Building a Case for Forward Lenders to Embrace Reverse

A major forward-mortgage consulting firm recently took a deep look into the potential diversification through reverse products — and ended up wondering what top players are waiting for.

Much like Home Equity Conversion Mortgage originators, forward players are struggling, according to the report from the Greenwood Village, Colo.-based STRATMOR Group: With fixed interest rates on the rise, and the Mortgage Bankers Association predicting average rates of 5.6% by 2020, many players anticipate declines in demand for refinances.

“As is typical in a down market, traditional forward lenders are looking for opportunities to improve profitability and gain market share,” Jim Cameron, senior partner at the consulting firm, observed in a new report. “This may include expanding into new channels such as consumer direct, or into new products such as non-QM, construction, renovation, and last but not least, reverse mortgages.”

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STRATMOR’s key pitch to forward lenders hinges on favorable demographic shifts on the horizon and the general underutilization of HECMs among the general population. In addition, the firm postulates, big banks’ departure from the business has left a void for independent mortgage firms — while major lenders such as Wells Fargo and Bank of America are unlikely to return.

Cameron used a “bottom-up” approach to approximate the amount of borrowers aged 62 and older who may have been able to use a HECM for their home-equity-loan needs but for some reason didn’t. Of the 250,000 people who completed a mortgage-satisfaction survey from STRATMOR, 45,000 were over the age of 62 — and of that group, 87% had loans secured by a primary residence, according to Cameron.

Drilling further down, 51% of those loans involved a purchase, prompting Cameron to ask how many of them could have considered a HECM for Purchase transaction instead.

“Based on our data, cash-out refinances typically represent 15% of total refinance transactions,” Cameron wrote. How many of these cash-out refinance customers should have considered a HECM? Were they asked?”

Reputation risk a key deterrent

In the report, Cameron expanded upon the results of a survey about lenders’ top reasons for avoiding the reverse mortgage; he first introduced the data at ReverseVision’s annual UserCon in San Diego earlier this month.

Concerns about reputation risk, a lack of in-house expertise, and the “distracting” effect HECMs might have from the forward business topped he list of potential hangups. But Cameron compared those worries to people who still use cassettes to listen to music, encouraging lenders to “toss that old cassette tape deck.”

For instance, Cameron pointed to Financial Assessment, life expectancy set-asides, and other recently introduced protections as counterpoints to the reputation-risk concern, while the so-called “distracting” effect of offering HECMs could present a key opportunity in a world of rapidly deteriorating forward margins.

“To lenders who are thinking about going into reverse, here’s the good news: Reverse is a mortgage product that can benefit senior borrowers,” he writes in conclusion. “Concerns of the past are being mitigated through regulation and improved practices. Compelling demographics will continue to create opportunities for lenders that can execute well in the go-forward market.”

Written by Alex Spanko

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  • I find these articles interesting to read at this moment in time. I’ve been reading about these pitches for well over a decade, all based on demographics and penetration rate. Unfortunately, there’s no evidence to suggest either will impact endorsements positively moving forward. With steadily rising expected rates, endorsement numbers are likely to fall.

    This is an industry that needs contraction, not expansion. The pricing it takes to win a loan right now is not sustainable for most lenders in the industry. I find it sad that there’s been a race to the bottom, but it is what it is. There’s no way the forward market is seeing the kind of volume reduction that we are (percentage wise), so I see the shift moving more towards forward than reverse. Good luck to any new entrants that think now is a good time to get started in reverse.

  • Hey George. I don’t think we’ll ever get a clear picture of if we are growing or not. How do we compare this version of HECM with any other in the past? Each time HUD drastically changes the program, we have a completely new product that has to be measured against itself. Unfortunately for this industry, we have major changes every year or two, so we have no idea what volume will ever project to be down the road. We are also unique in the mortgage industry in that expected rates will greatly affect our LTVs (PLFs) moving forward. LTV is everything to a significant portion of borrowers.

    In addition to that, I think we are perceived as how we entered the market, which is a product of last resort. After doing this for a long time, I don’t know that we are ever going to be able to change that perception. I work at it every day, but I also define myself as a realist.

    • Matt,

      Let me introduce you to a product that prides itself in differentiation, car manufacturers. They are always trying to show how much better this year’s model is over last’s in hopes of getting more sales while justifying windshield sticker shock. Investors really don’t care; they look at number of vehicle units sold from year to year. Car management is judged primarily on this one criteria, unit sales and the net dollars those sales put on the bottom line.

      The Volkswagen bug I drove in 1972 is much different than today’s bug but the price is much different even though the general looks are very much the same. Look at the price of a college education as it rises each year as well as medicine.

      When catalytic converters became required in California, all of a sudden there was a glut of those cars for sale going nowhere. They were overcrowding new car lots until Californians realized they weren’t going to get the cars of their choice, just the ones with catalytic converters. Investors did not care about overcoming new requirements, they demanded sale units to go up.

      When I was growing up there was the bread manufacturer who lived next door and had the bakery trucks that went around selling baked goods in neighborhoods (city block by city block) and competed head to head in many areas with Helm’s. We would occasionally go with his family to dinner. He would spend that time telling my dad how growing government regulation was limiting (not a verbatim quotation) his expansion goals. Yet his investors did not care; they just wanted more trucks making daily sales of the entire inventory on board those trucks and MORE.

      So as part of this industry I get your point but I really do not believe our investors care for our “excuses.”

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