Kroll Predicts Jump in Proprietary Reverse Mortgage Investment

As reverse mortgage borrower demographics have changed and lenders have expanded their product offerings this past year, new research from the Kroll Bond Ratings Agency foresees rising investor interest in the proprietary market.

In anticipation of this interest, KBRA compiled a report — called  “Five Things to Know About Reverse Mortgages”  — for those new to the evolving world of reverse mortgages. Since lower volume followed last October’s Home Equity Conversion Mortgage program changes, a plethora of new proprietary products have entered the market. In addition, the “equity-rich, cash poor” senior population is growing.

“KBRA believes that these factors will give rise, after a period of absence following the financial crisis, to an increase in both private and public securitization of jumbo proprietary RMs,” according to the credit rating agency’s report.

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Many former HECM-only originators added proprietary reverse mortgage products and forward loans to their arsenal of options for seniors in an attempt to counteract the decline in originations. KBRA categorized these moves as positive for the industry as a whole, as well as potential borrowers.

“This product-agnostic trend is a healthy development because the costs, proceeds levels, and total/fee interest costs of an RM may not be as favorable as a traditional forward mortgage or HELOC for some borrowers,” the research states.

As for when a surge in proprietary investments might begin, Dan Ribler, founder of analytics firm Baseline Reverse, said ideally in-depth historical data on how a product performs would be available for investors. Interestingly, he said, because so many different products have entered the space recently, performance history will be more “siloed,” with each product generating limited data for investors to analyze. 

“It’s not a road block, just a challenge,” Ribler said. “For non-agency volume to really take off, ideally we’d see one consistent program with centralized performance data. The more robust the performance data, the lower the return requirement will be from end investors, which in turn, will drive lower product costs to borrowers.”

Aside from product diversification, the KBRA research also discussed the importance of borrower credit and capacity; nuances surrounding property value; and the potential upsides of negative amortization.

KBRA also had general praise for the way these new proprietary loans are structured, pointing to safeguards that mirror the better-known Department of Housing and Urban Development-backed HECMs.

“Proprietary originators are increasingly mirroring HUD’s third-party financial counseling requirements to ensure the borrower understands the product, and disclosures have been improved,” the agency observed. “KBRA believes that these enhancements may result in better suitability for some borrowers, which should ultimately translate to fewer defaults and/or early voluntary repayments.”

The research stresses that reverse mortgages need to be analyzed differently than forward mortgages, both for individual loan risk and “in the context of a securitization.” For example, the research advises investors new to the space not to look at negative amortization through a forward mortgage lens.

“… a decreasing [reverse mortgage] equity position does not increase the borrower’s propensity to default because no regular payments are due. In fact, the higher the interest accrual amount, the more income ultimately passes to the trust — provided, critically, that the crossover point is not reached,” according to the research.

Lastly, the paper point outs that prepayments are generally rare and are not interest-rate sensitive. For loans that closed in a typical manner, such as the death of the borrower, these repayments also are also generally not dependent on interest rate, but rather borrower age and probability.

“Therefore, an important consideration for the future cashflow of an RM portfolio depends on the investors’ expectations for changes to life expectancy over time,” the research states.

Written by Maggie Callahan

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  • The investor discussion is clearly uneasy.

    Without adequate insurance, the proprietary reverse mortgage risk is immense even with low initial proceeds to home value ratios and unfortunately interest rates do count when looking at life expectancy since half of borrowers will pass before the end of their life expectancy and half will pass after.

    Then there is the issue of sufficient premiums so that the lender can afford to provide these loans. The major factor (although not the sole factor) is the interest rate that the market will endure.

    Investors do not need so much accrued interest that they will have to write it off some or most of it due to the non-recourse nature of all reverse mortgages. Negative amortization connected to a non-recourse mortgage is a difficult positive for most investors. For example, if one acquires a proprietary fixed rate reverse mortgage note (an asset to the acquirer) from a lender with a high interest rate, no doubt, the investor will pay a premium. Now will that premium be a loss to the investor due to insufficient proceeds from the sale of the home to pay off the balance due at termination (not closing as stated above)?

    How many proprietary reverse mortgage lenders have historical data going back 8 to 10 years, the normal range for a HECM to terminate after closing? Data from the HECM endorsement peak era may help but is not indicator of current performance since so many older proprietary reverse mortgages were adjustable rate products.

    While some predict an ascendancy of the number of proprietary reverse mortgage originations over those of HECM originations, please excuse my doubt. I do believe proprietary reverse mortgages as currently structured have the possibility of growing in originations and should exceed H4P endorsements in a matter of 2 years or so, it is not so clear how well they will fare compared to HECMs generally.

  • I read Bram Lupo’s comment and he did a great job with his explanation and facts! I can’t disagree with 99% of what Bram has stated.

    I do feel the proprietary jumbo products are going to gain momentum, they will fill many gaps the HECM does not. More lenders are becoming very creative with the proprietary products, such as FAR with their latest announcement.

    I tend to also agree with Bram Lupo on how well the proprietary programs are going fare against the HECM as far as endorsement goes, within the next two years. My own opinion is that the HECM will still out pace the proprietary products when it is all said and done.

    This is not saying the proprietary programs will not continue to grow in popularity and to fill needs of our seniors, on the contrary. Once again, I say these products are going to fill many important gaps that the HECM can not fill!

    On the H4P product, endorsements can pick up and be a good part of the reverse mortgage business. Providing our industry and the originators understand how to market the product properly. A great deal of educating on how to approach the real-estate sector is desperately needed!

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

  • The stark reality of whether non-HECM reverse mortgages offerings are a success by any measure, relies on whether the borrowers like it. How the numbers shake-out as an investment, or profit winner for the lenders, seems secondary to the volume of originations the proprietary-product (non-HECM) can generate.

    The formulas don’t work with plug-in-constant assumptions of adequate originations volumes.

    As with most any new product, it seems that the non-HECM would have to spark significant interest in the borrowers. It’s not clear how the non-HECM product is going to do this.

    In other words (for a well-known example): when the CVS stores began, it created great interest in customers via astonishingly lower prices than the standalone neighborhood pharmacies. Once the small businesses were driven out of business, CVS controlled the market and raised prices.

    Speaking from a “borrower’s perspective,” what’s the “hook”? Does a proposal of: “if your property is worth enough, you can get an inferior deal than the government HECM” create great interest? It creates…

    Huh!?

    How is the non-HECM product going to even compete with the government-HECM if it can’t even -match- the terms of its competitor?

    Is the much higher value-limit of the non-HECM anywhere near enough to make a dent in market share? Relying on this “niche of niches” feature seems a rather risky approach.

    Most of the pro-non-HECM comments/articles, before starting-in on the non-HECM narrative, seem to begin with (paraphrase): “After the October Changes there’s a need…”

    Yup, there’s a need for a higher PLF.

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