A continued favorable rate environment and increasing momentum on the proprietary side has started the reverse mortgage industry’s 2020 off on a decidedly positive note. If those elements can manage to continue through the year, then the industry will be in a very good position. This is according to perspectives shared by John Lunde, president of reverse mortgage market analytics firm Reverse Market Insight (RMI), in an interview with RMD.
In addition to those wider industry trends, Lunde also shares perspective on the growth being exhibited on the proprietary side of the business, and where the most growth appears to be concentrated, as well as the general improvement that the larger industry has made in terms of paying attention to new proprietary developments. That’s not to say, however, that there still isn’t room for improvement.
Low interest rates, high proprietary activity fuel a positive 2020
Citing a series of conversations and the general atmosphere in Nashville at the National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting this past November, there were primarily two factors which led to a more positive and optimistic outlook as we ended 2019, Lunde says.
“I think coming off the conference at the end of the year, and then conversations that we’ve been having since then, 2019 ended pretty optimistically,” he explains. “From a HECM perspective, rates are staying low enough to really offer maximum levels of principal limit to borrowers at a very, very attractive accrual rate. But then also, the proprietary side has really continued to gain momentum and build on some of that strength.”
The changes handed down by the Federal Housing Administration (FHA) which reduced principal limit factors (PLFs) in October 2017 led some in the industry to expect more proprietary activity at-large, and now that proprietary activity levels are rising, seeing it continue should be positive for the industry through the year, he says.
“Everybody expected coming out of the 2017 changes that FHA made to really see a lot more proprietary product, and we’ve very much seen that happen,” Lunde says. “Each successive year since then has really built on that momentum. So, I think [low interest rates and high proprietary activity] are the two big trends or underlying movements that are happening right now. And it’ll be really good to see both of those continue, frankly.”
Private products increasingly operating within HECM home values
In terms of trying to localize regions where proprietary reverse mortgage growth may take place, in the past it typically hasn’t been any more complicated than looking at home values that tend to be well above FHA lending limits on government-sponsored reverse mortgages, Lunde says.
“Historically, it’s very much been that the proprietary product has succeeded primarily where the home values are significantly above the HECM lending limits,” he says. “It has really been driven for the most part by the availability of additional proceeds. With some of the tools that [RMI] subscribers use on our dashboard, they can see where the maximum claim amount is and how that’s relative to something like the Zillow index in a given area. It just makes it really easy for them to compare and filter down to the areas that should work best for proprietary, so I know we’ve had a lot of clients who have had good success with using some of our tools in that way.”
One other encouraging aspect of growth in the proprietary market is the fact that many of the products are becoming better equipped to serve customers that fall within the HECM lending limit, offering a private alternative to a HECM without involving “jumbo” values, he says.
“I think it’ll be exciting to see that as proprietary products innovate and continue to evolve, it’s not just a jumbo play,” Lunde says. “That will make it a little tougher to identify where good areas are for proprietary focus, but I would imagine some of that will be around lower upfront costs. We’ve seen some of those places having more of a line of credit option on the proprietary side, as opposed to the fixed-rate full draw. I think that opens some of those doors a little further.”
Other places that proprietary options may create room for further innovation is on the processing side, which could likely use some simplification, Lunde says.
“Eventually we’ll see some innovation around process, [which will avoid] putting people through what is a little bit of a painful FHA process in terms of following all the rules,” he says. “So, I think there are other things that are likely to happen over time that can make it more than a one dimensional story on the proprietary side.”
The gap between HECM and proprietary products is closing
With proprietary reverse mortgages becoming more of a dominant player in the reverse mortgage arena, a recent report indicated that the proprietary side of the business makes up roughly 25% of new origination dollars. This illustrates that the products appear to be more readily embraced by lenders and borrowers.
“I do think proprietary is on an upswing, and it’s always more favorable to compare dollars, simply because the proprietary loans at this point are generally bigger than the HECM loans,” Lunde says. “So, that’s always going to favor the proprietary products. That being said, I do think that proprietary is on an upswing. The biggest question, in terms of whether or not that gap keeps closing, really lies in multiple outside factors that are outside the industry’s control.”
These factors include natural questions about what exactly FHA does with the HECM program in the future. The continued influence of proprietary business has the possibility of creating more similarities between public and private products, Lunde says.
“That could certainly create more parity or different dynamics in the two products and the volumes flowing through those. And then, the other things are interest rates, secondary markets and home prices, to the extent that those underlying drivers change. That could influence whether that gap keeps closing. Right now with the pace that the industry seems to be on, I’d expect that barring significant outside influences, the gap [between HECM and proprietary products] keeps closing.”
Of course, it’s difficult to make concrete conclusions about how much of the market is made up of proprietary business since reliable metrics concerning private product volume have yet to be released by lenders, Lunde says.
“I think there’s some reasonable guesses out there, but unless and until we have data that will support what this actually looks like, frankly, we’re just not there yet,” Lunde says. “We continue to work with our clients and partners on that, but the industry is not there yet. I think we’ll get there someday, but that’s not today.”