The long arm of changes to principal limit factors (PLFs) for Home Equity Conversion Mortgages (HECMs) continue to be felt over two years after they were first handed down by the U.S. Department of Housing and Urban Development (HUD). This has resulted in a number of mortgage lenders ceasing their reverse originations entirely in 2019.
According to origination data shared with RMD by Reverse Market Insight, hundreds of non-specialty mortgage lending firms across the country that had at least one HECM origination in 2018 have logged 0 reverse originations in 2019. While the majority of the companies that have apparently exited the reverse mortgage space fall into the category of having logged between 1 and 5 HECM originations in 2018, others logged anywhere from 60 to 80 HECM originations last year before ceasing operations in the reverse mortgage space in 2019.
One such company is Lancaster, Penn.-based Fulton Mortgage Company, which recorded 58 originations in 2018 before abruptly ceasing its reverse mortgage operations. Rob Hironimus, the former head of Fulton’s reverse mortgage division and now the company’s VP and Community Reinvestment Act (CRA) mortgage sales manager, confirmed that the company completely exited the reverse mortgage business in 2018.
PLF cuts and business exit
“Yes we did exit Reverse Mortgages last year, between late summer and early fall,” Hironimus told RMD. “We were finding that it was becoming harder to get loans approved with the industry changes, and this was felt both by the company and our loan officers.”
The reverse mortgage operation at Fulton was relatively small, and the majority of dedicated reverse loan officers managed to find a new home without much incident, Hironimus says.
“The issue was discussed with the team and most of the four loan officers went to companies that were more focused on reverse,” he says. “Everyone left on good terms.”
The decision to exit the reverse mortgage space stemmed largely from the changes to PLFs handed down by HUD in late 2017, stalling loan approvals and contributing to a major drop in reverse-specific business, he said.
“I would say that [the PLF cuts] were a major part [of our decision to close the division],” he says. “We just couldn’t get people approved with the lending limits and financial assessment. Our overall business dropped between 50% to 60% if I recall correctly.”
Other reasons for reverse mortgage exits
One of the other potential reasons that a lender may choose to exit the reverse mortgage industry, particularly if that exiting company is a multi-service lender, could be due to factors affecting the company that don’t necessarily fall under strictly HECM-related issues. One such company, Washington-state based Mortgage Brokers Services, Inc. (MBSI), went out of business entirely in late 2018.
This led MBSI’s reverse-affiliated company, Kiel Mortgage, to migrate its Washington state reverse mortgage operations to Kent, Wash.-based Mortgage Master Service Corporation.
Speaking recently at a hearing on the HECM program held by the House of Representatives’ Financial Services Subcommittee on Housing, Community Development, and Insurance, National Reverse Mortgage Lenders Association (NRMLA) President and CEO Peter Bell attributed some of the industry exits – particularly in terms of major finance organizations – to these kinds of broad changes in the larger mortgage business.
“I think the major banks dropping out of the reverse mortgage business is no different than any major bank dropping out of the mortgage business generally,” Bell said. “The mortgage business has moved over the past several years to be much more dominated by specialty finance companies and nonbank lenders. Our side of the industry is no different than the rest of the industry in that regard.”
In terms of the high-profile reverse mortgage exits observed over the past decade, the reasons for those entities’ exits are not exclusively because of reverse mortgage industry issues, according to Bell.
“The reasons that the major banks, which were MetLife, Wells Fargo and Bank of America, exited the business are different in each case, but they’re for reasons external to their reverse mortgage activity,” Bell said.
Product complexity as a barrier for lenders and borrowers
Another factor playing a role in industry exits could be the complexity of the HECM product leading to reputational risk, according to Laurie Goodman, co-director of the Housing Finance Policy Center and VP at the Urban Institute in Washington, D.C.
“Yes, [lenders] have cut back on both forward programs with FHA and reverse mortgage programs, but I think with reverse mortgage programs, they’ve perceived a great deal of reputational risk in terms of loans to senior borrowers,” Goodman said. “I think you have to realize that the HECM program is enormously complex. If I take out a forward mortgage, I have two choices: I can choose a fixed- or adjustable-rate mortgage, and I can choose a mortgage term of 15- or 30-years, and that’s it.”
In comparison with the plethora of reverse mortgage options including the fixed- or adjustable-rate, lump-sum or line of credit distribution options and different paces at which funds can be withdrawn, the reverse mortgage is much more complex than traditional forward mortgage options, Goodman said.
“This plethora of options makes the product more difficult for the borrower to comprehend, and puts the institution making the loan at more risk,” said Goodman. “I actually think that program simplification – getting rid of some of the less-used options – would make a big difference [in the health of the HECM program].”