The only reverse mortgage market constant is change, and 2014 was no exception. This year saw the impact of product changes implemented in late 2013, as well as new changes: non-borrowing spouse protections, new principal limit factors, a top-10 lender exit, product innovation, and many, many others.
Industry members saw Generation Mortgage wind down its reverse mortgage originations business while AAG rose in the ranks to become the No. 1 lender by volume. Some borrowers received more proceeds under the new principal limit factors announced in 2014, and principal limit factors in general became more sensitive to interest rate adjustments — a big unknown for the years ahead.
Also on the horizon are changes slated to take effect in the first quarter of 2015, namely a long-awaited financial assessment that will apply to all new reverse mortgage borrowers. But not all change is equal. Some of the major events of 2014 will have a lasting impact on the Home Equity Conversion Mortgage market, while others will be less significant.
With loan volume for the year falling short of 2013’s volume, RMD sought the input of industry analyst John Lunde, of Reverse Market Insight, to help weigh the good, the bad and the to-be-determined when it comes to the past year, and the coming months ahead.
While changes in 2014 will certainly leave their mark on the industry, the biggest impact on volume was actually a change that took place in late 2013, Lunde tells RMD. That change — a sharp cut to principal limit factors — is largely responsible for 2014 being a “down” year.
“We have been on an up-trend over the course of the year, but the immediate aftermath of that change was really rough,” Lunde says. “The turbulence lasted longer from that change than previously when we had principal limit cuts and a bounce-back later. This one had a longer-lasting effect.”
The effect can be seen in the trailing of endorsements following a surge in case numbers assigned prior to the change going into effect, which is, in part, why the downturn was not fully realized until well into 2014. But perhaps more important than changes in the past are the changes in the future that lenders are preparing for in early 2015.
“The issue we are looking at now is the financial assessment issue,” Lunde says. “It’s very hard to have a data-based expectation for how much impact that will have.”
The financial assessment, set into motion by the Department of Housing and Urban Development this November, will take effect in March of the coming year. Though it was outlined in detail this year, and has been discussed for several years, lenders are anticipating a decline in loan volume as a result, due to borrowers who would qualify today, but under the new rules will not meet the financial assessment requirements.
Many have referred to MetLife’s introduction of a financial assessment for its borrowers prior to the company’s exit from reverse mortgage originations in 2012. Shortly after introducing the assessment, MetLife announced it would discontinue the assessment due to a sharp decline in business seen as a result.
Now that the financial assessment has been laid out in detail, the magnitude of the change, while it’s still very much yet to be seen, will be substantial, Lunde says.
“It’s a lot more similar to the utilization restrictions in terms of the level of disruption, and maybe ever bigger than the PLF cuts of past years,” he says. “We’re definitely expecting an impact, and that will play out from a volume perspective and also in terms of cost of volume. There will be a lot of change in systems, training and everything involved. This will be significant.”
The New Year for Reverse Mortgages
The industry may see more contraction among originators before it sees growth, Lunde says, but opportunity lies in the potential brought by a new and improved reverse mortgage.
“Right now unit volume and revenue per unit are pretty low because of the utilization restrictions,” he says. “Those things argue for further contraction among folks who are not performing very well. The offset to that is that from financial assessment to utilization restrictions, these things are paving the way for one of the bigger brand name players to jump in, or jump back in.”
The last year brought the entry of one major brand to the space: Bank of New York Mellon. The bank’s Home Equity Retirement Solutions arm is planned as a reverse mortgage business that will purchase, securitize and service reverse mortgages. The company will also provide advisory services to brokers, financial advisors and asset managers on how the loans fit into retirement plans.
Other entrants remain to be seen, but many industry players are confident that the new reverse mortgage will be a more appealing product with less headline risk and more borrower protections than ever before.
The press has continued to play a role as well, with 2014 bringing an uptick in positive headlines, and more informed reporting overall, as charted under the Extreme Summit campaign, launched by industry members and the National Reverse Mortgage Lenders Association.
Additional initiatives launched over the last year will also continue in an effort to inform financial planners about reverse mortgage benefits from a retirement planning perspective, and to spread word among real estate professionals about the reverse mortgage for purchase loan. But, more than anything, the outlook is driven by the financial assessment.
“We have been recovering,” Lunde says. “We definitely have a bump in the road coming, but it looks to be a potentially flat year ahead—which would be a positive development given the financial assessment being implemented.”
This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.
Written by Elizabeth Ecker