used in projecting future endorsements on a fiscal year basis.  Combining that with endorsement information using 12 month rolling totals tempered to a small degree by month to month totals is a reasonable means to project major milestones twelve or so months out.  Even fiscal year endorsement totals are helpful.
         
        For example, it is interesting to observe that we may be in what seems to be a multi‑year plateau.  Amazingly, there were four years when HECM endorsements were in a plateau in the not too distant past.  In 1998 through 2001 total endorsements were 7,896 in 1998; 7,982 in 1999; 6,640 in 2000; and 7,781 in 2001.  It took five fiscal years to go from 5,208 endorsements in 1997 to over 8,000 (actually 13,049) in 2002.  It would be interesting if someone like Mr. Jeff Taylor could explain what was happening in those years and why.  That might provide some perspective as to where the industry is today and what we might expect for the next two fiscal years or so.
         
        YOU and your firm deserve a lot of credit for providing twelve months of endorsement activity each and every month for the readers of your report.  Such information when used by readers could be very helpful.
         
        When observing the trend from the 12 month rolling monthly endorsement totals it was clear, by September 2009, the industry was in a downward spiral.  That never stopped until March 2011.  Even inventory was drying up.  There is no clear mid-term or long-term evidence that this fiscal year would be better than last whether the Big Three are in the industry or not.
         
        But the principal target of my comment was not your statement in Reuters but those industry leaders with large staffs who seem oblivious to data when making predictions.  Instead of giving a range with some explanation about the high and the low, one number is provided as if that is an accomplished fact.  That is the problem with CPAs; they demand the kind of insight RMI provides.  Keep up the good work.

        Have a great evening.

      • Mr. Lunde,
         
        Fundamentally, you, The_Cynic, and I are in agreement about the impact of Savers on prognostications.  Their “endorsement enhancement” perception took their toll.  Even as a skeptic, they seemed like a sure winner.  Now moving on to the impact of the Big Three on projected endorsements for this fiscal year, we may also find some areas of agreement and no doubt disagreement.
         
        As a CPA, using month to month totals (even comparing that information to other years) only provides information about seasonality, short term trends, conversion times from assignment of case numbers through endorsement, and similar information.  Annual trends are much better understood by using things like 12 month rolling totals on a month to month basis.  But that is a matter of education, training, emphasis, and opinion on how to provide information to users.
         
        As someone who has had to deal with inventory not only in regard to tangible assets but also intangibles (such as unbilled fees based on hours worked), the inventory of applications with case numbers assigned is a critical part of analysis used in projecting future endorsements on a fiscal year basis.  Combining that with endorsement information using 12 month rolling totals tempered to a small degree by month to month totals is a reasonable means to project major milestones twelve or so months out.  Even fiscal year endorsement totals are helpful.
         
        For example, it is interesting to observe that we may be in what seems to be a multi‑year plateau.  Amazingly, there were four years when HECM endorsements were in a plateau in the not too distant past.  In 1998 through 2001 total endorsements were 7,896 in 1998; 7,982 in 1999; 6,640 in 2000; and 7,781 in 2001.  It took five fiscal years to go from 5,208 endorsements in 1997 to over 8,000 (actually 13,049) in 2002.  It would be interesting if someone like Mr. Jeff Taylor could explain what was happening in those years and why.  That might provide some perspective as to where the industry is today and what we might expect for the next two fiscal years or so.
         
        YOU and your firm deserve a lot of credit for providing twelve months of endorsement activity each and every month for the readers of your report.  Such information when used by readers could be very helpful.
         
        When observing the trend from the 12 month rolling monthly endorsement totals it was clear, by September 2009, the industry was in a downward spiral.  That never stopped until March 2011.  Even inventory was drying up.  There is no clear mid-term or long-term evidence that this fiscal year would be better than last whether the Big Three are in the industry or not.
         
        But the principal target of my comment was not your statement in Reuters but those industry leaders with large staffs who seem oblivious to data when making predictions.  Instead of giving a range with some explanation about the high and the low, one number is provided as if that is an accomplished fact.  That is the problem with CPAs; they demand the kind of insight RMI provides.  Keep up the good work.

        Have a great evening.

    • My comment in Reuters article that calendar 2011 would have been up from calendar 2010 in absence of lender exits refers to the uptrend in applications/endorsements since the trough following Oct 09 principal limit reductions.

      Relevant charts showing this uptrend can be found here: http://www.rminsight.net/reverseiq-newsletter/2011/08/second-half-swoon-retail-leaders-july-2011/

      I would also agree with the comments here and elsewhere that Saver endorsements have been significantly lower than expected, which also pulled down our forecast considerably.  The two factors combined (lender exits and Saver underperformance) are the vast majority of difference from our original forecast, with ongoing HECM standard production by remaining lenders only slightly different from our expectation.

      Even thoughtful projections are wrong most of the time, unfortunately.  In this case, subsequent events made the original projection very wrong on a bottom line basis.

  • Why is anyone surprised that HECM volume is dropping when Principal Limit formulas continue to fall.  The 10% reduction in 2009 eliminated some percentage of interested but subsequent ineligible borrowers and the 5% reduction in 2010 factors (somewhat offset by the lower 5% base rate) eliminated many more people at the top end of the age spectrum.  When the “system” makes it harder to qualify, who could reasonably expect volumes to increase? 

    • Duffer49,

      One could bring some reasonable arguments against your points unless you add in the current home value problems in most markets.  Adding that to your other points hammers in the problem of expanding our product into the traditional Standard market.

      The Saver marketplace seems somewhat immune to those issues since the borrowing habits of those individuals are rumored to be much different.  In other words Saver borrowers do not generally utilize the maximum proceeds made available to them nor do they view a HECM as a sale like many of the Standard borrowers do.

  • Why is anyone surprised with lower HECM volumes when Principal Limit factor reductions of 10% in 2009 and 5% in 2010 eliminated substantial volumes of “interested” but subsequently ineligible borrowers.  Couple those reductions with the corresponding crash in home values and people that were interested in replacing a forward mortgage with a reverse mortgage has been reduced dramatically.  If FHA lending limtis return to pre-2009 levels, the HECM program will almost disappear in high-cost states. 

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