A lot has changed for the reverse mortgage industry in the last few years. For the first time in what seems like a long time, there aren’t any major program updates looming on the horizon. And now that the industry has adjusted to the brunt of new rules and processes, in what has been year after year of adaptation, it seems that 2016 may finally signal a return to normalcy, at least to some degree.
In less than five years, the Home Equity Conversion Mortgage (HECM) program has experienced nearly a total reworking of its structure, including tweaks to how much loan proceeds borrowers may access, updated eligibility qualifications and even the elimination of the widely popular fixed-rate, full-draw product.
All of these changes were largely implemented with the multi-pronged intent to increase borrower protections, limit the potential for default and minimize risk of losses to the Federal Housing Administration’s Mutual Mortgage Insurance Fund. But now that all of these changes have taken effect, and for once there aren’t any further substantial changes planned for the HECM program in the near future, what does the year ahead hold in store for the reverse mortgage industry?
To get an idea of the reverse mortgage outlook for 2016, RMD caught up with John Lunde, founder and president of Reverse Market Insight, to hear his thoughts on how recent program changes have impacted industry volume over the past few years and what to expect as this year unfolds.
RMD: 2015 ended in the neighborhood of about 56,000 units—up 6.6% compared to 2014, though down 7.4% from 2013, when the industry last cracked 60,000 units in a single year. In 2014, Principal Limit Factor (PLF) cuts appeared to be the driving factor that dragged down industry volume that year. For 2015, can we attribute last year’s production to the impact of the Financial Assessment?
John Lunde: Part of the reason we were higher in 2015 than 2014, from an endorsement perspective, is was simply because most of the year endorsements were not impacted by Financial Assessment yet, at least in a negative way.
We really didn’t see that impact start hitting endorsement figures until the end of September and October; so we had January through August that was pretty much unscathed and even benefitted in June-August of people rushing to get in before Financial Assessment.
RMD: In 2015, from June-August, the industry saw some of its highest volume months, with each month exceeding 5,000 units. Then we saw a decline in September, then October and again in November, before volume picked up a little in December to close out the year. Has the industry yet realized the true impact of the Financial Assessment on volume, or could we expect further months of declines and disruptions?
JL: I think it’s pretty well-baked by now from a funding perspective. We’ve been seeing things stabilize pretty well and haven’t seen a big bounceback yet. I don’t see us dropping significantly from where the industry was at the end of the year from an endorsement perspective.
RMD: In 2014, the industry was anticipating the impact of the PLF cuts. In 2015, it was the Financial Assessment that became top-of-mind. Now, it seems that for the first time in a while there are not any major HECM program changes on the horizon. Do you see 2016 as a potential rebuilding year?
JL: I think so. The industry has always been very resilient. In 2014, it wasn’t so much the anticipation of the PLF cuts; it was the reality of initial utilization restrictions. That was pretty much a whole-year event and the industry clawed its way back from that. As the Financial Assessment has been baked-in now, I’d expect to see a recovery from where we’re at now, but it just takes time.
The fact that we don’t have negative headwinds for the first time in a long time, I think we’ll actually get to see where the industry goes with some of the recovery that has always happened after any changes we’ve seen.
It’s going to take time, though. So I don’t think 2016 is going to be setting any new records or anything. We’re a different shape from last year—last year, the first months of the year were stronger and the last four months were weaker. This time, expect to start off weak and hope to finish the year strong.
RMD: Do you think the reverse mortgage industry can get above 60,000 units in 2016? Is it possible?
JL: It’s possible. I think we’re going to start the year basically at a similar level to what started off last year; somewhere in the low 4,000 range. If we assume straight line growth, in order to end 2016 above 60,000 units, the industry would have to end the year at a monthly rate of something a little less than 6,000 units, which is a pretty tall order.
If we end the year in a similar place to where 2015 ended, a very different trend line would qualify that as a win and put us on pace for much better progress in 2017.
RMD: In your opinion, what must happen for the industry to climb its way back up to 60,000 units and beyond?
JL: We can talk about the math, but I think from a business perspective, there have been two things that have changed from Financial Assessment and some of the refinance policies that have been put into place, which have taken part of the traditional market away from the industry.
FA cleared out some of the borrowers that were in the most desperate financial need, so the industry has to replace that slice of the market that is now gone—replacing borrowers that do not fit the profile with those who are using reverse mortgages as a financial planning tool or middle market retirement tool. There is plenty of opportunity for that, but change takes time.
Secondly, from a refi perspective, the rules have become stricter around refinances. That was an easier customer to find and market to—they’re a motivated customer.
In many ways, the industry is getting back to basics; finding new borrowers and how to appeal to the broader borrower-base that is out there. But it takes time to evolve and adapt marketing and sales to serve that new borrower.
Written by Jason Oliva