Op-ed: For Reverse Mortgages, Financial Disaster Equals New Opportunity

The COVID-19 coronavirus pandemic has wreaked havoc on many industries indiscriminately, from energy to food service and seemingly everything in-between. While the expectation would be that the reverse mortgage industry would pivot and maneuver through this time based on its response to past crises, what’s actually happening goes beyond that: this pandemic seems to actually be helping the business.

Since mid-March, more than 44 million Americans have applied for state unemployment benefits, the largest figure in history. An additional 1.5 million people filed for benefits last week, according to the Labor Department. The stock market has been on a turbulent ride, with historic losses posted in March, many of those same losses recovered in May, and yet another steep drop being observed late last week.

These are all undoubtedly negative occurrences for American households, but they actually seem to be creating interest and — more importantly — activity for the reverse mortgage industry. Because of the economic impact of the virus and the already shaky ground on which senior retirement sits in the United States, reverse mortgage products and the professionals who offer them are finding themselves consistently busy as more Americans try and find new and novel ways to solidify their financial standings.

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Additional interest has been fueled by market losses, the freezing of credit markets has also led to reduced competition, and low rates that have been manipulated to help the economy through this moment in time have provided more of an active upside for reverse mortgage borrowers.

Like many people when this crisis started, I was sure that the economic devastation being wrought by the virus would not spare the industry we cover here on RMD, but that ended up not being the case because of one core reason: shocks like these give reverse mortgages their reason to exist.

From ‘shock and awe’ to pragmatism

Consider where the country has been over the past few months. Less than a week after President Trump declared a national emergency stemming from the coronavirus, the stock market saw its sharpest drop in over 30 years and necessitated more financial professionals to entertain less typical options to ensure the health of client portfolios.

As the industry reacted much like a lot of other businesses across the world and prepared for catastrophe — resulting in some reverse mortgage companies taking drastic steps including laying off some employees or scaling back operations.

Retirement experts Prof. Jamie Hopkins and Dr. Wade Pfau, respectively, related to RMD in March how the product features of reverse mortgages are uniquely suited to answer the new kind of immediacy required to safeguard client finances, with Hopkins citing the ability to pay off a forward mortgage with a reverse to eradicate monthly payments and Pfau touting the ability to use the reverse mortgage as a “buffer asset” during a bear market.

That initial disorientation related to the steep drops in the stock market gave way by even early April to a corps of reverse mortgage loan officers who have found ways to adapt to current economic conditions, and position the reverse mortgage as a possible solution. Loan officers in places like Colorado and Maryland even expressed to RMD in April that referral business had seen a noticeable spike, up to and including some partners who had gone back to the LOs because of the new situation created by the pandemic.

Based on conversations with these LOs, it looks like what has happened is that previous potential clients who at one point decided against getting a reverse mortgage have now seen their circumstances change. With that change in their own situation has come the realization that a reverse mortgage product is now better suited to help them through a tough time.

Regulation, and the necessity for the product

The industry’s chief governing body, namely the Federal Housing Administration (FHA) and Department of Housing and Urban Development (HUD), have also stepped up to make sure that the reverse mortgage product is available to serve people in the ways they need service. The government has allowed for relaxed appraisal and documentation requirements, is permitting digital delivery of HECM case binders during the emergency, and has actively facilitated the expansion of reverse mortgage availability as a result.

This has created some additional surprise on its own: the continuous flow of regulation and intervention on the part of the government is often a cause for anxiety and difficulty on the part of the reverse mortgage industry, since compliance anxiety often results from changes handed down by the government. In this case, though, the government’s intervention has made for a much easier time for the industry, streamlining and simplifying the way that people can originate and close reverse mortgage loans.

Relevance for the reverse mortgage product category is also bolstered by the fact that major financial institutions have halted their own Home Equity Line of Credit (HELOC) offerings, starting with JPMorgan Chase in mid-April and growing to encompass Wells Fargo by May. The exits of those institutions has only strengthened the stance of reverse mortgage companies, according to the perspectives of loan officers all across the country as related to RMD in May, limiting the competition and expanding the landscape of the business even further.

These factors have led reverse mortgage industry participants have transitioned from a perspective of overriding caution to one of general optimism. In mid-April, LOs across the country found themselves very nervous about what social distancing and other virus mitigation efforts might do to their ability to conduct business with senior clientele, with a California originator advising colleagues to “prepare for the worst.”

Now, many of those same originators are finding themselves busier than they’ve ever been all year, with a favorable rate environment enhancing benefits for borrowers and added interest in proprietary products coming from the current economic situation. Many loan officers I’ve spoken with have told me — both on-the-record and off — that things like referral partnerships and loan pipelines are as large as they’ve ever been, precisely because the product is there as a tool for seniors to weather financial shocks like this one.

Fulfilling a promise

It’s not exactly a good idea for the reverse mortgage industry to market to people how it has managed to profit off of a crisis that is afflicting millions of Americans, but at the same time, the truth of the matter is that this is why reverse mortgages exist in the first place. In an environment where seniors’ retirement futures have already been put at risk by dwindling savings and disappearing pensions, the idea of the reverse mortgage is to allow a senior to use the equity in their home to either meet necessary expenses in old age, or to enhance their quality of life in retirement.

Since this crisis has had a major negative impact on both the physical and financial health of seniors, the fact that this product category is around and providing some necessary relief for those who have been adversely affected by a widespread economic downturn should be an encouraging development for the industry, since it is fulfilling both its stated purpose and promise.

Keeping up with all the dimensions of news — from new business practices to swings in industry metrics like endorsement data — that the pandemic has revealed for the industry has been dizzying. Considering how much the general tenor of conversation has changed with people at all levels from boots-on-the-ground loan officers to chief executives, it has emphasized just how resilient the industry remains, while also illuminating that for American seniors, the reverse mortgage product is well-suited to serve as a tool to solve some of their financial problems.

Of course, what the industry does with these circumstances in the end will be anyone’s guess. As of right now, though, more people are both talking about and acting on the opportunities that can be presented by the reverse mortgage product category. The relevance and even necessity for some to explore reverse mortgage options has been present throughout the crisis, and has been further highlighted because of seniors’ need for additional stability.

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  • Truly an article based on very clouded optimist anecdote producing an incorrect outlook as to potential HECM growth for the remainder of this fiscal year and beyond. Yet the numbers are still welcome news but tell a much less optimistic story. In this comment numbers are allowed to tell the story while deemphasizing the hype contained in the article.

    Looking at endorsements for the first seven months of this fiscal year compared to last we find that endorsements are less than 1,900 more than they were in fiscal 2019 which is an increase of about 10.2%. H4P make up just 2.2% of the increase. Traditional HECMs are in a loss position of -29.3% but HECM refis make up 127.1% of the increase. Adding the three percentages together we see that they account for 100% of the increase. So what is carrying the industry as to increase does not come from consumers who are new to HECMs but rather existing borrowers who see in lower interest rates an opportunity to qualify for more proceeds.

    Yet CNAs increased by 6,911 (for a projected endorsement increase of about 4,500 endorsements) or about 24.9%. Of this increase, 79.4% comes from HECM refis, 18.8% comes from Traditional HECMs and the remaining 1.8% from H4Ps. To understand just how dominating HECM refis have become, 92.8% of the CNA increase in March 2020 comes from HECM refis while that percentage rises to 94.5% of the increase in CNAs in April 2020.

    HECM refis are dominating the increases in endorsements and CNAs during the first seven months of fiscal 2020. Normally very few HECM refis come from referral sources. Again what is driving the refi situation right now is the lower expected interest rates being offered right now. So the nationally, the principal source of all of the increased HECM activity are HECM refis. Since that type of HECM is the most volatile source of HECMs and the expected interest rates are not going much lower for now, expect to see a slight drop in HECM endorsements next fiscal year.

    What this shows is that if HECM refi increases are excluded from the endorsement count, the financial panic related to COVID-19 is responsible for maintaining endorsements that were at this time last fiscal year and not much more. Where the excitement over HECM growth should be focused is on HECM refis but that would not make for as an optimistic outlook for fiscal 2021 and beyond. Unfortunately following optimistic anecdote clouds the true picture of the source and type of HECM that is dominating HECM growth in the first seven months of this fiscal year.

    A deeper dive into why the picture of the first seven months of 2020 is a little pessimistic is that unfortunately, the last month we have both breakdowns in HECM endorsements and case number assignments (CNAs) is April 2020 when COVID-19 had its greatest negative impact on processing endorsements which totaled 1,597 endorsements yet we know total endorsements for May 2020 was 5,038 but HUD has yet to provide the breakdown of those endorsements. CNAs for May 2020 were 5,562 and again HUD has not provided the breakdown on CNA data yet. Do not get overly excited about the CNA total since only about 64.6% of the CNAs will turn into endorsements of about 3,600.

    In the next 2 weeks, we expect HUD to post the breakdowns for both HECM endorsements and CNAs for May 2020. Very, very few HECM applications that receive CNAs dated after June 12. 2020 are expected to become endorsed HECMs in fiscal 2020 instead we are now beginning to focus on fiscal 2021.

    Finally, let begin describing the trend we are beginning to see over the next few years. While fiscal 2019 experienced a terrible drop in HECM endorsements, fiscal 2021 could be the start of another period of secular stagnation due to the expected drop in HECM refis in early fiscal 2021 and no indicated substantial and sustainable growth in either Traditional HECMs or H4Ps. We could have up to four years in a row of HECM endorsements of less than 40,000 for each of those fiscal years. Perhaps we will see the return of a stronger proprietary reverse mortgage market in the following three fiscal years but for now that is mere speculation, not a true interpretation of the HECM endorsement and CNA numbers for this fiscal year.

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