Originators face a rocky road ahead as the federal reverse mortgage program undergoes a substantial overhaul, but many remain optimistic for what could be the rainbow after the storm: a more sustainable product that’s safe for lenders and borrowers alike.
That gain, however, will likely take some pain to achieve, perhaps felt most acutely by originators tasked with selling a very different product to a smaller pool of eligible borrowers.
“This is a positive thing going forward, but how long it will take to be a positive thing in public perception—that’s the unknown,” says Mike Gruley, director of reverse mortgage operations at 1st Financial Reverse Mortgages. “If it takes too long, it could turn out to be detrimental to the survival of the product. But we’ll have to see. It’s going to have to keep evolving.”
The introduction of a financial assessment for borrowers, effective January 13, along with an approximately 8% cut in principal limit factors, effective September 30, are expected to cause “significant changes” in the industry landscape.
“It probably is going to reduce significantly the number of loans that get done,” says Steve McClellan, CEO of Urban Financial. “The industry is still trying to evaluate that. No one has a complete handle of that yet, but preliminary estimates say volume could be off by 30-50%.”
Once all the changes are implemented in January, a reduction in origination volume of up to 50% for some lenders is “not unrealistic,” says Lance Jackson, president and CEO of Castle Financial, Inc.
The lower loan-to-value ratio being implemented October 1 could potentially cut out about 20-25% of volume for his business, he estimates, while the financial assessment slated for January could drop out another 25%.
“If the penetration rate for reverse mortgages does not improve and we don’t reach a greater audience soon, we’re going to see volumes decline,” agrees Gruley, who points to a penetration rate that has been stuck around 2% for years, according to some industry estimates. “As an industry, our future is in the 98%.”
The accelerated timeline for the changes to take effect is another challenge.
“My perception is that many in the industry are reeling a bit from the changes to the program and the velocity with which these changes are to be implemented,” says McClellan. “These changes are going to really cause some significant shake-up and shake-out in this industry.”
The speed with which the industry is being asked to implement the changes will create some stress, he says, as it deals with a “whole host” of challenges including new disclosures, new documentation requirements, and approvals.
“We recognize that the implementation period is short,” says Lemar Wooley, spokesperson for HUD, in an email to RMD. “However, HUD is committed to doing everything it can to ensure all questions from the industry are fully addressed and we are focused on making the transition October 1.”
While most agree the changes will be challenging, many are optimistic for the future. Home prices are expected to continue to appreciate, which could be a mitigating factor, lenders agree.
“Long term for the product, as long as the financial assessment isn’t too draconian, it’s good,” Jackson says of companies who are “willing to stick it out.”
Ultimately, the fundamental need for reverse mortgages still exists, especially with thousands of seniors reaching retirement age each day for the next decade or so, McClellan points out.
“HUD needed to do these changes, although I’m not sure this is the silver bullet that gets us [to where the product is widely accepted],” says Gruley. “The program needed this. It’s painful for everybody, but it needs this.”
Editor’s note: A previous version of this article had incorrect dates for when the HECM program changes and financial assessment would become effective. We regret the error.
Written by Alyssa Gerace