New policy changes for the Home Equity Conversion Mortgage (HECM) program in recent years have had a lasting impact on the reverse mortgage sector. As the industry continues to adapt within the new marketplace, they face one of the lowest years for volume in recent memory.
Just how low industry volume will finish in 2016 depends on what happens with application and loan funding activity during the third and fourth quarters of this year. But with the first six months of 2016 already in the books, the second half outlook appears to put the reverse mortgage industry below the year-end volume total of 2015, as well as other recent years.
HECM endorsements totaled 20,871 units year-to-date (YTD) through May 2016, a decrease of 9.4% compared to this time last year, according to the latest HECM Trends report released by RMI this month.
While the June report has not yet been released, doing the math, YTD endorsements through the first six months of 2016 will total somewhere in the range of 24,600 units—putting the reverse mortgage industry on track for one of the lowest calendar years for volume in recent history.
“The industry has struggled to recover significantly from the Financial Assessment,” said John Lunde, president of Reverse Market Insight (RMI). “It has definitely been a long time since we were this low halfway through the year.”
Full calendar-year endorsements peaked in 2008 at approximately 115,000 units, according to industry data tracked by RMI over the years. Since then, volume has been on a steady decline with a few hiccups along the way.
One of those hiccups occurred in 2013, when endorsements totaled 60,929 units during the calendar year, representing an increase of 15% from the previous year’s annual tally. The next year, endorsements plummeted to 52,949 units—a level not seen since 2012, when the industry finished the year with 52,992 loans.
Whether 2016 volume sinks lower than 2015, or falls further from recent year-end totals, remains to be seen as the year unfolds. Even comparing YTD endorsements through the first six months of the year doesn’t offer much insight as to how volume will shake out during the second half of the year.
The road backwards
It goes without saying that the first six months of a year differ from the last six months. Seasons change, temperatures cool down, and big-time holidays like Thanksgiving and Christmas punctuate the culmination of yet another year come and gone.
As for reverse mortgage volume, endorsements collected during the first half of the year don’t necessarily set the pace for what happens in the latter half. If the results from recent years can serve as any indication, volume is typically lower in the second half of the year compared to the first half, though there have been a few exceptions.
One such exception in recent years was 2010. A big year for volume—relative to recent years—2010 finished the year with about 72,748 total units, according to RMI data. Most of this total amount came from 36,932 units produced in the second half of the year, while the first six months totaled 35,816 units.
The trend of higher endorsements during the second half of the year didn’t hold up in the years following 2010, although last year was close, with 28,343 units reported during the first half and 28,020 units during the second half.
To compare what’s happening this year with a point in time closer to today’s endorsement production, rewind to 2005. Back then, endorsements came in around 48,400 units for the year. Through the first six months, volume was just under 21,000 units, according to RMI.
“Thinking about 2005—we were on the way up,” said Lunde, noting that the industry was on the upswing both in terms of heading into the second half of the year, as well as seeing a huge uptick to 85,600 units in 2006 and then 108,287 units in 2007. “The second half of the year was considerably better than the first half to get us to 48,400 units—almost over 30% better than the first half.”
This year resembles a “flatter shape” to endorsement volumes—not so much a repeat of 2005 levels, Lunde said.
“It’s just kind of where we are on our road backwards—we’re now back to 2005 levels in 2016,” he said.
Apart from endorsements, RMI also tracks data on HECM applications and funding activity. Based on its data collection, Lunde said he hasn’t seen much evidence that could possibly lead to significant volume growth in the coming months.
“I’d be surprised if we saw any significant increase in endorsement volume in the next three months,” he said. “Fourth quarter endorsements will be based on what happens in Q3 here. Depending on what we see in Q3 on the application and funding side, Q4 could be better.”
Even though the data suggests 2016 is likely to be one of the lowest years for HECM endorsement volume in the last decade, demographic potential, including the vast amount of home equity held by age-qualified prospective borrowers, presents a multi-trillion-dollar opportunity for retirees to tap into their housing wealth.
Homeowners age 65 and older command $3.1 trillion of the nation’s accessible housing wealth, representing approximately 44% of the $7 trillion in net housing wealth that is accessible among American homeowners, according to an Urban Institute study published this month.
A self-admitted optimist, Lunde views the future of the reverse mortgage industry from a long-term perspective.
“You need to survive the short-term to get to the long-term,” he said.
The problem is no one really knows what will be in store for the industry over the long-term. There is, however, some reassurance in the demographic trends posed by aging of the U.S. population and the growing number of households that could potentially benefit from reverse mortgages.
“There is certainly an increased awareness [of reverse mortgages] and it seems as though a lot of the PR struggle has been considerably better and much more positive lately,” Lunde said. “Over time, we’d expect both of those things to lead to higher numbers of loans being written, but I don’t have any crystal ball that tells me when that will start happening.”
This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.
Written by Jason Oliva