If the government makes any sudden moves in the reverse mortgage market, lenders have private products in development that could fill some of the void.
People familiar with their development say there are at least a few products that could come off the shelf within several months should the government decide to lower HECM loan limits.
The Department of Housing and Urban Development has said it will keep the current loan limits in place until December 31, 2011, but from there on out, it’s anybody’s guess as to where they go.
If they return to pre-recession levels, some feel the potential looks to be in place, but not without a few hurdles. First, there need to be investors interested in the product or some company willing to place the loans on its balance sheet.
Lenders also need to be able to originate a certain level of critical mass to pique investor interest—another challenge, should market conditions improve.
“Actual core development of the product is part of the process, then you have to educate the sales force,” says Mike McCully, partner at New View Advisors, which has helped in the development of past private products.
The development process could take a matter of months, he says, but finding the investor is the critical step. “If you originate it, someone has to buy [the loans],” McCully says.
Jumbo reverse mortgages are not new to the industry. When the financial markets collapsed, the government stepped in to raise HECM loan limits to $625,500 in 2009 and the private products—once offered by Financial Freedom, Bank of America and others—disappeared overnight.
A return of the private market seemed inevitable when Generation Mortgage released a jumbo product in 2010, the first since the subprime crisis. Today, there might be a market for the product, but it’s a different level compared with before.
“We’ve been writing them pretty consistently, but nothing like the old days when the factors were higher,” says Jeff Lewis, chairman of Generation.
“When jumbos were en vogue, houses were worth a lot more and loan limits were much higher.” The average home value for a jumbo during the boom time was around $900,000, Lewis notes. Today, that same home, now worth $600,000, qualifies for the government-insured HECM.
Without values upwards of $1.5 million, he says, there’s not much chance for the loans to compete with traditional HECMs.
Despite only one product on the market, some feel the investor interest is there, and could be realized as soon as today.
“Investors would like to see something, but haven’t seen anything yet,” says Jeff Traister, managing director for Cantor Fitzgerald. “If it’s priced correctly, there’s always money available, even if there are only five [loans].”
With home prices at their current levels and government projections of sustained losses and a painfully slow recovery, the outlook is not great, McCully says, but secondary market interest is a good sign.
“I think if you do get that bullish investor, it would be very good for the industry,” he says.
Written by Elizabeth Ecker