The reverse mortgage industry is likely to be led by Home Equity Conversion Mortgage (HECM) business as opposed to proprietary products in the near future, owing to the value proposition and rate environment according to industry leaders at two different top ten lenders. This is according to the leaders themselves during panels at RMD’s HEQ event earlier this month.
The activity that has taken place in the proprietary reverse mortgage space over the past couple of years has displayed a notable level of confidence that the broader reverse mortgage industry seems to have in it. Due to Home Equity Conversion Mortgage (HECM) program changes handed down in October 2017 by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA), lenders responded in 2018 by designing and implementing a series of reverse mortgage product unbound by the constraints of the HECM program.
Growth in the proprietary space continued well into 2019 and early 2020, and the landscape we have now is populated by lenders including Finance of America Reverse (FAR), Reverse Mortgage Funding (RMF), Liberty Reverse Mortgage and Longbridge Financial, in addition to other lenders outside of the top ten.
HECM in the driver’s seat
The current rate environment and recent details about the proprietary market that were shared in a recent publication of Home Mortgage Disclosure Act (HMDA) data by the Consumer Financial Protection Bureau (CFPB) offer a perspective that indicates HECM products as being the primary driver of the reverse mortgage business, at least in the near term. This is according to Chris Mayer, CEO of Longbridge Financial.
“If you look at the size of the market, my sense is that proprietary products have shrunk, and HECMs are growing a lot,” Mayer explained to Aging Media Network VP of Content Elizabeth Ecker at RMD’s HEQ event this month. “And I think for those of us in the business, at the end of the day, most people are offering products at or very near the 3% floor on rates.”
Looking at a product that can offer a borrower a 3% rate, a 0.5% initial mortgage insurance premium (IMIP) even if 2% of the home’s value is paid upfront, it presents a solid value proposition for the borrower, Mayer says.
“If you think about doing a loan with a rate around 4%, even including the IMIP rolled in, an effective rate, and being able to borrow 50 to 75% of home value, with high values, nearly $800,000 that you can qualify [for], that is a really good deal,” Mayer says. “And that’s as close to as good a deal — the PLFs were a little higher a while ago — but it’s still a really good deal to borrow money at rates that are historically low.”
That’s a total climate that many in the industry have not seen in their lifetimes, Mayer says.
“So, I think we’re seeing the HECM really take off,” he says. “I believe in proprietary products, I believe in the medium and long term of having a business doesn’t rely only on the government and a product that allows us to do things that HECMs can’t. But, I have to say, the HECM is a pretty good deal right now.”
HECM is still unique, reverse mortgage excitement resurgent
The value proposition is also reinforced by the relative uniqueness of the HECM product in comparison with reverse mortgage offerings in other parts of the world as well, Mayer adds. That’s a factor that should not be overlooked, especially in instances where American reverse mortgage companies can help the government to more efficiently manage the HECM program, he says.
“If you look around the world, pretty few places have a product that is backed by the government,” Mayer says. “And that is something that we should have and take advantage of. If we can help the government manage it a little bit better, then the HECM is still a pretty good deal. So I do think that’s where our near term future is as an industry. Obviously there are a lot of refinances that are taking place, but […] we’re really finding that this is a moment when new people are becoming really excited about reverse mortgages again.”
Longbridge does few refinances in comparison to other lenders, Mayer says. Its focus on expanding a pool of customers has been successful recently precisely because of the value proposition presented by HECM products during this time, he explains.
“Whether it’s working with our parent [company] and new brokers who are coming into the space who haven’t offered reverse before, or in our retail shop, we’re finding conversion rates of people who are looking for reverse mortgages are 50%, or more,” Mayer says. “[That is] higher than they were at the beginning of the year. Everybody talks about all the reputational issues and all this other stuff. I think a lot of it is that right now, a reverse mortgage is a good deal.”
Value proposition, the future of private products
One of the keys to the relative success that lenders are seeing right now in the HECM space compared to general performance over the last couple of years is in the presentation of reverse mortgages, and how a borrower may be able to take advantage of the product’s features, Mayer says. It’s that presentation that has led to the current leadership position of the government-sponsored product from lenders and broker partners.
“If we can present [the HECM product] and show people what the product is, and how it’s available, we’re finding that the HECM is really selling well, and is just an extremely attractive product,” Mayer says. “Brokers are having an easier time selling it and bringing it to the table. And, we are in our retail group. So we’re super excited about where we’re sitting today.”
In terms of other lenders, RMF President David Peskin told RMD Founder John Yedinak that he’s generally in agreement with Mayer’s characterization of leadership coming more from the HECM side of the business. Still, Peskin and Mayer are both strong believers in the proprietary product concept as a viable path toward the industry’s future.
“I think that’s probably right,” Peskin says about HECM products leading the business in the short term. “Rates are so low that you can obviously pull out a substantial amount of equity right now, as compared to even a proprietary product. When you’re getting into similar home values, the HECM product is very attractive. But I think that with some innovation, which is coming around the corner, I think we’re going to start to see more and more proprietary products for those other types of customers.”