Will Large Lenders Come Back to The Reverse Mortgage Market?

At least in the short term, it appears those positioned to gain in the business are the smaller, more independent lenders of the past, now rising the ranks to become today’s largest lenders by volume. 

The landscape has changed noticeably over the past 18 months, from a time where Wells Fargo, Bank of America and MetLife each had a stronghold on the market for retail and wholesale loans. Since their exits, in part attributable to the regulatory climate and rising compliance costs for banks as well as non-banks, many have wondered whether the new normal for the reverse mortgage market is the independent non-bank lender. Those who watch the market say: the end is not over for big banks, but there are a few things that need to happen before they will make a come back. 

“Larger lenders will return when they feel that home values have stabilized and the FHA program has issued guidance on tax and insurance underwriting protocol to level the origination market rules for all lenders,” says Jeff Taylor, president of Wendover Consulting. 

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Home prices stabilizing and growing consistently as well as successful financial assessment of borrower to reduce tax and insurance defaults are also strong points in favor of larger players reentering, according to John Lunde, president of Reverse Market Insight.

But the timing of these changes remains to be seen as home prices remain down from their peaks by double digits in most markets—despite the most recent reports indicating a turnaround is imminent with 99 metros around the country.

The financial assessment question, too, has yet to be addressed successfully. Before its departure from the business, MetLife tried a financial assessment on for size, then as quickly as it introduced the new underwriting guidelines, it reversed them. Urban Financial, following MetLife’s announcement, floated its own version of financial assessment through its broker channel, but without ever implementing it. Genworth Financial Equity Access, too, said it was working toward making a change to underwriting. Yet, the only company to speak publicly about changes is Reverse Mortgage Solutions, which was recently purchased by Walter Investment Management Corp. for a sum of $120 million. RMS told RMD in April it had stopped buying closed loans that did not meet a certain criteria, and was in the process of making changes in its retail channel. 

Once those changes do take place, say Taylor and Lunde, the market is positioned to attract new, larger players—and it will need them. 

“Additional well capitalized lender/servicers will also be needed to grow the HECM HMBS securities market,” Taylor says. “The HECM market ship has not sailed, but rather is mooring off the coast to monitor new lender entrants and senior demand for the product and its acceptance.”

Written by Elizabeth Ecker

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  • What Mr. Taylor and Mr. Lunde shared is hardly Pollyannaish but neither it is all that realistic.  The industry is not going away soon but neither is it growing, not a great sign for the industry.

    As to rising home values, what we have is an infant on a ventilator.  For the next seven weeks, very little will happen as to home appreciation unless it is negative.  The summer market selling season is gone.  The only thing left is for the dust to settle to gather stats and then to do a reassessment where we will find out after the Congressional election that the positive news we were presented wasn’t really so positive.  It happens every other year almost exactly the same way.

    A struggling home appreciation market does a double whammy on our industry.  The first is even lower endorsement totals for next fiscal year.  The second is a growing guarantee problem for lenders on all Ginnie Mae related secondary market sales of HECMs.

    We still have no information about total defaults to date, the size of the potential guarantees lenders are responsible for versus those Fannie Mae holds and is responsible for.  It is very doubtful if the default counseling efforts will prove to have succeeded beyond a very, very small percentage of defaults.

    Then beyond the mere number of borrowers newly defaulting is the issue of the the ongoing defaults of those who were already in the default pool.

    Is the default pool 9%, 12%, 15% or more of all active HECMs?  RMS was right to stop all wholesale operations.  Why be responsible for a broker or another lender who could go under if the Ginnie Mae must start pulling the plug on lender guarantees.

    No one expects HUD to come to the rescue for months.  The one help which is needed the most is the one thing none of us can do anything about and that is lower the level of the tides of the oceans and clean the environment up  —- oops, I mean reverse the home appreciation decline.

  • This is an interesting article. However, a little more depth would have gone a long way to explain what is going on:
    First of all all the big players were supervised institutions regulated by some federal regulator (you know who) and also BoA and Wells are what we consider megabanks. Now ask yourself the question: what does these two facts have to do with their exit of the market?
    As indicated in the article the biggest players that remain in the industry are nonsupersived, nondepositary institutions who are regulated by the states and the CFPB. This shows a trend in the attitude of certain regulator towards the product.
    The second point is that large and midsize banks are facing the requirement of implementing the Basil III regulation which imposed additional capital requirements, reserves for a full downturn economic cycle and reserves for residential mortgage business. This is all mandated by our famous Dodd-Frank act. So what are the banks doing to mitigate the risk? Well…, diminish mortgage operations in relatively risky product lines (or products who the regulator do not like) like reverses and wholesale channels (remeber Wells???) and utilize their depositors money which is FDIC insured, to leverage (1 to 10 ratio) borrowing from the FEDs discount window at 25 bps, invest that money in safe 3-4% return on investment cds or other invesment tools and then pay back what 50-100 bps dividends of the deposit funds to their depositors and you can get a safe profit of 1-2% risk free of the leveraged amount!!!. Compare this to the risk of buyback loans plus regulatory and headline risk and it doesnt take a rocket scientist to figure out what is going on. Can you see a mention of governement subsidy here??? Food for thought!
    So the question in the article of when will large lenders return?
    Answer: When either Dodd-Frank is repealed or when the economy finally picks up, and the companies who currently have huge amount of cash seating in their bank accounts decide to start investing and hiring  which will oblige the banks to look for other cash inflow (this was listed as huge risk to depositary institutions in the latest OCC report) or if the FEDs decide to increase the discount rates (unlikely for next couple of years as per the latest Bernanke statement with perhaps QE III coming on board.
    I know much is said regarding the T&I technical defaults, financial assestment etc, but this is relative small issues to the big bank when compared to other issues mention above. Metlife saw this coming and this is why they pull out of the banking business all together : why deal with all these headaches when their core business of insurance is well understood and relatively stable environment. The problem is not reverse mortgages so much but the regulatory push and the unintended consequences.
    And yes house prices do affect the picture but they wont really fully recover until unemployment recovers and as long as companies are seating and hoarding cash in their bank accounts there is no way any big push hiring is happening.

    • eqqmc2,

      You write about Basil III and risky investments.  It seems that argument alone only intensifies the issues related to HECM defaults for nonpayment of property charges such as property taxes and insurance and the potential liabilities they bring into play especially if the banks do not have HECM financial assessment rules in play to mitigate the risk.  Since HECMs have little other risk to the big banks outside of the potential liabilities for those specific defaults and the deferred maintenance issues on the horizon, you only bring out how important those issues are in the minds of the senior management at the major banks who are responsible for Basil III compliance.

      Your comment, however, is more distraction than reasoned comment.  Your typos and choice of words give pause as to your understanding of what you write.  No, I do not “remeber Wells.”  Nor have I ever heard of companies which “are seating … cash” as you state in your last sentence.  When you use a left parenthesis without a closing right, you show how little you care about what you write or how readers interpret it, such as when you state:  “…(unlikely for next couple of years as per the latest Bernanke statement with perhaps QE III coming on board.”  Where is the closing right parenthesis?  There is none at the end of the quotation or through the end of your comment.
      Few companies hoard cash “in their bank accounts.”  Most major companies hold their cash in “cash equivalents” which are low risk, highly liquid investments with large, ready markets.

      I really have no more time to dedicate in criticizing your comment but in the future please write in a manner that is kinder to readers.

      • Critic,

        The typos are related to the fact that I was texting from my iphone. In this modern world when you text is really hard to keep up with the proper grammar. My apologies for that.
        As for your comments regarding the information on the fact that companies keep their account in “equivalents”, the vehicle which actually is used by companies to keep their “cash” on bank accounts is not what is important. What is important is that the accumulation of such deposits in bank accounts, which are then used by the banks to leverage their borrowing from the FED causes a serious risk of running on the banks if the businesses decide to pull their money out rapidly due to an improvement in the economy etc. This was pointed out by the OCC.
        As for the comments on the HECM T&I, my point was that the big lenders in the reverse industry were banks, not the nonsupersived institutions that remain today, and the reason for the exit was the new regulations. If you follow your line of reasoning then should the Dod-Frank Basil III be extended to non supersived mortgage lending instituions because of the risk of mortgage lending? That would certainly mean another exodus from the industry. Again the reverse mortgage business was small percentage of the core business for these institutions and T&I was not necessarily the only issue for their departure.
        My point is that the regulatory requirements imposed on banks have caused these institutions to exit certain markets and that until those presures are removed it will be difficult for these players to reenter the space.

      • eqqmc2,

        As to typos, they happen.  In many respects software is far behind the level needed to support specific technology used in the business environment.There is little question that many factors led to the withdrawal of Wells and Bank of America.  However, some factors no doubt dominated over others and what those dominant factors were could have easily varied for each institution.Based on the public statements of Wells Fargo executives, it seems the default issue was a very prominent, if not the dominant, reason.  With Bank of America nothing much was said publicly.  All that stands out is that right after B of A announced it was leaving the industry for mortgage operational reorganization purposes (the downsizing excuse again), the price of its common stock rose.  Why?  Who knows?While you provide another possible factor it does not match any public statements.  Does that mean it was not a factor?  Absolutely not but it also cannot be verified as one of the prominent reasons for those banks leaving the industry.  It is in fact mere speculation as to a verifiable causation in the decision making of Wells Fargo or Bank of America senior management.It seems you believe that poorly managed lenders should not be allowed to fail and well managed lenders thrive.  Is the banking world actually better for Basil III?  I am but a lowly real estate broker and over 62 years old, so by definition of some senior advocates, I have no ability to participant in the discussion of such weighty matters.  After all both Barney and Chris are quite hefty you know even though both are older than me.

  • This may be a strange statement to make but just maybe the exit from the industry by the giants like Wells, Met Life, BOA has been a blessing.

    Another just maybe, just maybe the giants of the past were not really committed to the reverse mortgage industry. They all had other revenue streams that were more of a priority to them.

    Now take Urban, Generations, Genworth and others like them. They are focused on one primary product, reverse mortgages. Those of us that have been in the industry always knew not to mix out products and service them together. We were always more successful when we separated traditional lending functions from the reverse mortgage side of the world.

    I feel we will see growth in our industry to the point it will be greater than ever!

    Two things face us, one is a temporary slow down and that is it will take time to make up for the exiting of the giants in the industry. They covered such a vast geographical area and had so many origination people on staff. However, it is causing a temporary slow down.

    The main concern is the continual over regulating of our industry by the Federal Government. This could be the Straw the broke the Camel’s back! Lets hope not, lets hope we can fight the over regulatory agencies and overcome them.

    I do see a great potential for a new type of giant coming into the market, maybe not as large of a company of the past but one capable of doing more RM volume!!

    John A. Smaldone

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