The proprietary reverse mortgage market is still in relatively early days considering the amount of time in which multiple lenders have been competing in the space. While new products are likely to emerge in 2021, it may be unlikely for proprietary products to ever overtake the FHA-backed Home Equity Conversion Mortgage (HECM) offerings. Still, proprietary products are an important element of the reverse mortgage industry’s growth, and additional offerings and innovations should be expected.
This is according to David Peskin, president of Reverse Mortgage Funding (RMF). Peskin sat down with RMD Founder John Yedinak last week at RMD’s inaugural event HEQ: The Future of Home Equity in Retirement to discuss the state of the proprietary market, and how it can be expected to evolve in the future.
Proprietary versus HECM
When asked if proprietary products could potentially rise to overtake HECMs in the reverse mortgage market, Peskin wasn’t sure that could be the case but also added that it’s really dependent on ways that current and future products are positioned to potential customers.
“I think in general, at the end of the day, I don’t know that [proprietary products] will ever exceed HECMs,” Peskin opined. “I think they could, depending on some changes that come to the products, but I also do think there’s a big opportunity [that remains].”
Part of this could stem from the idea that many borrowers are looking for the product that will put the most amount of money in their hands, but product innovation in relation to the HECM is still in the relatively early stages when considering that the proprietary space has only been a venue for multiple players on a large scale since 2018, he says.
“Obviously, the HECM fits that bucket. For someone who’s looking for the most amount of proceeds, they’re going to turn into a HECM if they’re in that bandwidth,” Peskin explains. “But, for anybody looking for something outside of the HECM, obviously the proprietary product is there. There are a lot of people that shy away from the product today for other reasons, such as the misperceptions surrounding the product, etc. But I still think we’re in the early stages of innovation right now.”
Room for future innovation
One of the areas that the proprietary reverse mortgage space would likely be able to innovate meaningfully is on underwriting, Peskin says. This is because a lot of what is currently seen in terms of underwriting proprietary loans is an echo of processes that are adhered to on the government-sponsored side.
“I think a lot of [product evolution] is going to have to come from innovation. It makes sense on underwriting. Much of underwriting today mimics FHA, I think products can be far more focused around credit quality versus just residual cash flow,” Peskin says. “In some cases, you have a borrower who’s removing a $1500 a month mortgage payment, their credit is perfect, taxes insurance are paid on time, but they’re short by that residual cash flow that is really the set and stage for everybody.”
Making adjustments to that component based on overall credit scores or certain assets may help, but lenders need to start thinking outside of the box in a way that is evocative of many leaders in the forward mortgage industry, Peskin says.
“I think we can custom-tailor based on the individual’s profile,” he says. “Over time, as we maintain and look at the portfolio and how things perform, it gives us the opportunity to think about other alternatives that we can change in the product itself.”
Demographics still in industry’s favor
The potential for growth in the reverse mortgage space is still very high because of the demographic trends that are working in its favor, Peskin says. As those demographic trends continue, the likelihood increases for retirees who will either need or want to access their home’s equity for purposes ranging from covering expenses to increasing the quality of retirement.
“There are over a million people a year that own a home that are over the age of 60, and every year that grows by a million that have a first-lien mortgage,” Peskin says. “We have no choice but to find new ways to allow these older Americans to tap into the equity in the home. So, aside from product innovation, I think technology will obviously play a major role. When I think about what goes on today in the forward mortgage market. where [they’re] using technology to underwrite loans, we’re not doing that today in our world.”
Leveraging advances in technology, particularly in areas that it has not yet interacted with in the reverse mortgage business, will be key to the creation of new innovations and efficiencies in the future, he adds.
“I think we can be more specific to what a client can qualify for in terms of offering a better rate, or LTVs when we can get more specific to looking at age, credit score, and the property location,” Peskin says. “All that can be done through technology and innovation. At the same time, we’ve got to drive down our operational costs with technology like in the forward world, with these types of automated engines for appraisals and even underwriting the consumer, etc.”