Reverse Mortgage Endorsements Up in 2017, Fallout Likely Coming

Reverse mortgage lenders handily beat 2016 endorsement totals last year, aided by the rush to lock in principal limit factors ahead of major changes in October, but a predicted crash is close on the horizon.

Federal Housing Administration-approved lenders logged 56,912 endorsements during calendar 2017, according to the most recent data from Reverse Market Insight. That’s a substantial gain over the 48,794 from 2016.

Industry giant American Advisors Group once again topped the leaderboard, turning in 12,778 Home Equity Conversion Mortgages — more than double second-place Finance of America Reverse with 5,406. Reverse Mortgage Funding, Liberty Home Equity Solutions, and Synergy One Lending rounded out the top five.

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The top 10 lenders combined for 38,313 loans, or 67.3% of the total.

The September surge of borrowers racing to beat the Department of Housing and Urban Development’s October 2 principal limit factor overhaul was a major contributor to the uptick in 2017, according to RMI founder and president John Lunde.

“That creates a rush in Q4 on fundings, and then that’ll create endorsements starting in Q4, which we started to see in November, December, [and] probably continues through January,” Lunde told RMD.

But after the surge comes an expected fall: Last year, Lunde pegged the predicted drop-off in endorsements at about 25%, but he now tells RMD that it could be as high as 30% as the landscape makes things more difficult for certain borrowers. For instance, Lunde pointed out that expected rates have declined only slightly since the disappearance of the 5% rate “floor” after the new rules took effect.

“That implies that the pricing in the market is basically accepting the majority of the PLF cut as opposed to choosing to take an expected rate cut and a margin cut, and avoiding more of a PLF cut,” Lunde said.

As a result, a hypothetical borrower who owed 49% on an existing mortgage could still close on a HECM without bringing any money to the table, Lunde noted. But under the new rules, that same borrower might have to supply 6% to 7% to make the deal work, a potential turn-off.

“I think that still means we’ll see a significant hit,” he said. “I’m not sure what it is. I think 30-ish percent is as good of a guess as any.”

Written by Alex Spanko

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  • As usual endorsements follow case number assignments by at least four or more months. Some are endorsed in the first three months but by far the vast majority are endorsed in the three months that follow with most normally endorsed in the fourth month, followed by the fifth until all but a remnant are endorsed in the month six.

    The endorsements for October, November and December range from 4,597 to 4,782 which is consistent with the case numbers for June of 7,765, July of 7,433. and August of 8,905. In September 2017 we see the highest number of HECM case number assignments ever issued in a single month by FHA of 20,405. This sudden increase in case number assignments has yet to be reflected in endorsements but that should change starting with the January 2018 endorsement count.

    The HECM case number assignments issued in October 2017 was miserably low at 2,750 (the worst such count for a month in almost 14 years). Since only a portion of those (around 1,830) will ever be endorsed, it should become even clearer when endorsement normally takes place for a HECM obtaining a case number.

    For several years there was a somewhat less sophisticated argument running around that automation and technology had reduced the normal average period from HECM case number assignment to HECM endorsement but that has all but been proven to be a somewhat naive notion about the value of technology to the HECM process. In fact, FHA Single Family Production monthly reporting has been getting later and later recently.

    An October 1, 2017 RMD article states: “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.” Yet we will not see any significant declines in HECM endorsements until some time in the first calendar quarter of 2018. As usual the so called “researcher” (as proclaimed in the title of the article) shows his lack of experience and research with HECMs by ignoring the so called “four month rule of thumb” when it comes to HECM endorsements. Such lack of knowledge about HECMs generally calls into question several of the conclusion, researchers have made about HECMs.

    • Mr. Denton,

      Please provide the data for 40%. The last time we had a significant change was when financial assessment was added to the HECM process. Nationally the drop in the endorsements for fiscal 2016 (48,902 endorsements) from fiscal 2015 (58,053 endorsements) was 15.8%, not 40%.

      15.8% was bad enough.

      • Mr. Neumeyer,

        You are correct that it was low. It was the lowest in almost 14 years. Yet we have had similar (but not as great) drops in the following two month periods:

        1) September and October 2009
        2) March and April 2013
        3) September and October 2013
        4) April and May 2015, and
        5) now September and October 2017.

        Each of those two month periods resulted from a pull forward effect of significant changes made in the HECM program. It would seem there should be more over the last decade.

        We normally obtain monthly CNA totals from the monthly FHA Single Family Production Reports which first get posted as much as three plus months after the months in which the reported activity takes place. So we expect to see the November 2017 report around the end of January 2018 (or later).

    • Mr. Wagner,

      You bring up an interesting point.

      We have yet to see a similar pattern of a high month of CNAs followed immediately by a low month of CNAs reflected in monthly endorsement patterns. We saw a similar pattern of CNAs in September 2009 (over 19,000) and much lower (a little less than 5,900) in October 2009 but at no time in fiscal 2010 did we see that pattern in the endorsements.

      We saw that CNA pattern in March 2013 with over 13,600 CNAs followed by CNAs of almost 5,200 in April 2013 but again no similar pattern in endorsements in fiscal 2013.

      Again in September 2013 there is a spike in CNAs of just over 16,000 followed by a low of a little over 3,600 CNAs for October 2013. Again there is no perceivable reflection of anything close to this pattern in endorsements in fiscal 2014.

      There are other examples, but let stop here and consider why. It still seems as if the four month rule of thumb which states that it takes the average endorsed HECM four months to go from CNA to endorsement still holds true but that does not begin to account for how the endorsement pattern looks.

      It is my view that the endorsements from any one month come from four sources. First there is a small percentage that come from HECMs obtaining their CNAs about three months before endorsement. Then the largest source of HECMs endorsed in a month come from HECMs that received their CNAs about four months before endorsement. The next largest source and not terribly smaller in total number than the second group are those that were received their CNAs five months before. Finally are the small group that received CNAs more than five months before endorsement. This pattern has a smoothing effect on monthly endorsement totals that we would not expect in the normal production process.

      There is also the thought that the pull through rate on the 20,408 CNAs for September 2017 will be considerably lower than the mid 60 percent rate experienced in the modified annualized conversion rate over the last 19 months. If so, that rate will also produce a smoothing effect in monthly endorsement numbers.

  • Granted, the 2,750 applications (case numbers) that were issued in October will defenitley impact endorsements in January and February.

    However, we need to look toward March and there after. If the industry can bounce back, get over the October 2nd woes and take advantage of what opportunities are out there, we can turn the year 2018 into a good one!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      Generally the March 2018 endorsement total is already set in stone. Generally the vast majority will come from HECMs with case numbers assigned in October and November 2017. HUD has yet to post any case number assignment information for any month after October 2017.

      For seven years we have been hearing how we can make the current year into a good (to great) one. How is that possible? Is demand now growing? If so in what segments and what evidence is there of this growth or should we just be “keeping the” HECM “faith.”

      The industry still cannot openly discuss that we just finished the fifth year of secular stagnation. Why? Other than telling us that talking about it does no one any good, the industry is at best passively addressing the root of the problem through positive thinking and speech. But is that good enough? Not if one wants to do than just wait it out or so well recognized economists have stated.

      How real is the hope we declare without recent trends to back it? This is why so many are discouraged. It is not that being truthful will improve the situation other than meaning those who remain understand what we face and are committed to changing our difficult years.

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