Some Positive Reverse Mortgage Industry Effects of Oct. 2017 Changes

When the Federal Housing Administration (FHA) handed down changes to principal limit factors (PLFs) in October of 2017, by all accounts that changed proved nearly disastrous for the reverse mortgage industry. Endorsement volume for Home Equity Conversion Mortgages (HECMs) seriously declined, originators related stories of increased difficulty in finding qualified borrowers, and many still refer to the period immediately after those changes as largely damaging to the product and the industry as a whole.

However, now that those changes are primarily in the proverbial rearview mirror, it’s easier to look back and see that they may have led to some changes to the reverse mortgage industry that have ended up being directionally positive. Some of these shared by reverse mortgage loan originators include leading to an important re-examination of the business model, more direct engagement with different kinds of referral sources, and less overall reliance on the federal government as more private reverse mortgages have proliferated.

Forging a more resilient industry

One of the potentially positive ramifications of the October 2017 HECM program changes is that it forced some reverse mortgage professionals to re-evaluate aspects of their own business in order to be more reflexive on a faster basis. This is according to Steven Sless, reverse mortgage division manager at Primary Residential Mortgage, Inc. in Finksburg, Md.

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“I think, in retrospect, the industry is better off now than it’s ever been because we all had to look at the holes in our business models and figure them out on the fly, and do so while continuing to originate business,” he says. “I think there’s a better crop of reverse mortgage originators that are out there today. A lot of the bad apples got out of the business.”

That’s not to say that difficulties don’t still exist, however. Product awareness may be lower now than before the changes were put into place, which makes it more difficult to market reverse mortgages in general.

“[The changes] definitely made it harder to market the product. I think there’s less market awareness now because there’s less marketing,” he says. “There used to be three companies nationwide running commercials, and now that’s down to just AAG. So, I think just finding that the right kind of blend where you can still be profitable, still pay your bills, still pay your originators, it’s tough.”

That tough climate undoubtedly has presented difficulties, but having a necessity to take a harder look at the business model may have generally made those who stuck with the reverse mortgage business more generally resilient, Sless says. By taking another look at the model on an individual basis, it also led Sless and his team to embrace referrals more than they had been previously.

“Overall, I think the industry is positioned better than it ever has been, because it forced us to change the model. It forced me to change my model,” he says. “My group [operated with] almost no referrals prior to the 2017 PLF cuts, and we’re 25% referral right now. And so, it forced us to engage with the financial planning community where all of a sudden you have this new demographic of reverse mortgage borrowers that nobody ever thought would be around 5-7 years ago. I mean, who thought we’d be engaging in conversations with millionaires about reverse mortgages?”

Still, the product in its current form allows less people to qualify, but the changes and the industry’s reaction to them have reinforced the overall toughness of dedicated reverse mortgage industry players, Sless says.

“We have these conversations every day. And so, now it is unfortunate that a lot of people that we could help before we can no longer help, and it would of course be nice if we could lend a little bit more than we can lend now. But, we do the best, and we make the best with what we’ve got to work with.”

Spurring private product innovation

It’s hard to find much of any positive ramifications of 2017’s PLF cuts and the 2018 implementation of the collateral risk assessment, especially considering that the industry was not sufficiently consulted prior to the changes being handed down, according to Scott Harmes, national sales manager for the C2 Reverse division of C2 Financial Corp. in San Diego, Calif.

“These October 2 cuts [were] based on the MMI audit, which is based on assumptions,” Harmes says. “And so, you had kind of an avalanche triggered not necessarily by a false alarm, but it didn’t require the amount of changes that we saw.”

Still, it’s also hard to argue with the idea that the pressure the 2017 changes placed upon the industry helped solidify lenders’ motivations to make further investment in proprietary products, Harmes says. This can be considered generally positive, since it means the industry will be less impacted by government changes if proprietary products (for which Harmes prefers to use “portfolio products” as a descriptor) continue to become a major source of business across both traditionally HECM and jumbo values.

“I actually think that if there is a positive, it has driven more of a focus on the portfolio programs and products and getting a higher percentage of the overall reverse application to move away from the HECM program, and I think that’s good,” Harmes says. “One good that came from [the 2017 changes] might have been a greater emphasis on the development of the portfolio program and the evolution of those programs, because it is just really exciting.”

Products including Longbridge’s recently-released proprietary reverse mortgage with a line of credit feature, along with promised continual product developments from lenders including Finance of America Reverse and Reverse Mortgage Funding, make the current product landscape a very exciting one, Harmes says.

“I came out of the NRMLA [Annual Meeting in Nashville] absolutely vibrating with excitement over what’s coming,” Harmes says. “And, you layer that on top of the market we’re in, and the trained loan officer corps we have to take those programs to market, then the excitement I have for the future is hard to contain.”

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  • There is no doubt about it, the effects of October, 2017 hit the industry hard, it hit originators in such a way that it created more of a shock than the FA act of 2015 did!

    Yes, it drove many out of the industry, it also further made the reverse mortgage a non-need based loan as in the past. Those that wanted to survive either had two choices, join the ranks of the forward lending world and take on duel rolls or change their origination habits completely!

    I feel many chose the first option, joined the ranks of the forward lending industry, but yet still combined reverse mortgages into their origination platform.

    Those who chose the later, changed their origination habits and started to profile a completely different type of borrower!

    Like Steven Sless stated, it forced him and his group to engage with financial planners for referrals. That in itself is easier said than done, as I am sure Steven Sless can attest to that. Dealing with the financial planner is a complexly different way of having to do business. First off, an originator, before attempting to do business with a financial planner, needs to understand as much as he or she can about how a financial planner does business with their clients, this is ultra important!

    Once that goal is accomplished, the originator than needs to be an adviser to the financial planner, not be a sales person. What I mean by that is the originator must be their to teach the financial planner as much as possible how our product can fit into their overall financial plan for their client.

    When the timing is right, then the originator moves into counsel the financial planners client on the ins and pouts of a reverse mortgage. What is extremely important here is that the originator needs to follow the plan the financial planner laid out for the his or her client. Never deviate for their plan, stick to it, but always be honest with the client on the pro’s and con’s of our product! What question comes to mind, where does your loyalty lye?

    As far as the originator that has committed him or herself to remain a reverse mortgage originator, this is where the profiling of a borrower takes on a completely different mind set!

    A senior homeowner to be a good prospect must meet the FA guidelines and have a substantial amount equity in their home over and above any lien’s on the property. Originators mus seek out those with little or no debt against their properties.

    Hold educational workshops, team up with elder law attorney’s and home health care providers to hold these educational workshops. Work with municipalities that have department’s on the aging.

    In short, become a different originator than that of the past, be creative, look at the reverse mortgage to be truly a financial tool to improve the quality life of a senior! Can we in today’s environment put the senior clients best interest at heart????

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

    • Fortunately in our industry, originators owe their duty to their employer before the customer or any referral source. Many times, the potential for conflict of interest between customer and source can be clarified at the supervisor level. There are some occasions where our duty to the customer exceeds that of the prudent businessman rule.

      Yet due to the value of a referral source, we do not want to lose them. This is a particularly difficult proposition where the referral source is charging the customer an exorbitant fee for services rendered or is choosing investments that have the greatest return to the referral source. What is your duty in such cases.

      There are many serious questions on this subject that are rarely discussed or addressed. This is also the test of whether you put the interests of the customer above your own. Going over scenarios like these with other originators can be very useful so that you are not caught off guard when real life situations stare you in the face.

  • Of course, we now know that One Reverse Mortgage is no longer accepting reverse mortgage applications. That is a huge negative especially since their reverse mortgage originators are likely to be absorbed into their “rocket” division.

    Another loss that the article does not recognize is one that Scott Gordon has spoken about several times, experienced originators. While some speak in terms of bad apples, there are a lot of excellent reverse mortgages originators who are no longer with us especially due to the extreme loss in HECM production since September 30, 2017.

    “’These October 2 cuts [were] based on the MMI audit, which is based on assumptions,’ Harmes says. ‘And so, you had kind of an avalanche triggered not necessarily by a false alarm, but it didn’t require the amount of changes that we saw.’” There is a lot of misleading information floating around the industry and part of it is that the 10/2/2017 changes were based on an audit. That is simply not the case. The audit could not be finished within two days after the end of the fiscal year 2017.

    So let us correct the record. HUD works on the MMI Fund quarterly. A growing problem in the MMI Fund was indicated in both the annual report to Congress on the financial status of the MMI Fund for the fiscal year ended 9/30/2016 (2016 Report) and the annual review of the HECM portfolio in the MMI Fund by the independent actuaries for fiscal year ended 9/30/2016 (2016 Actuarial Review). Both the Report and the Actuarial Review are loaded with assumptions. The fiscal year 2016 audit of HUD by the OIG provided a poor view of the MMI Fund as well; the assumptions used in the audit are embedded in the numbers provided by HUD and the actuaries.

    Throughout fiscal 2017, HUD was working diligently on its Quarterly Report on the MMI Fund. By the end of summer 2017, HUD was also deeply involved in the 2017 Report, the actuaries in their 2017 Actuarial Review, and the OIG in their audit of HUD for fiscal 2017. Looking at the 2016 Report, the 2016 Actuarial Review and the 2016 audit of HUD, there was a growing consensus that to avoid Congress and the President coming down hard on MMI Fund operations, some harsh changes had to go in effect for HECM originations near the start of fiscal 2018 which they did.

    Although many felt that the extent of the 10/2/2017 changes were draconian, the fact is, they were insufficient. The measure of whether or not changes are sufficient is not found primarily in the economic value of the MMI Fund but rather whether or not the projected net cash flow from current originations is negative, zero, or positive. The changes are based on current conditions not wished for conditions in the future. HUD handled the situation responsibly and with integrity even though HUD probably should have implemented slightly harsher changes.

    While those in California are happy with the addition of proprietary products the same cannot be said for the majority of the country. Many states are waiting to see if they will ever have proprietary reverse mortgages to bring to market. Others are not finding the success that some see in California.

    What is not addressed in the article is that by the end of 2007, the industry had a wide variety of quality proprietary reverse mortgages (much more useful than even today) but then the mortgage bust essentially ended the era of proprietary reverse mortgages to any extent for over a decade. Could the same thing happen now?

    “‘I mean, who thought we’d be engaging in conversations with millionaires about reverse mortgages?’” In 2007, that was a common event. Not only were we talking to the affluent but because the general public in Southern California had not felt the impact of the mortgage collapse, many reverse mortgages were originated on properties with high values. Many of those proprietary reverse mortgages, except for the size of the loans, resembled the adjustable rate HECMs of the era and had 5% growth rates on their lines of credit.

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