Chart of the Day: FHA Projects 2012 Reverse Mortgage Volume Jump

The Department of Housing and Urban Development recently published projections for 2012 Home Equity Conversion Mortgage volume following the close of its fiscal year on September 30.

According to the projections, HECMs will see an increase to near 88,000 in 2012 from a total of 73,129 in FY 2011. Of the 2011 total, HECM Savers represented 3,828, or 5.2% of the loans.

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Written by Elizabeth Ecker

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  • HUD also estimated HECM endorsements for the fiscal year 2009 in its October 2008 FHA Single Family Outlook report at 210,000.  That was the highest fiscal year for endorsements but the actual year end total was less than 115,000.  They did come very close last year; however, they also made no estimate on Savers for that year; thus they overestimated HECM Standards endorsements by over 5,000 and underestimated Saver endorsements.

    So far this fiscal year, estimated applications with case number assignments in four month inventory at the beginning of this fiscal year were over 23% LESS of that same number last fiscal year.  So that gives no justification for an increase in endorsement numbers.

    The certified counselee dropout rate increased substantially last fiscal year with no reason to believe that trend will reverse.  In fact as to conversion from case number assignment to endorsement, that segment of the dropout rate is clearly growing.  So that does not provide much hope for better endorsement numbers this fiscal year.

    Saver endorsements are growing but only slowly so.  There is not much hope for substantial growth there.

    With Wells and B of A gone, there is no hope of endorsement growth from this source.

    With the advent of financial assessment underwriting, there is zero hope of increase from that source.  The only question is how much it will interfere with endorsement growth.

    Although unlikely, a drop in the lending limit this fiscal year would not result in an increase in endorsements.

    Most observers do not believe it will come much if any from home appreciation during this fiscal year.  In fact the appreciation would have to come before June 1 based on the rule of thumb on the four month period it takes for an application with a case number assigned to get endorsed.

    So what is the source of HUD optimism?  My guestimate (guess plus estimate) is total endorsements will be less than 60,000.

      • Mr. Lunde,

        I also hope the HUD projection is right even if it is difficult to find its justification. I appreciate your explanation of the expectation of increased endorsement volume due to the realization by senior owners of their shrunken asset base .

        Clearly there is a popular financial strategy in the industry that HECM proceeds should replace retirement payouts in excess of Required Minimum Distributions and should be used to avoid converting portfolios into cash. In principle that is just another form of leveraged investing which has many detractors including me.

        As the partner in charge of taxes of a large regional CPA firm emphasizing the audits of multiemployer and single employer Taft Hartley (union) employee benefit plans, this is hardly what we as a firm would recommend to our clients as a strategy for them to advise to plan beneficiaries. I am against and have NOT changed my position that Golden Gate Financial (“GGF”) was fundamentally wrong to advocate the position that HECM proceeds should replace retirement payouts and portfolio reduction without also admonishing that the first thing which needs to be done is an evaluation of the retirement plan(s) and the portfolio to determine if they are correctly invested.

        Based on the evaluation of the financial position of the senior, then consideration should be given to replacing some income with HECM proceeds if on an overall economic basis, the senior is better served but the evaluation that requires is not one strategy fits all. The GGF strategy was not only unsound and outlandish but outright irresponsible. The strategies advocated by Salter and Evensky are far superior to the GGF advice.

        Financial planning is generally more independent and unbiased if the cost is not found in commissions or asset management fees but rather in fees based on services rendered at hourly rates with caps. It also drives most salespeople batty as someone is looking into the plan they need to control to maximize their income.

      • In most cases on a financial basis, you’re absolutely correct that using HECM proceeds to replace/offset losses in the financial asset (not real property) portfolio is leverage.

        I would suggest there are at least two reasons to consider the other implications of the strategy.  First, on a purely financial basis I think it makes a lot of sense to credit the hedge nature of a reverse mortgage against both future home price declines on the one hand (you’ve locked in your current home value in the pricing decision) and your own longevity on the other.  The former is higher quality than selling the house given that you can still live in it with the reverse mortgage hedge in place, and the latter is better than comparable annuity options given that you only owe what you receive plus fees and interest (relative to an annuity without minimum payout conditions).

        On the second hand, from a personal perspective (not financial) I do think our financial logic sometimes underweights the desire to stay in the home if possible.  If a viable financial plan can be made that leaves the senior in home with enough resources to age in place, it might not be optimal financially compared to selling the house, but could be optimal from a more holistic perspective if a senior prefers that to stay in place instead of moving.

        I’d be the first to say that reverse mortgages are not a universal savior for all age eligible homeowner households.  My opinion is that some of the asset prioritization strategies and investment management strategies researched by Salter and the Genworth white papers open up new domains for households to incorporate their feelings about their aging process and their home into their retirement planning.

        These strategies would ideally be presented side by side with selling the house and other alternatives so consumers could see examples of financial implications of each strategy, incorporating these quantitative ideas along with their qualitative views about their life in retirement.

        Of course, having never been a loan officer in this industry, I’m more than a little guilty of some detachment from the kitchen table perspective for how the rubber hits the road.

      • Mr. Lunde,

        In leveraged transactions, the increase in available assets to invest means more exposure to risk.  Risk can result in good and bad.  For example, the Dow reached past 14,000 over a decade ago and has yet to get there since despite changes in the composition of Dow stocks.  Yet in the last few weeks the Dow is overall  positive despite some stocks doing better than others. So in one case passively investing in a Dow indexed fund over a decade ago would have produced a negative result while doing so currently would be positive. If leveraging was in play the losses and gains would both be larger.

        Staying in the home using a HECM is a completely different topic.  For example, looking at maximizing the monthly tenure cash flow of a HECM Saver, I ran several scenarios for a 95 years old woman.  The reason for using the Saver was to minimize the upfront (risk) costs of the HECM.  The question was if the widow should stop spending down her current portfolio which at the current rate will run out in about 26 months and get a HECM now or spend down the portfolio to zero and then take out a HECM.  What I found was neither strategy was as valuable as one I had never heard of.

        With some creative cash management techniques, I found a way to grow Saver tenure payouts by about 50% in 26 months by spending down the portfolio to zero while taking out the Saver now and starting tenure payouts immediately.  I will not bore readers with the strategy because few will have a borrower who is 95 and has this situation.  However, we are HECM originators who should know how to use the product to the best advantage of borrowers while not being bound by financial strategies developed with little knowledge of HECMs and their nuances.  The concern of the brothers (one of whom is a close friend) is having access to sufficient cash to care for their mother.

        The strategy will result in less than $2,000 in additional costs in the 26 month period; however, the growth in tenure payments will not be as dramatic if the cash needs of the mother grows.  While we will not grow the line of credit by 50%, that does not mean tenure payments cannot grow by that amount. Due to the value of her home and the expected interest rate, the strategy we are using will result in about 25% more monthly cash than is currently being spent.  

        Experimenting with the HECM product shows how the HECM is an excellent cash management tool which is still largely misunderstood even by those members of the financial community who promote it.  Rather than trying to understand the HECM, too many try to fit into an existing financial strategy.

        HECMs are a lot like tax law.  The value is not always in the general rules; it is many times in the nuances few investigate.

  • How could overall volume possiby increase with stagnant home values, tougher qualifying, a possible reduction in the lending limit (not likely though), and the largest lenders exiting the business?  It will likely decrease.

    • Mr. Jackson,

      You are right.

      This will be the endorsement year of the lender not the industry.  Except for Wells and B of A most lenders should see the highest levels they have ever seen in endorsements.  The reason is the loss of Wells and B of A and a reallocation of the endorsement pie.

      BUT as to overall endorsements, there seems to be few, if any, ways for that number to grow.

  • I stick to my earlier prediction that we will level out at about 3000 closings per month for next year. Demand is heavily driven by loan originators calling and visiting clients. The big banks expanded the market through their branches, ads and several thousand boots on the ground. Until February, I was one of them. I generated most of my loans through networking, leads and advertising that I paid for out of my pocket.
    When the banks left, virtually all of the demand they created went with them. There is no vast pool of unmet demand patiently waiting for the survivors to tap into.
    Others have detailed additional reasons for continued shrinkage of this market. That FHA doesn’t see reality (or is ignoring it) is predictable. 

    • Using your rational, all we need to do is look at the endorsements as of the end of the fiscal year.  Since the total from other lenders exceeded 48,000 for last fiscal year, it seems you are far too pessimistic.  The remaining lenders are even picking up volume over what they did last year.

      Several of believe that half of the endorsement volume which Wells and B of A did last year will evaporate this fiscal year.  That puts the industry at about 60,000.

      36,000 endorsements would be a 25% reduction among the remaining lenders.  That just seems too highly unlikely.   

  • In reply to Cynic
    The 48000 loans you refer to contain thousands of loans that came from the marketing efforts of Wells Fargo, BOA and Financial Freedom.
    I personally loved getting a call from a client of WFB wanting to compare terms. It seems that almost everyone hates doing business with WFB and all I had to do was match their proposal, which was usually not discounted in any way. They also had fees like the mandatory legal review of every Trust that we didn’t have.
    Brokers especially loved the big banks because they had so many ways to beat their proposal, like reducing an origination fee based upon the latest deal they could get from their wholesaler.
    We are seeing the last influence of the big banks fade away, and with it will go a lot of the demand. The additional negative factors others have noted will further shrink demand and/or the ability to approve a loan. Don’t forget, also, that the big banks are now actively trying to convert clients away from RMs using the reduced interest rates and lower equity requirements of forward loans.

    • roxie1,
       
      It would probably be worthless to reason with you. 
       
      No excuses, no nothing.  I will predict that two of the next three months will see endorsements exceeding 4,000 and that the total for the three months will exceed 9,000.  That is November, December, and January, months full of holidays, etc.  It will be SO EASY for you to be RIGHT in those months.  B of A had 3 endorsements in September and most everyone is indicating the endorsement production for Wells will be low from November forward.
       
      I do not care for betting.  This will be between you and me.  If you win, then you can remind me of my error every time I write and I will do the same. 
       
      How are you with that?

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