FHA: Reverse Mortgage Performance Improves as Data Shows Borrower Preferences Change

The Home Equity Conversion Mortgage (HECM) program has seen a general increase in activity over the course of fiscal year 2020, though some of that increase can be attributed to higher levels of refinance transactions and unique components of the mortgage market observed during the COVID-19 pandemic. A longer view also shows some interesting shifts in borrower preferences concerning the type of product being used, and what borrowers choose for their rate type.

This is according to Dr. Joshua Miller, senior advisor to the deputy assistant secretary in the Office of Single Family Housing at the U.S. Department of Housing and Urban Development (HUD). Dr. Miller presented this update on the reverse mortgage industry during the National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting & Expo this month.

Counseling certificates, case number assignments

According to data from HUD, counseling certificates issued in fiscal years (FYs) 2018 and 2019 hovered right around 60,000 certificates issued, while those issued through the third quarter of FY 2020 numbered at approximately 50,000, but the data indicates that the full number of certificates issued in FY 2020 is on track to exceed what was seen in the prior two years, Miller said.

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“A simple, straight line projection suggests that we will exceed FY ’18 and FY ’19 [in the issuance of counseling certificates],” Miller said. “But, it is important to point out that not all certificates are going to turn into HECM endorsements. Nonetheless, this does provide us information that is useful, and helps us understand what may potentially come in the door.”

In terms of data regarding HECM case number assignments, data shared from the first six months of 2020 show a noticeable increase in the sheer number of assignments in 2020 when compared with both 2018 and 2019 on a monthly basis. It comes with a slight caveat, but the increased number of assignments fits well with the observed increase in counseling certificates, Miller said.

“As we know, HECM certificates and case numbers, those go hand-in-hand,” Miller said. “But I think the important takeaway from this is to see that in each and every month for the fiscal year 2020, the case numbers assigned exceed those [seen] in terms of ‘18 and ‘19.”

When directly compared with case number assignments in June of 2019, the figure in June of 2020 is significantly larger than the figure observed one year prior. Since this is at the beginning of the loan process, this figure isn’t necessarily indicative of the amount of loans being endorsed, but it does illustrate a noticeable uptick in reverse mortgage business activity on the HECM side, Miller said.

“This is at the beginning, individuals actually getting case numbers from HUD,” Miller said. “And so in particular, we can see for the entire month of June in fiscal year 2020, there were over 5,700 case number assignment requests.”

In June 2019, this figure sat at just over 4,000 case number assignment requests, according to the data.

Assignments and endorsements by product type: booming refi business

When looking at reverse mortgage data as separated by product type, an interesting picture emerges: while HECM for Purchase (H4P) activity is still very low, the data indicates that it is starting to rise as a product choice for reverse mortgage borrowers. However, as has been noted previously by other data and by industry leaders, HECM-to-HECM refinance transactions are seeing a lot of activity across the reverse mortgage business.

“We have seen throughout the program that the traditional [HECM} is where the bulk of the case number assignments or endorsements for the portfolio lie,” Miller explained. “And as far as [H4P] goes, that’s generally trending slightly upward. But during this time period in fiscal year 2020, what we see is the relative share of case number assignments going for purchases about 4-5%. Where the real action is, is actually in HECM-to-HECM refinance. The actual share is elevated over the historical norm. And as far as June month-end goes for all case number assignments in June, 31% are for HECM-to-HECM refinance [transactions].”

Looking at the product types used based on endorsement data also shows that in terms of the raw numbers for refis, 2020 saw a new record, Miller said.

“From fiscal year 2010 to the third quarter of fiscal year 2020, there has been movement across product types. For example, refinance has a recent historical low of just under 3% in terms of the share of all endorsements, and that was seen in fiscal year 2012, to a high of over 17% of all endorsed loans in fiscal year 2020, in terms of the third quarter,” Miller explained.

This is lower than the refi figure seen in the case number assignment data, but still sees a notable spike in refinance activity in 2020, which could be attributable to some of the unique factors at play due to the COVID-19 pandemic, he said.

“Just looking for those first nine months [of] fiscal year 2020, 17% of all endorsed loans are for HECM-to-HECM refinance,” he said. “So, the long run average in terms of HECM-to-HECM refinance over that period is about 8%, but we have seen fluctuations. Some of those fluctuations can be explained by the interest rate environment. Low interest rates, and also above-normal house price appreciation.”

Volume trend being ‘reversed’ in 2020

In terms of raw HECM volume, the trend observed over the past decade has been moving in a noticeably downward direction, stemming from the immense amount of change that the HECM program has undergone since the earliest days of the recovery from the 2007-08 financial crisis that universally impacted housing in America. However, indications based on the HUD data is that a downward trajectory of HECM endorsements is beginning to show signs of turning around based on the data, Miller shared.

“What we see in terms of endorsements — this is by fiscal year — is that the volume has generally been trending downward since fiscal year 2010,” he said. “This is particularly true for ’18 and ’19, but at least the preliminary numbers through the third quarter of fiscal year 2020 suggests that we’re going to reverse that trend.”

Based on the data from the third quarter of fiscal 2020, the data detailed about 30,000 HECM endorsements by that point in time. As other industry analysts have previously pointed out, it doesn’t take a whole lot of extrapolation to see where the full year endorsement total is headed.

“Simple, straight-line projection suggests we’ll fall squarely between FY ’18 and ’19, but more importantly, above last year’s numbers in terms of endorsements,” Miller said.

While it had not yet been released at the time Dr. Miller made this presentation, the 2020 Annual Report to Congress by FHA detailed that the reverse mortgage portion of Mutual Mortgage Insurance (MMI) Fund continues to stand at a negative capital ratio on the overall government-backed portfolio, according to an annual actuarial review of the fund’s finances released late last week. However, its negative value over the past year has been almost entirely diminished, sitting at approximately -$500 million compared with the -$5.92 billion figure recorded in 2019.

This marks a second consecutive annual improvement over the issues that have been present in it over the last few years, though FHA continues to see a need for action to be taken to create further stability in the HECM book, according to FHA Commissioner Dana Wade.

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