Reverse Mortgage Brokers See Slow October With New Rules in Play

It’s been less than four weeks since the Department of Housing and Urban Development made major changes to the reverse mortgage program, but brokers say they are already feeling the impact. September saw a flurry of activity as many worked to push loans through the pipeline before the changes to principal limits and insurance premiums took effect October 2. But now that the new rules are in play, many say activity has come to a near halt. 

Jimbo King, a broker with McGowin-King Mortgage in Birmingham, Ala., says the September rush was a strain.

“It really crashed the whole system, from the counselors to the brokers,” King tells RMD. “Everybody was overwhelmed. Since then, turn times have slowed. I expect we’ll go dark for a while.”

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Glen Smart of NOVA Home Loans in Tucson, Ariz., says he spent September working through his entire prospect list. Now that the rules have gone into effect, business is slow.

“After Financial Assessment, we went through the same thing. We were slow for a while before it picked up again. Right now new applications have crawled to next to nothing,” Smart says.

Smart says that he has had a number of prospects who have been negatively impacted by the new rules.

“We’ve unfortunately had a significant number of folks who would have been better served under the old principal limit factors. Now they have to bring in cash or it’s no longer effective,” he says. “It’s unfortunate, the number of folks who won’t be helped now. They are almost paying a penalty for the old book of business.”

Bracing for a decline

Many brokers say they are bracing for a drop in volume and revenue — at least in the near term.

Lynn Wertzler of Greenleaf Financial in Portland, Ore., says this is inevitable.

“There will be those marginal borrowers who would have been just barely feasible under the higher principal limits, and now they will be under,” Wertzler says. “So I think we’ll see those people drop by the wayside. Whether we’ll see a decline of 20 or 30 percent, I’m not sure, but I do think we’ll see a decline.”

Mac Tennant of Access Reverse Mortgage in Clearwater, Fla., says he’s tweaking his business model to adjust to a 40 percent decline in revenue. He says the higher upfront MIP is part of the problem. 

“The principal limit is not a big deal, but we are getting pushback on the closing costs. The sticker shock that used to be there is back again,” he says. “We always gave closing cost credits and were able to reduce our pay in some cases to cover all of the customer’s closing costs. Well, under the new rules, that’s really tough to do. The only way to get that money is to jack the margin up, and that impacts principal limits pretty dramatically now.”

Tennant says brokers will end up taking a hit: “I don’t see any way that we’re not going to see a massive reduction in revenue per deal.”

King says some might be forced to either charge or increase origination fees to recoup a portion of the loss, but this too might be a challenge.

“When your loans have a high initial MIP on the closing costs, there’s pressure for us to give on the origination fee, but we’re already going to be making less on the back end,” King says.

Rethinking the marketing

Many say the new rules have forced them to reassess their marketing.

“The challenge is a lower return on investment for most lead generation now,” says King. “With a TV ad, for instance, you’re going to lose an additional 20 percent of the market under the new program, but they are going to charge you the same. So that gets tougher.”

Tennant says the new rules might force people to change their business models.

“I can’t see a company that is dependent on spending a lot of money on marketing in whatever manner—buying leads or lead transfers or TV or whatever they’re doing—how they are going to make it. I don’t see how that business model works anymore,” Tennant says.

Weeding out the uncommitted

Smart says that the tumultuous landscape might discourage part-time participants, and that is a positive.

“Because it’s a bit more complicated on the origination side with principal limit factors changing and the floor changing, it might drive the people who dabble in reverse mortgages out of the marketplace,” Smart says. “You’re not going to do one or two a year and have any idea what you’re doing. It’s going to be left to the people who do this full time. In that respect, it’s a positive. It’s going to drive out the ones and twos and leave it to the professionals.”

King agrees.

“I think this could thin the herd—get some of the onesies and twosies out of the business,” King says.

Written by Jessica Guerin

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  • This information should not be surprising to industry participants. After all wasn’t John Lunde just quoted in a recent RMD article that he expected demand to drop by 25%. That seems well reasoned although it could be less. But since John is the recognized industry analyst and his percentage seems reasonable, there is no reason to confuse the issue.

    But the first four to five months of this fiscal year should have significantly higher endorsements than last due to strong case number assignment information for July and August 2017 (the latest information as of 4PM ET). Endorsements should fall off substantially in the remainder of fiscal 2018 bringing total fiscal 2018 endorsements down from their total for fiscal 2017 of 55,322 to around 46,000 to 50,000 for this fiscal year (the current pattern of secular stagnation suggests around 46,000 while calculated projections based on estimates brings it in at 50,000).

  • John,

    Your point of view is most interesting. You want to shine on the one fact that was the primary focus of this post, lower demand and the its root cause. You also adopt the speculation of proportionately lower part-time originations in relation to full-time originatiors.

    You are exactly on point to encourage originators to reach out to create more demand in new market segments. Lower demand is with us and for some who have been barely hanging in, part-time or not, perhaps it is time to move on but moving too fast may mean lost income.

    I strongly believe that demand will not return before fiscal 2019 but then that is a belief based on prior patterns of demand after similar FHA changes. Lower demand is not just about pull forward impact of applications due to Mortgagee Letter 2017-12 but also the new but significantly lower demand for HECMs after the implementation of the changes in that mortgagee letter.

    You have presented some great points but your interpretation is overly optimistic which takes away from their punch of those points.

    • Cynic,

      You may be right, I have a tendency of taking the optimistic point of view!

      I realize I also have to be a realist but I still feel if we can adapt quickly enough to the change and seek alternative markets to plunge into, we can pull it out!

      It may be a long shot and I do agree that you make very good realistic points!

      John A. Smaldone

      • John,

        What is needed is not a vague reference to alternative markets than our present “Red Ocean” but new markets as well.

        A few years ago the “Blue Ocean Strategy” was in vogue in the industry. Despite years of frustration in cultivating referrals from the financial advising community suddenly the proclamation went forth that HECMs were now specifically designed for THAT industry. That claim was nonsense. Yet those who made the proclamation do not want to be held accountable for making it.

        Remember the Extreme Summit, well it was based in large part on trying to claim that the NEW strategies were working. That using HECMs could hedge sequence of return risks on investments. Then I cited an article from Golden Gate Financial incorporating the concept but dated in the prior decade. Somehow that was bringing rain on someone’s parade.

        Accountability seems to be a lost virtue in our industry. Some still hold onto it as expressed by Yup in a comment in this thread when that originator presents disgust with having to take more fees from HECM proceeds just to avoid leaving the industry. Yup is not alone in that feeling. However, it is also true that in the era when Fannie Mae was the exclusive (pre-2007) or dominate acquirer of closed HECMs (pre-2009), the origination fee was the part of the origination revenue that an originator participated in. Yet Yup does show a conscience in that we see gouging to some degree in the industry right now.

      • Cynic- Thanks for the positive comments. Nothing irks me more then people taking advantage of a Senior. During those years I did charge an origination fee also. How many principal limit reductions has there been since then? 3 or 4? So IMO it was easier to swallow charing that fee.

      • Cynic,

        You brought up many good points. I remember the FNMA days, pre-2007 very well.

        As far as gouging in our industry today, no doubt it is going on. As far as the origination fee, it appears it is back again!

        John A. Smaldone

  • I was excited about the changes and the wave of people that would leave the business. After all the Reverse Mortgage space has gotten too crowded. After selling the new loan for the past few weeks its hard to be optimistic about it. I agree 100% with the originators from the article

    I personally do not feel right selling high margins and taking even more cash away from a Senior. Pricing across the board is not pretty. The margins are too little now. So i am forced to sell a full origination to make any money and it just looks so bad. Its hard to get behind the program now, and I believe you need to believe in your product in order to be successful.

    I have been selling Reverse for over a decade and have spent a lot on marketing. Its going to be impossible for anyone to market (with todays lead prices) and run a successful marketing campaign. Even if you are selling a high margin and trying to charge an origination its going to be tough, and you are most likely going to be under cut. The risk reward is not there IMO.

    During my career I have spent many hours networking for referrals and its never panned out. Most seniors still do not like admitting they took a Reverse Mortgage. I have yet to meet with a financial advisor (in NY) that is even allowed to refer a Reverse Mortgage. I have asked many industry leaders if they know of any successful originators on a referral only basis and I haven’t heard much.

    If you think its going to be tough for wholesalers its going to be even uglier for retail. They needed the higher margins to pay for the very expensive cost to have lo’s. The retail compensation model is much different then the wholesale compensation model. The only positive I see is that there is going to be a lot of people leaving the business. The next 12 months is going to be tough for Reverse only Originators.

    I already started hitting realtors to supplement my income. This was a valuable lesson for me. I allowed myself to become a one trick pony, and I am going to work three times as hard this year to do well.

  • Frank,

    Pearls of wisdom.

    Yet somehow we need to tap some part of the over 98% of the seniors who do not have HECMs. (Today there is about 550,000 HECMs active with another 50,000 or so in the unassigned pool. The US population over 62 years old is over 58 million.)

    How do you suggest we do that?

    • Education and word of mouth. I am not talking about commercials, I am talking getting news articles out there that educate. This cannot be a one off thing where the local newspaper puts out something once every three years, but getting them to talk about HECMs regularly. It could be letters to the financial guru, letters to the editor, newspaper stories about HECMs that work, etc.

      Along with that, you need word of mouth. Seniors have to understand that getting a HECM is not something shameful, or even last resort. It is as much a financial tool as any other financial tool in their quiver. Seniors do not generally share that they have a HECM because, for years, it was treated as a tool of last resort. It is not. It is one, of many, strategies that a senior can utilize.

      Somewhere along the line HECMs got tagged as being a tool of last resort. The only people that got them were those in desperate need. Part of this I lay at the door of counselors. That is how I was trained more than a decade ago, and many counselors never got beyond that. Part of it I lay at the door of financial advisers, probably for the same reasons. And part of it I lay at the door of the industry who started to sell it that way because of the counseling and the financial advisers. Over the years, particularly as I saw the diversity of the people coming through my counseling sessions, I learned that HECMs are not a tool of last resort, they are one tool among many. They need to be utilized properly, but as every human being is different, there is no one, true way to utilize the various financial tools. Deliberately limiting them is a mistake, and as an industry all of us, salespeople, counselors, underwriters, etc. need to start to not only understand that, but educate others.

      It will not happen immediately, but we at least have to try.

      Frank J. Kautz, II
      Staff Attorney

      Community Service Network, Inc.
      52 Broadway
      Stoneham, MA 02180
      (781) 438-1977
      (781) 438-6037 fax
      FrankKautz@csninc.org

    • Oh, one last addition. Get TV characters to talk about it. Find a way to get it discussed, realistically, on made for TV movies (particularly places like the Hallmark channel watched by many seniors), serious dramas (I would avoid comedies, too much chance to screw things up), etc. It does not have to be a product placement for a particular company, but imagine the impact Tom Selleck would have if, instead of a commercial, he had the discussion with his father on Blue Bloods?

      People generally understand a typical 30 year fixed mortgage. They understand adjustable rate mortgages. Very few understand HECMs.

      Frank

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