When Will the Reverse Mortgage Industry Start to Grow?

It might not be until roughly 2014, according to estimates from industry executives who spoke before attendees of the National Reverse Mortgage Lenders Association eastern regional conference in New York City this week.

“In the long term, the industry is poised to grow,” said Steve McClellan, president and CEO of Urban Financial Group speaking on a conference panel. “There are 1.5 million new seniors every year. Echo Boomers by themselves are expected to absorb 75% of all real estate inventory by 2020, which will cause real estate to start appreciating.”

McClellan, when asked for his estimate of when the industry will see 100,000 loans on an annual basis estimated that it will not be next year, but 2014 or 2015.

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Other executives agreed that the industry is not likely to return to its 100,000 peak level until home values return to a higher level. Those values, according to a recent Zillow survey of real estate economists, may not show an uptick until 2013.

“It’s probably not 2013,” said Pete Engelken, president and CEO of Genworth Financial Home Equity Access, of the reverse mortgage industry’s return to 100,000 annual units. “It could be 2014. It’s going to be a function of a lot of things, home values being a catalyst.”

The market potential driven by financial planners is another source executives are looking to for future growth. Some say financial planners are beginning to come around to reverse mortgage products, with two recent studies analyzing the use of a reverse mortgage to supplement retirement income, and finding that overall, retirees are better off when tapping into their home’s wealth through a home equity conversion product.

“It’s slow going, but we are seeing more and more planning professionals looking at this product seriously,” Engelken said. “I talk to as many financial planners as I possibly can. Five years ago, [one planner told me] half joking, if he’s doing his job right, no clients will ever need a reverse mortgage. I reminded him of that comment recently and he said he has 10 clients right now that absolutely need to start using home equity. It’s not a question of if they’re going to run out of money, it’s a question of when.”

When the market does begin to grow, new products are one source that could drive that upward movement, executives said.

“With the Saver and Purchase, we’re starting to see different consumer segments emerging,” Engelken said.

“There are a lot of new markets we still need to tap,” said Michelle Zachensky, vice president of reverse mortgage fulfillment, MetLife. “The HECM Purchase could be 70,000 units annually by itself.”

Written by Elizabeth Ecker

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  • This is very interesting. Can we really predict the future, I don’t think so,  especially in this unpredictable climate we are in. We have many political uncertainties, we have uncertainties where the economy in general is heading ETC.I would like to think the reverse mortgage industry will  experience the growth that is being talked about.
    Lets look at some of the uncertainties that are making it difficult to predict. First off, will the CFPB perpetrate so much change and new regulations on our industry that it could hold the market back from growing?Second concern are the interest rate’s that Raymond brought up. Will rising rates in the future create an alarming increase in shortfalls? Does this mean we will need to look at readjusting our actuary calculations again?Let us not forget the up coming elections! Yes, the political environment can have a profound effect on what will happen to our industry as far as growth is concerned. The market is also in need of new products? Because of all these uncertainties, I fall back on what I originally said, “We really can’t predict with any accuracy the growth trend of the reverse mortgage industry”, can we?  John A. Smaldone

    • John,

      Why if interest rates go up would “actuary calculations” have to be “readjusted”?  The Principal Limit Factor tables already take into consideration a fairly wide range of possible expected interest rates.

      However, if interest rates rise, the percentage upfront cost to proceeds will rise in some cases dramatically.  One form of the test divides gross available proceeds (Principal Limit in HECM jargon) into upfront costs.  For example, assume a home is appraised at $100,000 and the upfront cost of an adjustable rate Standard HECM is $6,000.  If the Principal Limit is now $60,000 and drops to $40,000 in the future, the upfront percentage cost would go from 10% to 15%.  Some measure that percentage by using the Principal Limit after upfront costs which means the current is 11.1% and 17.6% in the future.  For those who use such measuring devices, most use the latter approach.

      If interest rates rise will origination fees on fixed rate products find their way back into the market due to lower principal limits?  To recover quickly HECMs need rising home values and relatively low expected interest rates.  

       

      • Cynic,

        I should have used the term Principle limit factor tables, to me they are the same but I know what you are saying.

        The reason I say that is because we have already seen the factor tables adjusted to where the senior gets less. The factor tables were adjusted when rates were going down. If rates go up to levels that exceed the levels when factor tables were adjusted, we are in trouble!We will experience many more shortfalls unless another adjustment is made to bring up the LTV percentages. By the way, I know LTV may not be the right word to use but you know what I am getting at. I hope I explained myself better my friend.John A. Smaldone

      • John,

        How long were the PLFs which were changed in 2009 in play?

        PLFs are not changed as a result of changes in interest rates.  They are changed because information becomes available which indicates there is inordinate risk in the current tables.  For example, in 2009, the life expectancy of seniors was much longer than in 1989.  As life expectancy increases, one would expect PLFs to drop.

        HUD are long experience realized that deferred maintenance was much higher for older seniors than younger so they reduced the PLFs for older seniors accordingly in the PLF tables released on October 4, 2010.

        Will there be more changes?  Yes but it is doubtful if they will be about interest rates.

    • John,

      I firmly believe there are ways to predict with some significant accuracy growth trends for the industry in the short run.  The further one goes out into the future, the less reliable the information becomes.  

      For example, there is little likelihood, endorsement volume for this fiscal year will exceed 70,000.  Based on the trend of case numbers being assigned each month and the drop in the pull through (or conversion rate) along with the time it takes for an application with a case number assigned to become endorsed, the probable endorsement total for this fiscal year will be less than 60,000 and maybe lower than 55,000.

      Add the continuing resistance of home values to rise, the vast over supply of inventory, and the recent decline in investor confidence in the future of home construction entities, one has difficulty understanding why some prognosticators stubbornly predict that the calendar year will have better (in some cases much better) results than the fiscal year.  That has not been true since December 2009. 

      The problem in the past was endorsement predictions were based on unbridled euphoria.  For example, in late 2010, we had industry leaders declaring we would see 100,000 endorsements first for fiscal year 2011 and then soon after for calendar 2011.  Yet nothing, absolutely nothing other than unbridled reason was pointing to that conclusion.

      Like The_Cynic, there is little probability we will see 100,000 endorsements for any twelve month period again before 2015.  That does not mean I necessarily believe things will be worse over the next few years, it just means it is hard to believe the necessary environment will have evolved before 2015 to see 100,000 endorsements

      The article shows that facts and reason can overcome unbridled, euphoric optimism.  Industry leaders seemed to discuss the future in a calm mood.  While anecdotal evidence was still stressed too much, all in all, attendees should not have left that meeting with overly optimistic expectations for the next few fiscal years.

         

      • Jim,

        You make good points as usual. However, even with all your statistics I can’t go along with your thinking. We have to many uncertainties in the world today, much less our own country!I want to see the growth in our industry as much as anyone but I have to be a realest. The uncertaintiesI mentioned in my first comment are fact, they face us daily and it makes it almost imposable to predict with any certainty.Thanks Jim,

        John

      • John,

        You are correct.  There are uncertainties but those uncertainties are not fact; they are just possible events.  Yet we have businesses to run.

        Excessive fear and irrational euphoria are both poor indicators of the near future.  Life is full of opportunities and risks.  It is a reasonable possibility some of us will die in auto accidents in the next two years but to stop going places makes no sense at all.

        Our business is like farming.  If there are so many applications with case numbers assigned within the last few months, we can tell what the result (the harvest) will be with reasonable accuracy on a national level.  BUT just like farming, terrible events can intervene and my personal farm could be devastated despite what happens at the national level and vice versa.  

        You may call me an optimist and others, a pessimist but given a specific number of applications with case numbers assigned in the last four months plus current relevant trends one can reasonable project endorsements for the next few months.  Does that mean that the projections will always be accurate? Not at all.  After all Congress could decide one morning to shut down the whole program, a possibility but hardly a probability today considering it is early Friday afternoon in DC.

        Despite uncertainties, we still have a HECM program helping tens of thousands of seniors each year.  Until we have better information, I will continue working today as if the industry will continue as it has in the recent past and hope for a brighter and more prosperous future.  

        Call me crazy but it is hard for me to imagine how despite six months left in this fiscal year, we can reach 100,000 endorsements for this fiscal year based on the HECMs endorsed and case numbers assigned so far this fiscal year and also based on the current housing market.  I also do not believe that there is much chance there will be less than 36,000 endorsements as at least one experienced originator predicted some months back unless the program comes to a very sudden end before mid May.  Does 50,000 or 70,000 endorsements seem reasonable for this fiscal year this morning (on the West Coast)?  Probably not but they seem far more reasonable than less 36,000 or more than 100,000 endorsements for this fiscal year.

        How do you see the future?  What are you telling your clients to plan for short-term and long-term?  Whether we like it or not, we all operate with a short-term and long-term future in mind.

      • Jim,

        I understand what you are saying and by the way, I am an optimist as well. Like I said before, I am also a realist.

        I also agree with you about reaching 100,000 endorsements this year and why it will be hard to reach.

        I also understand that we all still have to run a business and we must look at the glass of water being half full, I am with you on that my friend.My only point is that in the age of uncertainties we live in today that predicting out two years becomes only a crap game of guessing.I shall remain optimistic with you Jim and I will do everything I can do to stay  successful. I will even establish plans for the future, everything that I know you will do, I will try and do the same.

        You also ask a good question, what am I telling my clients about the future. You gave my answer for me, I tell them to plan short term and for the long term. They can do that with a reverse mortgage.

        You and I are on the same page Jim. I enjoy going back and forth with you, I learn something every time. Make it a great weekend.Thanks,John A. Smaldone

      • John,

        While fiscal 2012 is firming up, 2013 is a big mystery for now except to say, nothing significant is on the horizon which says 2013 will be much better than 2012.  But again it is far too early to be saying anything definite at this time.

        Enjoy the weekend.

  • This is very interesting. Can we really predict the future, I don’t think so,  especially in this unpredictable climate we are in. We have many political uncertainties, we have uncertainties where the economy in general is heading ETC.I would like to think the reverse mortgage industry will  experience the growth that is being talked about.
    Lets look at some of the uncertainties that are making it difficult to predict. First off, will the CFPB perpetrate so much change and new regulations on our industry that it could hold the market back from growing?Second concern are the interest rate’s that Raymond brought up. Will rising rates in the future create an alarming increase in shortfalls? Does this mean we will need to look at readjusting our actuary calculations again?Let us not forget the up coming elections! Yes, the political environment can have a profound effect on what will happen to our industry as far as growth is concerned. The market is also in need of new products? Because of all these uncertainties, I fall back on what I originally said, “We really can’t predict with any accuracy the growth trend of the reverse mortgage industry”, can we?  John A. Smaldone

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