Slowing HELOC Market Leads to More Reverse Mortgage Inquiries

Reverse mortgage originators have long heralded the benefits of reverse mortgage options for some prospects relative to home equity lines of credit (HELOCs). Yet recent changes in the home equity lending environment have brought this comparison back to the forefront, and some originators are receiving even more inquiries due to individuals who are interested in HELOCs but can’t qualify.

“In my opinion any change in the credit markets tends to raise the profile of the [Home Equity Conversion Mortgage],” says Laurie MacNaughton, a reverse mortgage consultant with Atlantic Coast Mortgage. “Just months ago when credit was easily had and rates were low, it was still easy to compare the merits of a HECM to a HELOC. Now the tables have turned, but conditions have simply made the comparison that much more favorable, and the discussion that much easier.”

J.P. Morgan Chase Bank recently announced it would cease accepting new HELOC applications due to the coronavirus pandemic, clearly presenting a competitive advantage for HECMs. Wells Fargo soon followed suit.

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Other lenders may have adjusted their lending standards and product offerings as well.

With some prospective HELOC borrowers either not able to qualify, or facing fewer options this is also leading to more conversations with other professionals who are referring borrowers to learn more about reverse mortgage options, originators say.

The conversations extend to forward originators, too, who may not be able to offer HELOCs to interested clients.

“A few times a week a forward LO from a competitor bank or lending institution calls regarding clients who came in seeking a HELOC, but whom they cannot help,” MacNaughton says. “These calls often start with the forward LO simply asking if their aging clients are HECM eligible — and many times, clients are still sitting in the office. I believe this new urgency is due to market turmoil and growing job loss, and clients cannot wait a few weeks to call.”

With much of her business coming from referrals, MacNaughton says she is getting many more in-depth questions from Realtors and attorneys about qualification guidelines.

“I am certain these newly in-depth questions are a result of homeowners having been turned down by a forward lender,” she says.

The no freeze benefit

Highlighting the pros of reverse mortgages during times of uncertainty, and specifically the fact that a lender cannot freeze or cancel the reverse mortgage as is possible with a HELOC, is a major selling point, originators say.

“We are really bringing up this key point to our clients and financial planners because it’s can be a pivotal protection during uncertain times,” says Christina Harmes Hika, an originator with C2 Reverse, based in San Diego. “So many clients are looking for security in their retirement and this feature is able to ensure that.”

Inquiries are coming both from existing HELOC borrowers and prospective ones.

“I just spoke to a financial advisor about this,” says Christine Jensen, branch manager, Fairway Independent Mortgage Corp. in Arvada, Colo. “He’s concerned that his client could lose access to her line of credit when she needs it the most. He told me that it’s never been more urgent for his clients to have access to this product.”

Jensen also cites a personal experience with a frozen line of credit and the problems it can cause for the borrower. In 2010, she received a letter from Chase Bank stating that she could no longer draw money from her HELOC, despite her perfect repayment history

“They just didn’t care, it was infuriating,” she says. “A HELOC can be a great short-term money option, but the borrower is not in charge.”

For some borrowers, it may be too late, but the time is right to stress with referral partners and borrowers the benefits of a reverse mortgage safety net.

“Without reservation I can say the most distressing thing I see is a homeowner who took out a HELOC and now is in greater financial distress than ever,” MacNaughton says. “Currently, many lending institutions are pulling their HELOCs altogether, and older homeowners can be completely at a loss in terms of where they can turn.”

Written by Meredith Landry

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  • “And if you came along
    I know you couldn’t disagree.
    It’s the same old story, yeah
    Everywhere I go….”

    These are interesting anecdotes but what is carrying the growth is not found in the referral story for the industry as a whole this fiscal year.

    72% of the 3,196 increase in HECM endorsement volume in the first six months of this fiscal year over the same period last fiscal year is HECM refis. The HECM endorsement growth rate for this fiscal year is 20.5%. If it were not for HECM refis, that same growth rate would be just 5.7%.

    Then there is the decrease in volume in the availability and number of closings of proprietary reverse mortgages so far this fiscal year. So where is this referral growth going to? It may be that interest in reverse mortgages may be up this fiscal year but as to increased volume, “it’s the same old story….”

    Anecdotes are just that. They don’t change the course of a river and so far, they have not moved the industry in a completely positive direction in over a decade.

    Could this be the start of another period of stagnation? In the last thirteen fiscal years we have seen two periods of stagnation. The first was the slow rise in endorsements from fiscal 2007 to fiscal 2009. The second one was the slightly downward sloping HECM endorsement activity during six year period beginning with fiscal 2014 through fiscal 2018. Will this be the third?

    • Some good news that has developed in the last few days. Now backing up the anecdotes about more inquiries into HECMs, HUD has reported that April is the second month in a row that HECM Case Number Assignments (CNAs) have exceeded 5,550. That has not happened since October 2, 2017 (the day when the latest [but lower] PLFs went into effect along with the change in rates for both upfront and ongoing MIP).

      Total HECM CNAs for the twelve months ended 4/30/2019 were low at 50,577. That same total for the twelve months ended 4/30/2020 is slightly higher at 52,587 for an increase of 2,010. Yet the total HECM CNA increase for the two months of March and April, 2020 alone is 2,360 more HECM CNAs than the total HECM total for the two months of March and April, 2019.

      What this data shows is the inaccuracy of anecdotes expressed by so many about the increase in HECM demand in the five months before March 2020. (This is but another example that anecdotes are both right and wrong which means they are generally unreliable.)

      While several of us have made face saving statements on behalf of the industry regarding the HUD endorsement production for April 2020 (just 1,601), we are speculating. Despite statistical inference, it could be that more prospects are dropping out of HECM closing process after getting their CNA. Yet we will not see proof of any decrease in the conversion rate until perhaps after the new fiscal year starting on 10/1/2020. Yet there is no evidence that the low endorsement level last month was caused by anything other than problems for both the lenders and HUD trying to adjust to the social distancing requirements caused by Covid-19.

      So finally there is empirical evidence that demand for HECMs (but not necessarily proprietary reverse mortgages) has risen during the Covid-19 crisis.

      Based on the four month lag rule of thumb, any HECM application with a case number assigned after next Sunday (May 31, 2020) that converts into an endorsement will most likely be endorsed in fiscal 2021 rather than this fiscal year. For most long time industry participants, this comes as no surprise.

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