Reverse Mortgage Margins Fall As Lenders Compete Under New Rules

Recent changes to the reverse mortgage program that reduce principal limits will likely force lenders to drop margins in order to stay in the game. Some say rates have already fallen and that they expect the trend to continue as lenders work to capture market share in an increasingly competitive environment.

Sherry Apanay, chief sales officer at Finance of America Reverse, says she has seen rates vary across the board since the October 2 changes.

“We are seeing a good deal of variation now. We expect this level of variation to continue for another few months until we can see data from a few more trades in order for the current variation to stabilize,” Apanay says. “We expect to see rates drift downward as competition in the space embraces the new metrics.”

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Bruce Barnes, executive vice president at Live Well Financial, also says he’s seen rates drop.

“We’ve seen competitive quotes with margins as low as 1% on the annual HECM. However, the average margin for the annual product appears to be trending at or above 2.25%.” 

Ibis Software president Jerry Wagner says there is a consistent 2% margin, for now.

“We just changed our NRMLA calculator to 2%,” Wagner says. “I imagine competition is going to bring it down even further. We’re just in the beginning stages.”

Michael McCully, partner at New View Advisors, says lenders will be forced to compete on margin to gain volume, driving the expected rate down.

“I think people will try to put out margins that create a lot of profitability, and then when they realize somebody else is putting out a margin that is lower, if they want volume, they are going to have to match it,” says McCully.

“Once a lower margin is out there, anyone who wants to continue to get volume has to meet it. And then the question becomes: How low can they go?”

Barnes says that if margins drop too low, lenders won’t have a sustainable business model.

“The difficult part is how this is going to affect the overall economics of the transaction. Certainly, it helps guard against future refinances by lowering the margin up front, so that’s good for the secondary market. But, is there enough in these same day loans for the lender to still compete and be viable given the economic changes that have taken place? That is a bit of an unknown right now,” Barnes says. 

“If we put too much downward pressure on margins and expected rates, the business will become unviable. That is the problem and that is what everyone is facing right now: how to compete in the marketplace and how to still be viable.”

Wagner says that with lower margins, and therefore lower yield spread premiums, lenders are bound to take a hit.

“I think margins are going to go all the way down to whatever the market will bear,” he says. “I think the little guys will be dropping out.”

Apanay agrees that the new PLF tables will put pressure on the marketplace, but says that the product is better positioned for success for those who work for it.

“Despite some grumblings in the industry concerning the recent changes, the future of the reverse mortgage industry is incredibly exciting,” Apanay says. “These changes really establish HECMs as more of a mainstream product, and it’s up to those of us in the industry to find ways to expand the market beyond where we’ve penetrated to date.”

Written by Jessica Guerin