Liberty, Longbridge Execs Share Reverse Mortgage Lessons Learned from Pandemic

The reverse mortgage industry hoped for the best and prepared for the worst shortly after the onset of the COVID-19 coronavirus pandemic, but industry leaders from some of the top lenders in the space are encouraged by the way the business has performed, owing to the demonstrated value that a reverse mortgage has presented to borrowers and fuller loan pipelines.

Still, challenges remain when it comes to broadening the base of reverse mortgage borrowers to include new clients in addition to repeat refinance customers, especially as the industry makes an effort to communicate potential benefits to financial planners and other referral sources. This is according to a panel discussion during the National Reverse Mortgage Lenders Association (NRMLA) Virtual Summer Conference this week.

The discussion featured industry leaders including the CEO of Longbridge Financial and the president of Liberty Reverse Mortgage, discussing how the crucible of the COVID-19 pandemic has shaped the industry, with many observing positive business outcomes while acknowledging that longstanding difficulties still remain.

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Reverse mortgage helped borrowers weather a stock market storm

The drop in the stock market in the immediate aftermath of the pandemic’s onset in the United States is well-documented, but for those customers who had a reverse mortgage already in place, they were well-situated to take advantage of their home equity to withstand the economic shock observed in the stock market. This is according to Mike Kent, president of Liberty Reverse Mortgage.

“On February 12, if I had my money invested in the stock market, I’d be feeling really good because the Dow Jones Industrial Average was at 29,551,” Kent explains. “Just one-and-a-half months later, that same wonderful feeling I had would begin to give me a sinking feeling because now, the Dow Jones Industrial Average is at 18,591: a drop of 10,959 points in less than a month-and-a-half.”

For seniors, that could mean the evaporation of wealth over a very rapid period of time, causing real financial stress and anxiety. This is where the story of the reverse mortgage product demonstrates the utility and flexibility of the category.

“This is the story we tell: if you had a reverse mortgage and an available line of credit, you wouldn’t have to tap those equities for cash because you would tap the equity in your home,” Kent says.

In the intervening time the stock market has recovered the majority of the losses it endured earlier in the year, but that does not diminish the usefulness of a reverse mortgage because of the scenario that played out.

“All through this, if I would have had my reverse mortgage and my line of credit, I wouldn’t have really had to worry about it,” Kent says.

Most observers understood that the market dive came about because of the immense amount of uncertainty that the pandemic created in the financial markets, and that once that uncertainty stabilized, there would be some kind of recoupment of market losses. A borrower who had the ability to draw on a reverse mortgage line of credit would’ve likely been able to ride out the market volatility, tapping that asset instead of more volatile investments.

“This story that we tell about how a reverse mortgage could be an essential part of your retirement and an absolute life changer, in some cases, was just proven out,” Kent says. “I think that’s something we all need to take to heart, and we should feel good about that story we tell because it is factual. For many seniors — some of the most affected by the pandemic — that story we tell came to fruition and probably made a significant difference for those who still had a reverse mortgage.”

Pandemic difficulties, a need to broaden the borrower base

Longbridge Financial is all too familiar with the high level that the business is performing at being contrasted with the strain and challenges presented by the pandemic on organizational and personal levels, since two of its own employees became infected with COVID-19 earlier this year according to Chris Mayer, CEO of Longbridge.

“Luckily, both of them survived and are back at work, but we’ve had a number of relatives of our employees who have passed [away from] COVID,” Mayer says. “And so, it’s important for us to think and realize how lucky we are to have jobs, and to have an industry that is doing well at a time when there’s still a lot of uncertainty and a lot of disease spreading.”

Other metrics indicate that the industry has grown and that the origination of new loans is more profitable today than the process was in mid-2017, since raw volume is lower while average balances in Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) have increased, Mayer says.

“In other words, loans are more profitable today than they were [in mid-2017], but we’re actually serving fewer customers,” Mayer says.

Additionally, lower-balance borrowers have displayed more reticence in terms of getting a reverse mortgage, put off by a 2% initial mortgage insurance premium (IMIP) that is more expensive than it was prior to October of 2017. On top of this, the low interest rate environment has seen an abundance of refinance transactions.

“Obviously, the reason behind refinancing is clear,” Mayer says. “But at the same time, what’s also happening is it has, to some extent, restricted the number of new borrowers we’re bringing into the system.The number of new loans has shrunk relative to where we were three years ago, from 4,200 to 3,600. But of the loans that are being originated today, at least a third of them — certainly by dollar balances — are refinances.”

This means that the industry is serving a fair amount of repeat customers as opposed to broadening the borrower base, and the industry should keep this in mind for the future. Hiring to manage the new levels of volume is also difficult because of the pandemic, while health concerns for borrowers can also create issues for brokers and customer connections. Still, the opportunities granted by borrower needs and factors like low interest rates have heated the proverbial iron, and it’s up to the reverse mortgage industry to strike it, Mayer contends.

“Never has this product been more valuable than it is today,” Mayer says. “With rates likely to be low for the foreseeable future, I think the opportunity for us to make our case is going to be as good as it’s been for a long time.”

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  • “…for those customers who had a reverse mortgage already in place, they were well-situated to take advantage of their home equity to withstand the economic shock observed in the stock market.”

    Not only did Mike use the right name for our borrowers but he makes an interesting point about existing borrowers who have adjustable rate HECMs. What stats show that use?

    “‘I think that’s something we all need to take to heart, and we should feel good about that story we tell because it is factual.'” The only part of the story that is clearly factual is the event itself, unless there is verifiable data from an independent third party showing that the practice has been indeed adopted by some percentage of HECM borrowers.

    “… a 2% initial mortgage insurance premium (IMIP) that is more expensive than it was prior to October of 2017.” Not true. For some borrowers the initial MIP went up but others saw their initial MIP drop.

    Up until October 2010, the initial MIP was 2%. That continued to be true for HECM Standards but not with the new HECM Saver with its 0.01% initial MIP rate. The highest initial MIP for a Saver was just $62.55. That is caused three well recognized financial planners to recommend HECM Savers including John Salter, Harold Evensky, and Michael Kitces. When HUD stopped offering insurance on Savers, Harold and Michael no longer saw HECMs quite so positively.

    On September 30, 2013, for the first time, we different initial MIP rates were offered with HECM Standards. If mandatory obligations were not more than 60% of initial principal limit, the initial MIP was just 0.5% but if mandatory obligations were greater than 60%, the initial MIP was 2.5%.

    Thus on 10/2/2017, for borrowers with mandatory obligations of no more than 60% of the initial principal limit, they saw their initial MIP claim 1.5% to 2% but for those with more than 60%, their initial MIP DROPPED by 0.5% to 2%.

    If Chris Mayer is right and as predicted HECM Refi endorsements drop substantially, lender revenues could be hit hard next fiscal year. Except for this article, there has been a deflecting of the importance of HECMs Refis to the industry this fiscal year. Chris Mayer makes an even bigger case than I have about the importance of HECM Refis. The big problem for next year is that HECM Refi revenue could tail off by more than 70%.

    Once again Chris Mayer brings an excellent perspective to where the industry is right NOW.

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