New Reverse Mortgage Rules Expected to Cut Volume, Margins

After a predicted September surge, reverse mortgage endorsement figures could take a significant hit once new principal limits and mortgage insurance premiums take effect October 2.

The short-term effect could be the same as when the Department of Housing and Urban Development instituted Financial Assessment rules or made principal limit factor (PLF) changes in the past, according to Reverse Market Insight president and founder John Lunde — meaning a drop of 25%. 

But an impending dip in endorsement data will only be one of the problems facing the industry in the coming months, as lenders face a serious drop in revenues.

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“I believe this round of changes is bigger than any of the other prior rounds of changes, primarily because of the reduction in the expected rate floor in calculating PLFs,” Lunde told RMD in an e-mail, adding that the per-loan drop in revenue could be 50% or more.

“Put those two factors together, and the revenue change picture is going to force a lot of cost reductions for lenders,” Lunde said.

Now that the expected “floor” is gone, many lenders will have to compete on rates, making the Home Equity Conversion Mortgage landscape look a lot more like the traditional “forward” lending market, Nationwide Equities president Glenn Wallace told RMD. 

“It’s going to get much more competitive out there,” Wallace said.

In the wake of the announcements, the Mahwah, N.J.-based Nationwide plans to take a close look at its expense structure, redouble its efforts to promote the HECM for Purchase products, and provide loan producers with more marketing materials to boost their competitive advantage in the more cutthroat market ahead, Wallace said. 

Paul Lamparillo, Nationwide’s CEO, said the company will also explore expanding its forward lending space and expanding its small call center, launched within the last three months, as it pursues new business instead of HECM-to-HECM refinances. 

“What you have to do is look at your expenditures,” Lamparillo said. “You have to be a little smarter, a little more crafty in your marketing approach.”

Silver linings

While he admitted that the “ruthless” strategy — taking out a reverse mortgage line of credit and only cashing out when the available funds were worth more than the home itself — may be less appealing now, Lamparillo said the HECM credit line can still be useful in riding out down markets or unexpected expenses. In fact, the day before speaking with RMD, Lamparillo applied for counseling so he could take out a reverse mortgage line himself.

“The math speaks the truth — the cost of the MIP versus having that availability in the event that it’s needed — so I think that will still be attractive on a personal basis,” Lamparillo said.

Both Lamparillo and Wallace emphasized that they understood HUD’s desire to shore up the Mutual Mortgage Insurance Fund, and Lunde said the changed HECM will end up being an overall better product for consumers — which could end up leading to higher volume over the next few years.

Private jumbo products could also become more competitive now that the HECM is more restrictive, Lunde said.

And in the end, it’s important to remember that it may be too soon to tell exactly how the changes will shake out over the coming years.

“It’s like throwing darts,” Lamparillo said. “Everybody’s speculating. But the fact is, you have to sit down and reevaluate your business models.”

Written by Alex Spanko

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  • Without industry wide revenue data it is hard to reasonably estimate the loss of revenues to the industry. Per Mr. Lunde, his guess is that total industry revenues will be about 37.5% of what those same revenues will be for fiscal 2017. In other words if origination volume drops to 75% of what it was for fiscal 2017 and premiums drop by 50%, premiums paid by Ginnie Mae issuance buyers, revenues will only be 37.5% of what they were in fiscal 2017; this amounts to a loss in revenues of 62.5%.

    Obviously any overall industry loss will experience by each lender differently. If Reverse Vision is right and the number of TPOs and approved lenders now using their software is up and they have any volume at all, long-term industry lenders could see revenue reductions of up to 70%. Some may call this pessimistic or cynical BUT these are mere adjustments to the normally optimistic views expressed by both Reverse Market Insight and Reverse Vision.

    Now let us turn to NRMLA. In the midst of this new future, will NRMLA have sufficient revenue to continue its programs unabated or will they have to pick and choose as would be expected. If industry support and promotion for the CRMP program has been constrained in the past, it will no doubt be more so if total industry revenues are as low as Mr. Lunde (as revised using Reverse Vision data on new origination companies in the industry) predicts.

    If the 25% drop in volume is true, its seems we will not stay in secular stagnation but slip into a horrible loss position; however, if case number assignment volume significantly climbs this month, our volume this fiscal year could drop by 20% leaving endorsements in the position of still technically being in secular stagnation with a downward slope. That would mean an industry wide drop of 60% of the revenues we experienced in fiscal 2017 which is better than 62.5%.

    While some may be ready for revenue losses of this nature during fiscal 2018, few of us are. The only question left is how long will the increase take to where are we see higher endorsements than this fiscal year? Who can tell? We have NOT even started fiscal 2018 yet.

    I would expect to see cuts both in lender administrative and operations staff at most lenders as well as lower commissions to originators by the end of next fiscal year. All of this is premised on the outlook of two of our national leaders in their respective fields. We live in exciting and excitable times.

    • Dont be so pessimistic. Change creates opportunities. The reverse industry and the mortgage industry as a whole runs on change. I’m upbeat about the future of this program and glad it will be sustained going forward. We have an enormous amount of retirees out there and growing. Many will find value in this product! But…if your business relies on hecm to hecm
      refinances you need to change your marketing strategy or leave this business!

      • reverseguru1,

        Ah, the voice of irrational exuberance! You are indeed a number one reverse guru. A summary of the voice in your reply: “Take away our straw and we will build more bricks.”

        I did not provide much of my personal outlook about these changes in my original comment in this thread. I just ran the numbers provided by two normally optimistic industry participants. That is why I refer to your view as irrationally exuberant. After all it was John Lunde who told us to the NRMLA National Convention in 2008 how HECM volume would have doubled by now due to 50% of endorsement volume coming from just H4P. I do not consider John to be a pessimist, just a somewhat measured realist in his comments above.

        Just remember the most prevalent synonym for cynic is not pessimist but rather skeptic. The daydream you provide us causes me to be very skeptical of your outlook. Like most irrational optimists you fail to provide us with numbers. But as many like you would say that is part of the joy of being an (irrational) optimist.

        Not even HUD is convinced its current changes will make the program self-sustaining. So far the actuaries have told us that HECM reimbursement and assignment operations have a projected loss of over $15.2 billion. Due to the kindness of HUD, about $5.8 billion in funds from forward loan programs (of which some seniors are borrowers) have been “permanently” transferred into the HECM portion of the MMI Fund along with all of the $1.7 billion taken from Treasury in 2013, bringing the overall net asset loss position of the HECM portion of the MMI Fund to just a $7.7 billion negative.

        I remember when guys like you thought that the $798 million projected loss from the new book of business for fiscal 2010 made by the Obama OMB in May 2009 was ridiculous and made up stories about the cash losses at HUD. After reducing PLFs for fiscal year 2010, the loss currently projected for that fiscal year is $843 million so that OMB should have used $1.641 billion rather than the $798 million they did. See

        https://reversemortgagedaily.com/2009/05/07/obama-administration-requests-798-million-to-aid-reverse-mortgage-program/

        and related RMD stories and comments. Compared to $15.2 billion, $798 million seems rather tame.

        Problems are coming. No amount of irrational optimism can change that. I am sure the opportunities you expect to find will bring back over 100,000 endorsements by the end of fiscal 2018 or maybe the 300,000 that was suggested in fiscal 2013. There is no end to the good that will result when you are truly irrationally exuberant as you seemed to be in writing your reply.

      • AMEN- Reverse Guru. I have no love lost for originators focusing solely on Hecm to Hecm refinances. They will certainly struggle moving forward and will most likely leave the space.

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