Researchers Look into Reverse Mortgage Crystal Ball

By the time you’re reading this, it’ll be too late for reverse mortgage borrowers to complete the process — from counseling to application to case number — ahead of the October 2 roll-out of lower principal limits and higher mortgage insurance premiums for certain applicants.

So RMD figured it was time to start looking into the future — specifically regarding the financial-planning uses of the reverse mortgage, which had contributed to the rehabilitation of the product’s image among the general public.

We looked to two of the most prominent voices in the world of academic inquiry into the Home Equity Conversion Mortgage, American College of Financial Services professors Wade Pfau and Jamie Hopkins, to find out where they see the reverse mortgage in the post-October 2 world.


Change comes fast

Hopkins expressed surprise at the speed of the Department of Housing and Urban Development’s rule change, which was first announced at the end of August — giving the industry about five weeks to prepare.

“That’s a very close deadline,” Hopkins told RMD. “A lot of times, you’re thinking six months to a year out ahead, and not basically less than two months.”

But he pointed out that even more so than other regulated industries, the HECM space must maintain a close, cordial relationship with Washington, and thus couldn’t do what other industries might have considered in the situation: filing a lawsuit to obtain an injunction.

“That’s never really been a thing in the reverse space,” Hopkins said. “If you start suing the government … it gets weird very quickly.”

Worry may be overblown

In separate interviews, both Hopkins and Pfau sought to downplay the potential for a major sea change in the reverse mortgage industry: The program still has great value, both told RMD, and it may simply be up to lenders and brokers to tweak their strategies slightly.

For instance, many had pointed out the potential death of the so-called “ruthless strategy,” in which borrowers take out a standby HECM line of credit and wait to cash out until it significantly increases in value. While there was speculation that the promotion of this technique among academics and the industry led HUD to clamp down on principal limit factors, Pfau said that the niche strategy was never popular enough to put the Mutual Mortgage Insurance Fund in peril on its own.

“I do not get the impression that this option has become popular enough to become a problem for the insurance fund; however, it is hard to say exactly how much current HECM holders are thinking to use the line of credit in this way,” Pfau told RMD via e-mail. “But overall, I think this is more of an effort by the government to slow down these strategies before they did become more of a problem.”

If anything, Hopkins said, more limited credit line growth under the new structure may make the products more attractive to consumers by eliminating the “too-good-to-be-true” factor.

“That very robust line of credit growth, I actually think that might have been hard for people to really believe,” Hopkins said. “I think a more reasonable-looking line of credit growth, with some limitations, actually feels more powerful from a marketing and consumer standpoint, where I’m more likely to believe it when I hear it.”

Still too early to tell

Both Hopkins and Pfau admitted that it may still be too early to tell the exact effects, with the real verdict handed down once HUD begins endorsing loans after October 2.

“It remains to be seen what effect this will have on upfront costs for opening a line of credit,” said Pfau. “If costs rise, then planners will need to take this into consideration.”

Hopkins also emphasized that while the changes may seem earth-shattering to people who work in the industry every day, consumers may not necessarily see it that way.

“It’s significant to the people who get the details, and it’ll be significant in the short term,” Hopkins said. “But I’m not sure that these changes, to the consumer, really matter. Dropping down the amount of money people can get from the house — most people weren’t taking the previous [maximum] amount up front.”

He did admit that endorsements will likely decline after a September and October burst. But in the end, according to Hopkins, the principal limit factor shift of 2017 will likely go down as a blip, not a time when the industry changed forever.

“I would expect a pretty big bounceback early next year, to the levels we were seeing,” Hopkins said. “From a consumer standpoint, it will be minor, especially in the long run. I think in a year, we’re not going to be looking back and cursing the October 2 deadline.”

Written by Alex Spanko

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  • The article claims that “…the real verdict handed down once HUD begins endorsing loans after October 2.” Expecting any start to a verdict before February 2018 is a little too premature. Between now and February 2018 almost all endorsements will have a case number assignment date before October 2, 2017. No “verdict” will come before February 2019, if then.

    It seems the endorsement count for fiscal 2018 will most likely be a forty-six/fifty-four split as to HECMs with case numbers assigned before 10/2/2017 and after 10/1/2018. This is based solely on 1) an earlier estimate made by Mr. John Lunde of a 25% drop in endorsements with case numbers assigned after 10/1/2018 and 2) an estimate of a 20% increase in endorsements for the first four months of last fiscal year. By this estimate, total endorsements will be about 48,000 or a little higher number of endorsements than the current pattern of secular stagnation yields. As to Mr. Lunde’s estimated drop, see

    While Mr. Hopkins claims: “I would expect a pretty big bounceback early next year, to the levels we were seeing,” he does not tell us what will bounce back early next year, he does not tell us if that is endorsements or originations. It would seem that Mr. Hopkins is talking about total endorsements for fiscal 2018 of about 52,000, a drop of about 3,000 endorsements from the fiscal 2017 total endorsements of 55,233. This estimate for fiscal 2018 is based on first quarter of fiscal 2018 being based on a 25% drop in total endorsements for the first quarter of fiscal 2017 and the endorsements for the remainder of fiscal 2018 being the same as in fiscal 2017.

    Although Mr. Hopkins could be right, I find the arguments of someone far more familiar with endorsements, Mr. Lunde, to be far more compelling. than the assumptions of Mr. Hopkins. It is my belief that we will see total endorsements for the first four months of fiscal 2018 equal 120% of the total endorsements for the first four months of fiscal 2017. It looks like the endorsement total for the remaining eight months for fiscal 2018 will be 25% lower than that same total for fiscal 2017. The result is 46,000 which is insignificantly closer to the answer that the model for the current pattern of secular stagnation provides. So unless we come close to breaking the current patter of secular stagnation (but not secular stagnation itself) as Mr. Hopkins seems to be predicting, the current pattern of secular stagnation seems as if it will prevail even in fiscal 2018 despite the reason for its cause.

    It is hard to believe that the current downward sloping classic peak to valley pattern of secular stagnation has continued for five years and now it seems we are heading into the sixth consecutive year of this pattern.

  • IMO, the October 2 changes will mark the end of the discretionary HECM borrower – typified by the “Standby Line of Credit” – and a return to a predominantly needs-based borrower profile, especially among owners of higher-value homes.

    A 2% IMIP coupled with a full origination fee – totaling almost $19,000 in transaction fees on a max MCA property BEFORE adding third-party costs – is too high a hurdle to clear in the absence of a current, and perhaps even pressing, need for funds.

  • It is disappointing to see independent members of personal finance academia getting caught up in endorsement speculation. Hopkins in particular tells we will have a verdict once HUD begins endorsing loans today which once again displays novice regarding the reverse mortgage business. It is not that Hopkins is not free to speculate but such wild speculation detracts from his reputation in the field of reverse mortgage financial strategies as did the speculation on the effect of the DOL fiduciary rule on the need of financial advisers to seek out our expertise.

    It takes between 3 to 4 months for the average HECM to go from case number assignment to endorsement, depending on endorsement volume and the time of year. We saw that in particular in September 2015 with financial assessment. The highest month in fiscal 2015 for case number assignments was April 2015 but for endorsements, it was August 2015 with a strong tail of endorsements in September 2015 (the fifth lowest month that fiscal year), while case number assignments for May 2015 were the lowest for any month in over a decade. What the monthly endorsement activity through January 31, 2018 or even February 28, 2018 is the closing activity of HECMs with case number assignments through October 1, 2017 but very little, if anything, about HECM closings for applications with case numbers assigned after October 1, 2017.

    Where we need help is in finding new streams of demand. Our endorsement count for fiscal 2017 was 55,322 putting it almost in line with the speculated 56,000 endorsements based on the current pattern of downward sloping classic peak to valley secular stagnation that .
    ///8874w/e have experienced for the last five consecutive years. While industry leadership may not want to read this, it is fact and not myth. Instead of disproving the point or proactively trying to cure it, industry leadership seems interested in trying to eliminate the voices who bring it up. Yet once the voices of Alvin Hansen and Larry Summers fully develop the cure, finding new streams of demand. When I came into the industry, industry leaders were telling us that HECMs had streams of income. That was clearly myth but new streams of demand seem worthwhile developing.

    We would be far more benefited as an industry if Pfau and Hopkins focused on helping us develop streams of demand than speculating into endorsements which at least Hopkins has shown he does not understand its intricacies. I strongly suggest lender leadership PROACTIVELY encourage the finding of more streams of demand over novice speculation about endorsements. Endorsement speculation is more the domain of Lunde and myself.

    Except for the first four months of fiscal 2018, I find myself agreeing with the 25% drop in new endorsements this fiscal year but my opinion is that will only be true in the last eight months of fiscal 2018. I opine that the first four months of fiscal 2018 will be 20% higher than the first four months of fiscal 2017 (which only represented 30.9% of all fiscal year 2017 endorsements). This prediction of 45,700 endorsements is in line with that provided by the model for our current pattern of downward sloping classic peak to valley secular stagnation of about 46,200 endorsements in fiscal 2018. If endorsements are in that range, we will remain above the endorsements of 43,131 for fiscal 2005, the next lowest year for endorsements. Yet based on the 25% drop for endorsements in fiscal 2018 predicted by Lunde when compared to fiscal 2017, what we find Lunde predicting is a much gloomier total of about 41,500 endorsements.

    Will the current pattern of secular stagnation continue past 2019? Most likely the answer is yes, since the model would expect about 6,400 more endorsements in fiscal 2019 over fiscal 2018. What about beyond fiscal 2019? For now this juror and his speculative verdict are out. I would hope that the current pattern of secular stagnation would not follow us into the next decade even if secular stagnation does. I am just hoping that the predicted low of 45,700 holds both for fiscal 2018 and all fiscal years thereafter.

  • That’s a good point: ““From a consumer standpoint, it will be minor, especially in the long run.”

    It was just recently that there were articles about the conclusions drawn from “ordinary consumer/would-be borrowers” focus groups where a more than a significant percentage of people (participants) were unaware of the Line-Of-Credit’s potential; they were vaguely aware of a growth aspect, but not the considerable rate of growth in the Line-Of-Credit.

    On one hand, the HECM is after all intended for those who need it to supplement their income over what may be a long period of inflation-flamed expenses throughout their years of retirement. So, (we’ll assume for argument-purposes) the government decided to preserve this unique integrity for “seniors who need it” and take steps to discourage those more affluent seniors who would take advantage of the HECM program; for reasons of financial expediency.

    On the other hand, the problem with that is, the gummint is throwing the baby out with the bath water, leaving the seniors who need it with less than they had in the first place.

    There seems to be a glaring inconsistency in logic here. To the point of, where, the questioning of motives may apply. I believe that it’s just a matter of the government’s tolerance of the middle class having a financial loophole to their (the borrowers) benefit is “against their (the government’s) religion.”

    If the government was actually, truly concerned about the HECM program only benefiting the “cash poor, property rich” segment of retirees, then why don’t they set-up a means-tested tax-limit on those more affluent retirees who would aggressively exploit the program (the “ruthless strategy”)? Then, obviously, the seniors who really need it, could continue to get it (the current value-to-loan ratio and insurance premium rate).

    When “we all” sign a contract, which a HECM is, we’re obligated to the terms “in perpetuity.”
    The government seems to be the only “player” who ever “gets to” change the rules in the middle of the game. When they do, they always at least pretend that there’s a good reason behind the change, and that hardly stands-up to close scrutiny in this situation.

    But then, of course, no one will win or lose an election on this, as they might in eliminating, say, the forward mortgage-interest-deductions in a tax bill.

  • kevin v,

    There are those of us in the industry who believe you are right as to being adverse to relying on the referrals of financial advisers as our principal source for growing out industry sales. Over the last five years, I have even heard some of the best known industry proponents of working with financial planners complain about the reception HECM originators receive when meeting with financial advisers and how low the benefit of receiving referrals really was.

    I first heard the idea of emphasizing not just financial planners but financial advisers of every stripe (but what seemed to boil down to independent asset managers) at a NRMLA West Coast breakout session about six years ago. There the sales management team from MetLife under the direction of a prominent HECM sales management veteran instructed us on how to meet financial advisers and (entice them by) “helping” them see that they can use HECM proceeds to “enlarge” the asset base at a crucial time in the decumulation phase in the life cycle of their customers and by that increase their management fee base.

    Yet in the years before 2011, many industry veterans warned that if the industry begins relying on the good graces of the financial industry as our principal source of sales, we would be sorely disappointed and growth could be setback for years.

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