What Rising Reverse Mortgage Refinances Could Mean for the Industry

Refinance transactions are commonplace in the broader world of mortgages, and they appear to be increasingly common for the reverse mortgage industry. As low interest rates continue to fuel mortgage production generally, many reverse mortgage borrowers have become interested in refinances to take advantage of the current low-rate environment. Interest in this kind of activity seems to have increased in light of the COVID-19 coronavirus pandemic.

With an increase in refinances, however, comes a concern: the reverse mortgage industry recorded approximately 31,500 Home Equity Conversion Mortgage (HECM) originations in 2019 based on recently-released Home Mortgage Disclosure Act (HMDA) data by the Consumer Financial Protection Bureau (CFPB), and the industry has had its eye toward expanding the base of reverse mortgage borrowers as a result of reduced volume stemming from 2017 product changes. Refinance transactions, however, indicate repeat reverse mortgage customers.

This may be concerning on its face, but some also see it as an evolution of the reverse mortgage industry with plenty of paths forward, according to perspectives from loan originators and an industry analyst.

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Refis on the rise

In Q2 2020, reverse mortgage refinances made up 19% of all endorsements. This figure rose to 27% of all endorsements by July of this year, according to data shared with RMD by Reverse Market Insight (RMI).

While that rising figure may have elicited some concern previously from John Lunde, president of RMI, now he tends to look at the increasing prevalence of refis a little differently.

“Yes, I do think we’re seeing more origination volume and revenue/profitability right now because of the refis,” Lunde tells RMD. “I used to be more concerned about it since refis don’t add customers to the industry, but I believe that refis are becoming a normal part of the industry at this point similarly to forward.”

The fact that additional incentives have been added to the prospect of refinancing a reverse mortgage in recent years makes these changes easier to place in context of the product category’s evolution, Lunde explains.

“As the product has become more sensitive to interest rates with the lowering of the PLF expected rate floor, it naturally creates more interest rate sensitivity,” Lunde says. “Couple that with many originations since the 2017 product changes being done above the floor and it creates significant incentive for the borrower and originators to refinance.”

Doing the legwork now on new, potential reverse mortgage prospects will also ultimately help the industry to expand when the rate environment inevitably changes, Lunde says.

“Just like in the forward world to the extent originators and companies focus on refinances, it makes for a very volatile, cyclical business dominated by interest rates that are out of their control,” he says. “By continuing to do the harder work of reaching new customers through professional relationships, customer referrals and other means that take longer but are more evergreen, some originators and companies will be much better positioned for when the market is less favorable for refinances.”

Nonetheless, since reverse mortgages make up only a very small fraction of the larger mortgage market, the pool of customers who have the ability to refinance their existing reverse mortgage will eventually be exhausted, he says.

“There are simply much less potential customers for refinance in reverse than forward, so the refi wave will only continue for so long,” Lunde says.

Reverse refis ‘should not be viewed differently’

Reverse mortgage refis should not take the industry’s proverbial eye off of educating new prospective customers, but that doesn’t mean that being in the middle of a “refi boom” needs to be concerning in and of itself, either. This is according to Steven Sless, reverse mortgage division manager with Primary Residential Mortgage, Inc. (PRMI) and branch manager with the Steven J. Sless Group in Owings Mills, Md.

“In my practice, reverse refi’s (HECM to HECMs) are accounting for over 50% of our total volume,” Sless tells RMD. “I don’t think that’s a bad thing so long as we remain committed to our mission of prospecting for new business in a variety of ways.”

With higher refi volume has come higher profitability for Sless’ business, which he’s taking advantage of by launching a number of new initiatives related to education and borrower outreach, he says.

“I’m developing new initiatives to engage first-time HECM borrowers while my team, in large part, handles the refi clientele,” he says. “In the fall we will be rolling out a new educational video series focused on educating new borrowers and advisers alike. We’re also rolling out a new website and around the first of the year, and I’m excited to launch a new podcast.”

All of this work, he says, has been funded by increased refinance volume. On top of this, looking at reverse mortgage refinances differently from forward mortgage refis is too common a practice, he says.

“I know HECM-to-HECMs have a certain stigma about them, but I really don’t feel they should be looked at any differently than a forward refi,” he says. “We’re helping folks drastically reduce their interest rate and in most cases lower their mortgage insurance premium (MIP) from 1.25% to .5% annually.”

This can lead to both more preservation of home equity, and access to greater amounts of it for borrowers, he says.

“It’s a net win for the borrower, and after all that’s who it should be about,” he says.

Health and volume, different components

Refinance volume is most definitely up, but isn’t a sole indicator of the health of the reverse mortgage industry according to Laurie MacNaughton, reverse mortgage specialist with Atlantic Coast Mortgage near Washington, D.C.

“‘Health’ of the reverse mortgage market and ‘volume’ of the reverse mortgage market, in my estimation, are two different – though related – things,” she says. “I believe both the industry’s health and its long-term upward trajectory are solid, apart from the additional H2H volume we’re currently seeing. The sizable uptick in volume is absolutely due in no small part to HECM-to-HECM refinances. H2H refis represent only a fraction of my volume, though this year I have done more than in most years.”

Once rates begin to rise again, HECM-to-HECM refi volume will begin to fall, she says, though necessity is often a driving factor behind many reverse mortgage borrowers so rates are not a sole, determining factor in someone’s decision to move forward with getting a reverse loan.

“Consequently, the current [refi] volume upswing doesn’t concern me, nor do I think it will have a long-term deleterious impact on the health of the HECM market,” MacNaughton explains. “My observation is that each time there is an exceptional event, new lenders enter the market believing it to be an easy sector. This is not an easy sector.”

When new lenders who do not remain committed to reverse find themselves interacting with “typical” reverse mortgage borrowers, they may find themselves unequipped to handle the more consultative aspect of the reverse business, MacNaughton says.

“Once the low-hanging fruit is harvested and the more typical borrower becomes their customer, some industry newcomers do not have the organic network – nor, in some cases, the interest – to go the distance with the complex and slow-moving scenarios that are commonplace,” she explains. “We’ve seen this before, and I do not doubt we’ll see it again.”

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  • I would be curious to hear the perspective of someone in the HECM secondary market re the effect of accelerated prepayments due to H2H refis on bids for new HMBS pools.

  • Jim Warns makes a crucial point. If HECM refis begin to erode HMBS/REMIC investor confidence in the expected life of HECMs, we could easily see lower premiums.

    On the other hand, originators and lenders are pleased with HECM refis since they yield a second, third, or in some cases a fourth premium on an ever growing UPB. In fact, there have been peaks and troughs over the last ten fiscal years related to HECM Refis, so in that regard their inconsistent volume is normal for HECM Refi fiscal year endorsement activity.

    As to the reasoning that HECM Refis are as normal as forward refis, think again. MBS/REMIC investors generally invest in fixed rate fully amortized forward mortgages and expect to see the UPBs of these mortgages go down over time while receiving cash distributions on performing mortgages. Their highest interest payouts are much larger in early years than later years. While Refis in that mortgage segment means that the discounted cash flow from performing mortgages that terminate due to refis mean less discounted cash flow to MBS/REMIC investors, their lower returns than anticipated will generally be higher than the same situation for HMBS/REMIC investors.

    HECMs also have different interest expectations. Since the dominant portion of HECMs being endorsed since fiscal 2013 are adjustable rate HECMs (ARHECMs), we will focus on that product alone. The majority of ARHECMs have their UPBs increase monthly through interest and MIP accruals. As to interest accruals on HECMs, there are four components: 1) simple interest on the principal limit drawn to date, 2) interest on the growing accrual of interest, 3) interest on the growing ongoing MIP accruals monthly and 4) anticipated increased interest rates based on the general rule that the expected interest rate is higher than the initial at closing. MBS/REMIC mortgage interest is generally not compounded and is charged on an ever decreasing UPB.

    HMBS/REMICs generally receive one payout with a HECM and that is at termination. Whether its investors receive any portion of those payoffs until the cash reserves of the REMIC are at a certain point depends on the terms of the REMIC. Currently the performing HECMs that terminated this last fiscal year had an average mean of about 9 years. If a HECM Refi occurs before 9 years and no payout is made to the investors, the discounted cash flow and rate of return are substantially reduced to the investors.

    It would be great if RMD reached out to its secondary market participants to determine how long it takes on average for a HMBS/REMIC investor to begin to see payouts on their investments and what percentage those payouts are of their total value on the date of payout. In fact, it would be nice to see a graph of those payouts and percentages for each year of the investment.

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