Last month in a mortgage webinar, a presenter stated that Home Equity Conversion Mortgage originators are the sole fault for “the gradual losses” in annual HECM endorsement production over the last eight years. The explanation was that HECM originators are generally older than forward mortgage originators and as a result have been gradually retiring over the last eight years by phasing out their origination production in a manner reflective of the endorsement losses experienced in that eight-year period.
The presenter also claimed that Federal Housing Administration changes in the last eight years have only made HECMs better, even those of October 2, 2017. The presentation made 1) the Department of Housing and Urban Development look like the hero, 2) HECM originators appear infirm and 3) HECM lenders seem inept at figuring out that they needed new originators to take the place of those retiring.
That perspective was the inspiration for this column.
The real heroes of this story are HECM originators and the strength of the HECM. Without the effort and work ethic of HECM originators against the tide of lower endorsement production and constant negativity, we would be talking about eight years of endorsement losses rather than three years of enormous losses followed by five years of secular stagnation. The importance and value of HECM originators are best seen in the recent five years of secular stagnation.
No stagnation should be looked upon as positive, but the HECM version of stagnation is not all negative. The current pattern of HECM stagnation is circled in this graph.
The expanded story behind the graph over the last eight years includes the efforts of lenders, the National Reverse Mortgage Lenders Association, task forces, HECM-backed securities investors, production staffs, and other key players all pulling together to combat and mitigate endorsement losses — but that is not the focus of this article. So what is the actual historical context to the annual endorsements over the last eight years? As clearly depicted in the graph, it is much different from that in the previously mentioned presentation.
Three Years of Enormous Annual Endorsement Losses
While fiscal year 2009 was the all-time peak fiscal year of endorsement production at 114,692 endorsements, three years later, the annual endorsements for fiscal 2012 had fallen to less than 50% of that amount, at just 54,822 endorsements. First, fiscal 2010 ended with a shocking fall of 31% in endorsements when compared to fiscal 2009. Then during fiscal 2011, the endorsement count fell by 36.2% of the fiscal year 2009 endorsement level. The experience was both frightening and shocking to much of the industry.
While the endorsement losses of fiscal years 2010 and 2011 were due in large measure to the Great Recession stemming from the delayed effect the mortgage crash and the housing bust of the 2008 and 2009, the endorsement losses of fiscal 2012 had an additional dynamic: the decisions to abandon the origination units at Bank of America and Wells Fargo, the source of more than 40% of the industry’s endorsement volume. The departure of the HECM origination units at these two banks resulted in an enormous loss in HECM marketing, the loss of large financial institution credibility, and — as Shelley Giordano of the Funding Longevity Task Force recently reminded me — the loss of their branches as a rich source of “warm” qualified prospects for their respective originators, particularly through Wells Fargo branch offices.
While Bank of America left the reverse mortgage industry toward the end of the first half of fiscal 2011, Wells Fargo left about three months later. The impact of endorsement losses from these banks was delayed until fiscal 2012 due to the four-month (or longer) endorsement rule of thumb related to the length of time it takes the average endorsed HECM to go from case number assignment to endorsement.
Five Straight Years of Secular Stagnation
Despite the loss of the origination unit at MetLife Bank early in the third quarter fiscal 2012, fiscal 2013 was the first year that we saw growth in HECMs in three years. At the time MetLife left the industry, it alone accounted for about 24% of all HECM endorsement production. While marketing fell, MetLife had few brick-and-mortar facilities where customers saw reverse mortgage banners or other forms of advertising, nor could they provide the leads that Wells Fargo once did. Yet despite these changes, endorsements finally grew in fiscal 2013.
There were signs throughout fiscal 2013 that fiscal 2014 would be a year of loss in annual endorsement production. First HUD ended fixed-rate Standards for all HECM applications with case numbers assigned after March 31, 2013, and by fiscal year end, it did the same for all Savers and adjustable rate Standards for HECMs.
Along with these moves, HUD also generally lowered principal limit factors for HECMs with case numbers assigned after September 29, 2013 so that HECMs were reflective of the unpopular Saver. HUD also created a new regimen for these HECMs, addressing high draws in the first year following origination through its first year disbursement limitation. It also lowered the product’s upfront MIP to 0.5% and introduced a 2% upfront MIP “penalty” for exceeding that 60% principal limit on first year disbursements. So as expected, endorsements for fiscal 2014 were not just less than those for fiscal 2013 but also fiscal 2012.
Fiscal 2014 saw a Mortgagee Letter issued that only affected HECMs with case numbers assigned after August 3, 2014, which added payment deferral for specifically defined eligible non-borrowing spouses when they survive the death of their borrowing spouses; it also adjusted principal limit factors slightly for those 62 and older. The impact of the Mortgagee Letter seemed minimal. In fiscal year 2015 endorsement production once again surged forward.
Despite its rise in endorsements, fiscal 2015 was a disappointment to many. What had been promised as a game-changer for endorsements in early fiscal 2014, the Extreme Summit, completely fizzled within 15 months of its official announcement. Although it cannot be measured with any degree of accuracy, the distraction of this marketing effort kept endorsement counts down to a significant degree in fiscal 2014 and even fiscal 2015.
In fiscal 2015, HUD posted a long-promised Mortgagee Letter that established Financial Assessment for HECMs with case numbers assigned after April 26, 2015. Due to numerous difficulties, its impact was not seen in endorsement numbers until fiscal 2016, when endorsements were heavily impacted by Financial Assessment — so not only was the surge of fiscal 2015 stopped, but the fiscal 2016 endorsements produced were lower than those in fiscal 2014 and fiscal 2012.
With no new major changes to the HECM, once again endorsement production surged ahead in fiscal 2017—the third year of endorsement resurgence since fiscal 2012.
So why cover these eight years so extensively?
Misconceptions are circulating throughout the industry about these eight years. Many of these myths ignore the real heroes of the era, HECM originators, and their positive contributions of the last five fiscal years.
Between fiscal years 2012 and 2017 (inclusive) we saw three years of resurgence, but each of the first two was followed by one year of loss in annual endorsement production. To see such resurgence despite loss year after loss year is proof of the resilience of HECM origination.
If you wonder where the originator is in this tale, wonder no longer. The HECM originator has gotten up every morning over the last eight years knowing very well that he or she will be fortunate to have more than one or two closings for the month where many had several times that amount each month before fiscal 2010. While lenders may tell origination staff that all they can do is sell what they have, it is HECM originators who have done just that day after day over the last eight years.
It is HECM originators who have created this environment of resurgence, and thus resilience. HUD may have taken their straw but originators are still working hard to do their part to produce bricks.
Inspired by the speech to children of farmers about their fathers by Charles Bronson’s character in “The Magnificent Seven,” one can only conclude that HECM originators should be honored and respected for all they do for everyone else in the HECM industry.
HECM originators carry the responsibility for all of us in this industry by introducing seniors to a currently more costly form of the vastly unpopular “Saver” and helping seniors realize its value. “…This responsibility is like a rock that weighs a ton. It twists … and bends them…” under its weight. Yet they do this because they love those they serve. No one is forcing them to do this. Few others in this industry have the courage of our originators to face the negativity they do day in and day out. HECM originators are not responsible for the loss in HECM annual production that we have seen over the last eight fiscal years.
As the primary heroes of the last five years, all fiscal 2019 should be known in the industry as the year of the HECM originator.
Written by James VealePrint Article