Program Changes Behind, Reverse Mortgage Industry Finds Solid Ground to Grow

Many of the policies that have earned reverse mortgages harsh criticism and negative press in the past have since been corrected, ushering in a new era for the industry. But while this new environment may facilitate some new growth opportunities for lenders, many of the same challenges remain.

In the past year alone, the Home Equity Conversion Mortgage (HECM) has undergone a series of key changes in efforts to improve the sustainability of the program, strengthen protections for borrowers and their non-borrowing spouses, as well as reduce risk of losses to the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund.

So far, those changes have been paying off for the FHA. In its annual report to Congress, FHA revealed the HECM program currently sits at an economic value of $6.8 billion in fiscal year 2015, an upswing of a nearly $8 billion from last year. As a whole, the gains contributed to the Fund exceeding its Congressionally required 2% capital reserve ratio (2.07%) for the first time since 2008.

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“We reached this goal sooner than expected and large gains in the HECM fund are part of that,” said Kathleen Zadareky, deputy assistant secretary for single family housing at the Department of Housing and Urban Development (HUD), during her keynote address at the National Reverse Mortgage Lenders Association annual conference in San Francisco this month.

The HECM program, however, is very volatile as it pertains to the MMI Fund, Zadareky added, as small changes in interest rates and home price appreciation can adversely affect the economic standing of the portfolio.

While HUD continues to monitor the program and manage this volatility, and the reverse mortgage industry continues to digest the most recent policy changes, the market may have finally entered a quiet period where lenders and industry groups can focus on addressing the reverse mortgage product’s greatest inhibitions.

At the bottom of just about everything in the reverse mortgage world, education is key.

Turning the PR tides

Education is key to boosting penetration rate in the reverse market. It’s key to raising awareness, to acceptance and ultimately, to greater absorption of the product among eligible seniors who aren’t borrowing because they lack information or grimace because of what they heard from a friend.

“Education is at the center of what we all do,” said Sherry Apanay, chief sales officer for Urban Financial of America, during an industry leader insights panel. “Our responsibility as an industry and for those of us who interface with seniors, it’s important that we all come together and make sure we have education available and that we advocate for our own people to be the most educated in the industry.”

Raising awareness of how HECMs have changed over the years and where they stand today is critical to distancing reverse mortgages from past misperceptions of the product. Even if people don’t have a factual understanding of reverse mortgages, it is difficult to change their minds if they have already formulated a negative opinion, be if from hearsay or something read on the Internet.

As a result, this has necessitated reverse mortgage industry members to take on various initiatives aimed at educating not only the massive Baby Boomer and senior market, but also financial professionals such as realtors, homebuilders and financial planners or advisers.

“This is a tough challenge. It’s a big issue,” said Jason McNamara, chief executive officer at Celink, an independent reverse mortgage servicer based in Lansing, Michigan, also speaking during the insights panel.

McNamara also serves as Treasurer for NRMLA and chairs the organization’s Public Relations Committee, which is tasked with tackling reverse mortgage awareness efforts via public outreach and messaging. One of the overall strategies of the committee seeks to bring perspective to the reverse mortgage industry for consumers.

People often talk about the high risks and costs of HECM, but in relation to what? (e.g. compared to a HELOC or a traditional refinance?) So what the reverse mortgage industry needs to do, McNamara said, is come up with analytically-led research that starts providing real numbers around comparing the HECM product and program, and the results of it, to other financial tools.

“I’m very optimistic that if we come up with an analytically-led conversation that’s not anecdotal, we are going to be able to provide that perspective which we struggle to get today,” he said.

Doing so, McNamara added, will also allow the industry to play offense when it comes to marketing and public relations, rather that taking a defensive approach whenever the program is portrayed inaccurately in the press or the target of questionable government scrutiny.

“We’re always on the defensive, but if we can get some of this research and some of this analytically-led dialogue, that’s going to allow us to get on the offensive,” he said.

Education also needs to permeate into the investor market to spur more interest in the return of big banks to the reverse mortgage space.

Changing behaviors

The most commonly held belief is that recent HECM program changes such as the Financial Assessment and non-borrowing spouse updates have added more credibility to reverse mortgages. These changes, along with the initial fixed-rate draw limitations, have also reconciled many of the reputation risks that caused the big banks to exit the reverse mortgage business in the past.

While some industry members have noted increased interest from outside banks and credit unions in recent months, the market has yet to see the return of bigger players of a caliber like Bank of America, Wells Fargo and MetLife. But now that the HECM program has entered a period where additional policy changes don’t appear to be in the queue for HUD, it’s time for lenders to change their behaviors when attracting outside professionals such as financial planners, realtors, builders and banks back to the reverse mortgage market.

“If we want to grow as an industry and change perception, then we have to change our behavior,” said Reza Jahangiri, CEO of American Advisors Group, during the NRMLA industry insights panel. “We’re sitting here a lot of times waiting for the market to come to us. People are investing this quarter or this month—they’re not looking at longer-term initiatives.”

Industry volume has remained relatively stable since 2012, balancing between 50,000 and 60,000 units for each full calendar year since then. Thus far in 2015, from January through October, HECM endorsements total just 48,181, according to industry data collected by Reverse Market Insight.

“We’ve kind of found our floor,” Jahangiri said.

So what does the industry do now? Like the industry has adapted to so many HECM program changes, it must also shift its marketing approach in line with demographic and retirement trends.

Home equity is the primary asset of many seniors, but because of increasing life expectancy, the reality is that a lot of people have not saved adequately to fund their longevity. And often times, home equity needs to be tapped in order to have a comfortable retirement. But while a reverse mortgage can be a viable solution in these situations, the negative perceptions facing the product impede acceptance and utilization.

For these reasons, lenders need to change their behaviors and embrace forward-thinking strategies targeted not only at their marketing efforts, but how they approach and attract non-industry players to the reverse mortgage market.

“Without more disruptive marketing and looking at additional distribution channels; not waiting for big banks to come back in, but us going out there and not just talking to a couple financial advisors or planners, credit unions or a couple community banks—but putting budgets and long-term thinking and long-term expectations in terms of ROI in our behavior,” Jahangiri. “Without forward thinking, expect us to be sitting here next year talking about how we get past 50,000 units.”

Written by Jason Oliva

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  • So how will HUD continue to “manage this volatility?” The volatility comes from two sources HUD does not control: 1) the rate by which the actuaries discount cash flows and 2) home appreciation rates.

    Now a discussion on how those two sources of volatility are managed by HUD would be most illuminating.

  • It seems our industry has no end of myth. “Education is key to boosting penetration rate in the reverse market. It’s key to raising awareness, to acceptance and ultimately, to greater absorption of the product among eligible seniors who aren’t borrowing because they lack information or grimace because of what they heard from a friend.”

    There is no evidence that this is true. In fact there is now research reporting that 97% of seniors have heard of HECMs and 83% knew that reverse mortgages allow seniors to take wealth out of their home. Yet only 43% knew that reverse mortgages are loans. On the second most important point about reverse mortgages, seniors are at best confused. What does that say about the content of our education? ( http://reversemortgagedaily.com/2015/11/19/research-reveals-factors-influencing-consumers-reverse-mortgage-acceptance/ )

    Look at our endorsement history. Starting in September 2010 there was a huge drive to put forth education on Savers and Standards. We had three and one-half years of relative stability. Yet when the rest of the residential home mortgage industry was recovering, we were still in endorsement decline. Education did little to improve endorsement numbers.

    Then we had the Extreme Summit. Its purpose was to educate and change perspectives on HECMs. It could not even get off the ground. Once again our current education content failed us. All of the time not only are endorsement annual volume on a general downward trend but so are our conversion rates.

    Not only do we need a substantial change in our education content but we also need to recruit those who can reach financial advisers. Without these changes, people like Reza will be reasoning two years from now at the fiscal year 2018 national convention on how to return to the fiscal year annual endorsement numbers we “enjoyed” prior to October 1, 2015. By then lower endorsement volume may have led to lower permanent premiums.

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