The last few years of running a business in the reverse mortgage industry has been a wild ride. From principal limit reductions to lender exits, it has been anything but boring. But after what seemed to be one negative after another, things seem to be changing now for the better.
After a few extremely challenging years in Washington, several changes made to the Federal Housing Administration’s (FHA) reverse mortgage program to ensure the program’s viability are paying off. Earlier this year, President Obama’s fiscal year 2013 budget showed the HECM program being cash flow positive for the second year in a row and it couldn’t have come at a better time.
Detailed in the President’s budget, the Department of Housing and Urban Development (HUD) was forced to cut two programs related to nursing homes and assisted living facilities because they require subsidies to operate at break-even. If the HECM program wasn’t generating receipts for the government, it could have likely suffered the same fate.
While the budget turnaround is great news, it may not be as important as an increasing acceptance, if not positive coverage of reverse mortgages in the media.
Several recent studies from the financial planning community have led to more acceptance from trade media and those people employed in the financial planning industry. The main stream media’s perceptions of the product are also changing. It was only a short time ago when it was common for reverse mortgages to be described ONLY as a loan of last resort. Slowly, that trend has changed, and it felt like it started after the New York Times’ columnist Ron Lieber wrote that Reverse Mortgages are Here to Stay.
Sure there has been some less-than-glowing coverage along the way, but after watching a full positive segment from NBC Today on reverse mortgages last week, it’s hard to argue the public’s perception hasn’t changed.
But with all this good news, HUD and analysts expect reverse mortgage volume to fall again in 2012. It shouldn’t come as any huge surprise though; when you lose Bank of America and Wells Fargo in less than a year, you can’t expect everything to bounce back right away—or can you?
At the most recent National Reverse Mortgage Lenders Association event in New York there was discussion on one of the panels about when the industry will get back to 100,000 units in annual production. Let’s just say that the panelists had a pretty optimistic view of when that will happen.
Now I have no doubt we will get back there, but to think the industry will go from an estimated 60,000 units in 2012 to 100,000 in 2013, they must be dreaming. I mean no disrespect to any of these people; I just can’t see it happening so soon.
The industry is doing everything it can to bounce back from the Wells Fargo and Bank of America exits, and luckily there are several lenders who are making investments in the space to fill the void. It’s interesting though, to see the lenders who are doubling down and hiring like crazy are primarily those who operate different models than Wells and Bank of America did.
Lenders like American Advisors Group and One Reverse Mortgage are purely call center-driven and are doubling down on their business models. There is still room for the a more traditional model, but both lenders are solidifying that having a retail call center is a huge asset—and people are noticing.
New Players About to Enter the Space?
It’s no secret that big players like New York Life have been posting job openings about entering the business, and while it seems the insurer will no longer enter the business, there are plenty of others waiting on the sidelines.
In order to get volume back to 100,000 as fast as possible, the industry needs some of these companies who are waiting on the sidelines to get into the game. Let’s be honest: there has never been a better time. If a company decided to pick up a top-10 lender in the next six months, it’s realistic they could build it into one of the top-3 reverse mortgage lenders in the country. When Bank of America and Wells Fargo were in the business, this wasn’t possible.
The good news is that there is plenty of interest. During the NRMLA conference, one executive at a leading player in the industry smiled and told me his company was getting so much attention from institutional investors that it felt like it was 2006 all over again.
Unfortunately, I couldn’t get too many details about who he was talking about, but there are several high-profile private equity companies that I know of who are actively looking to make an acquisition.
All great news, but the problem that needs to be addressed is this: Why haven’t they pulled the trigger yet? I’m told it likely has to do with some secondary market issues, but I do think those issues will get worked out in the end. According to investment bankers I’ve spoken with, the fact that industry volume is down isn’t as much of a concern as it used to be because of one thing: demographics.
The number of baby boomers who are age 65 is increasing by 10,000 every day according to AARP. Even though volume has been down, the penetration rate has risen from below 2% in 2009 to roughly 2.25% in 2012 according to data from Reverse Market Insight. The demographics of the industry will take over and volume will go up, there is no question.
Luckily, the industry is doing everything it can to ensure these companies are comfortable about entering the space. When exactly everything will be lined up and there will be major acquisitions or new entrants is anyone’s best guess—kind of like those people on the panel talking about when the industry will get back to 100,000 units.
While I have no idea when it will happen I do know one thing for certain… the faster we get more mid to large companies into the reverse mortgage business, the faster we get back to 100,000 units.