The Year Ahead for Reverse Mortgages: 2013

Within the next 30 days, the reverse mortgage industry will likely have lost its most popular product.

The Department of Housing and Urban Development promised Congress in December that the fixed rate HECM standard will become a thing of the past this month and many wonder if the business will lose its identity as a result.

The elimination of the industry’s most popular product leads to one big question: Will borrowers continue to choose reverse mortgages if the standard upfront full draw is no longer available?

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On the surface, this would appear a dramatic shift in the business, but it may not necessarily mean such major change for originators or the borrowers served by the product.

The product changes

The fixed-rate product currently comprises about 70% of new reverse mortgage loans, indicating a strong shift from two years ago when the adjustable rate product was the only one available. HUD has since introduced the HECM Saver, a very large majority of which are taken at an adjustable rate, but still comprising only a fraction of total reverse mortgages.

Originators will have to shift to a market with a markedly different product mix, but analysts say volume will likely remain at a stable level.

“Removing the fixed Standard product is not a direct effect on volume from consumers (in comparison to a principal limit factor reduction that would have a direct impact), as it would seem very likely that borrowers simply use the ARM if that’s what’s available,” says John Lunde, president of Reverse Market Insight. “That might be a bad assumption if borrowers truly feel strongly enough about wanting a fixed that they wouldn’t take the loan if fixed isn’t available, but before fixed was prevalent in 2009 onward that didn’t seem to be an issue.”

 

Last year proved a struggle for the overall industry loan total, which amounted to just shy of 55,000 loans for the fiscal year ending September 30. The downturn from 2011’s total of more than 60,000 loans is attributed largely to the exit of MetLife from the reverse mortgage business, as well as sustained low home values nationwide.

The peak year for reverse mortgages, however, saw a total of more than 100,000 loans, and this at a time when there was no fixed rate option for borrowers. There’s confidence in the market that the adjustable rate product is a viable one, but it will prompt change in terms of marketing and product economics, with originators having to shift accordingly.

“It will have an indirect impact because it will reduce revenue on the average loan that is available for marketing,” Lunde says. “If originators are not able to market cost effectively at the lower revenue levels of ARM product, then we’ll see fewer loans if all else is equal.”

Lenders have supported the change with a statement of support coming from Walter Investment Group—owner of Reverse Mortgage Solutions and Security One Lending—following the letter from Galante, who has since received Senate support for confirmation as FHA commissioner.

“We are very much in favor of changes in the reverse market that make marketplace stronger for the long term,” said executive vice president Denmar Dixon on a call with investors in late December. “We see significant growth in the base market overall not affected by this change, since there are other products available to address the need.”

In spite of the current product balance and having to make changes in terms of product marketing, independent lenders too say that long-term, the modifications will be welcomed. “The changes to the program that are coming from HUD are good,” says John Mitchell, founder and CEO of Reverse Mortgage USA. “It solidifies the program long-term.”

Investor demand

The secondary market for reverse mortgages has been strong over the last 18 months, and the business got a real shot of liquidity when Walter Investment Management and Ocwen announced they would get into reverse mortgages. This week, Walter also announced it would be acquiring Security One Lending in an all-cash deal.

The introduction of big balance sheets to the landscape which formerly comprised just a handful of lenders led by Urban Financial Group and Reverse Mortgage Solutions is a very positive change.

But while HMBS traders say there is always demand for Ginnie Mae reverse mortgage securities, there is some concern that volume could suffer, impacting demand in the year to come.

“Volumes continue dropping, but with greater velocity and this ultimately affects sponsorship in capital markets,” says Jeff Traister, managing director for Cantor Fitzgerald. “With smaller volumes, there is less incentive for Wall Street traders and investors to focus. This affects liquidity and pricing to originators. This behavior takes time to filter through the system but is likely to occur.”

In 2013—and beyond

Ultimately, the outlook is strong for the market despite the upcoming change, supported in large part by a rapidly growing demographic of people who are 62 and older in the United States as well as home price recovery expected to continue through 2013 and beyond.

Up more than 4% in 2012 according to the housing industry benchmark S&P/Case-Shiller index, home prices will be the key to forward momentum, with the demographics only getting stronger in 2013.

Those factors will outweigh the short term change, according to industry leaders.

 

“We believe the fundamentals are as strong as when we first looked at the market,” Walter executives told stakeholders in December. “The demographics are very much in favor of this product. There is still significant level of equity in homes that can be addressed by the reverse product and it is still very underpenetrated.”

Outside influences are likely to push the business forward in 2013, analysts say.

“The population is increasing at a rapid clip,” says Doug Kelly, IBISWorld analyst. “The demographics are the most favorable growth opportunity for the industry. There may be concerns among smaller lenders about higher regulations, but they will lead to greater transparency.”

Kelly projects the business seeing an uptick in 2014, once the housing market recovery takes hold.

“Over the five years to 2017, IBISWorld anticipates that seniors and financial advisors will increasingly take out reverse mortgages as a viable financial planning tool to cover higher living and medical expenses and make up for the gap left by poor performance by retirement income alternatives such as retirement plans and interest income,” Kelly wrote in an industry report published in December.

Written by Elizabeth Ecker

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  • Elizabeth,

    When it comes to fixed rate Standards there is a lot of confusion. So I decided to present the relevant facts. For example, you state: “The fixed-rate product currently comprises about 70% of new reverse mortgage loans, indicating a strong shift from two years ago when the adjustable rate product was the only one available.”

    In fact the first fixed rate HECMs were offered in late 2006. In fiscal 2007 we had 120 fixed rate endorsements followed by:

    2,667 in fiscal 2008,
    13,258 in fiscal 2009,
    54,498 in fiscal 2010,
    49,195 in fiscal 2011, and
    37,668 last fiscal year.

    On March 28, 2008, HUD finally released its Mortgagee Letter 2008-08 in which it required that the expected and note interest rates be the same. Up until that time many lenders used different interest rates in line with variable rate HECMs. What is also interesting in the Mortgagee Letter is that HUD permitted both open and closed end fixed rate HECMs.

    You are not the first to present the idea that fixed rate HECMs have only been around since late 2010 or early 2011. We have had three fiscal years of over 100,000 endorsements, fiscal years 2007, 2008, and 2009. Even though there was virtually no significant endorsement totals from fixed rate HECMs in those years (except in fiscal 2009), neither was there much GNMA issuance activity in those fiscal years. The rise in the popularity of the fixed rate Standard can be attributed more to their increased revenue rates in the last three fiscal years than anything else.

    One product which I wish would return but is unlikely to do so to any extent for now is the annually adjusting variable rate HECM.

      • Mr. Mastromatto,

        I have no idea what your seniors may or may not have done in whatever time period you are referring to. I have had few seniors who needed close to a full draw at closing that have not selected the fixed rate Standard. The few who did were expecting to pay back the HECM over time and liked the line of credit feature. A few of those have annually adjusting CMT Standard HECMs with higher margins than most of our adjusting rate products have today.

  • Despite the heroic and tragic claims of “analysts,” with endorsement volume already down over 13% for the first three months of this new fiscal year when compared to the same period last fiscal year, is it reasonable that endorsement totals will not be significantly lower this fiscal year? This is the eighteenth month in a row when prior month’s total endorsements are lower than for the same month in the prior fiscal year. Things have NOT stabilized (other than going down on a year over year basis) and are definitely worse even before there is any final word on exactly when fixed rate Standards will be eliminated.

    Are the optimistic statements more unfounded wish than calculated forecast? It is telling when no one is using actual recent HECM data rather than tired and general demographic trends. In the face of the fourth year of falling endorsements, there seems to be growing grounds for the illogical but observed phenomenon that there is in fact a reverse correlation between the growth in the senior population and the growth in HECM endorsements.

    No doubt, within four months after the the fixed rate Standard is eliminated, the endorsement trend will most likely take a further turn for the worse. The principal reason is (not seniors but rather) the inability of many originators to properly present adjustable rate Standards. Then there are those of us who have been around for
    quite awhile who are like rusty pipes and will need a short period of time to be fully geared up to properly present the adjusted product mix. Some originators have never lost their edge when it comes to adjustable rate Standards and will continue to do a great job with them.

    Our potential future growth is not with the traditional HECM market segment although it will always be with us. Our growth in endorsements is with the mass affluent and the not-quite-affluent senior. Until we learn how to “farm” that community, our endorsement numbers will remain lackluster, if not diminishing.

    • Properly presenting adjustable rate Standards to the need based seniors, does this included trying to explain where the 25 year Amortization schedule of .25% will be in 10 years. ps Jim we get the networking with financial advisors

      to open lines of credit with no draw to the mass affluent

      we really do. Thank You

      • Mr. Mastromatto,

        As to your first sentence, this is a matter of demonstrating with simple Excel amortization schedules the impact that varying interest rates have on a HECM balance due. There is really nothing difficult about that other than setting up a comprehensive but flexible worksheet to work from and showing from variable interest rate history the value of even such a high cap and how quickly high interest rates fall.

        Please read my comment again. Where was networking brought up? While I believe in “farming,” networking with financial advisers is only one part of that endeavor. During the heyday of proprietary reverse mortgages, we did several with no networking at all.

        To gain the mass affluent will require far more creativity and diligence in marketing strategies than just networking alone. That is why I spurned the use of the word “networking” and chose another word so as not to limit the imagination of those who know how to market to the mass affluent.

        While individual originators will do just fine with their traditional market base in the remainder of this decade, many others of us want to reach out to the broader senior market to present what we believe to be a product designed to help stretch cash flow much deeper into retirement than most in the mass affluent category generally perceive or understand. If networking as you describe it is effective than we should use it but if other ways are also effective we should use them as well.

      • To MARKET the Adjustable Rate saver to the mass affluent with no mortgage debt or no draw we will need lenders to cough up some money on top of Origination Fee seniors pay us

  • “Removing the fixed Standard product is not a direct effect on volume from consumers (in comparison to a principal limit factor reduction that would have a direct impact)”
    While I disagree with your premise that elimination of the FX STD will not affect industry volume, I also look for HUD to reduce PLFs concurrent with the FX STD program elimination. Otherwise, given your ‘no volume impact’ assumption, they will gain nothing in terms of mitigating risk to the MMI fund which is ostensibly the catalyst behind all of this.

    • REVGUYJIM,

      I am not so sure.

      It is not the principal limit which is so potentially destructive to the program but rather the balance due. Almost all fixed rate Standards have the maximum balance due. The same is not true with adjustable rate HECMs; some are in that situation but the vast majority are not.

  • As a HECM counselor, I see way too many cases where the financially illiterate consumer wants to take a lump sum. In my heart of hearts, I am nearly certain that these loans will default for taxes. Sooner or later.
    Seemingly, some of these lenders OWN entire inner city neighborhoods, or will.

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