Every business which serves a market of customers has to determine what counts as a benchmark for success, and oftentimes one of the key benchmarks is market penetration. Since businesses often have to define what market penetration is — and what it means — for their particular business segment, that determination can help the people inside that business figure out how to grow to more effectively serve people.
The idea of market penetration, and how it applies to the reverse mortgage industry, may have to be more specifically defined considering the level of utilization that the reverse mortgage product category has.
Defining what market penetration means for reverse mortgages, and how that information can be used to more specifically tailor the product’s services to its demographic category is an important element that was explored by John Lunde, president, and Jon McCue, director of client relations at Reverse Market Insight (RMI) in a recent presentation at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting & Expo.
Defining ‘market penetration’ for reverse mortgages, how to use it
In terms of what the term “market penetration” actually means for the reverse mortgage business, it actually has a broad definition that is driven by its interactions with its core demographic and the housing market, McCue explains.
“Basically, penetration, when it comes to reverse mortgages, is the percentage of 62-plus households in a given market that currently have an active reverse mortgage,” McCue says. “Right now through the most current endorsement data from HUD, our penetration is sitting at around 2.3%.”
A low figure by most objective measures, but while illustrating a generally low level of utilization among the core prospective base of potential borrowers, it also reiterates a key facet that drives so much optimism for many who operate within the reverse mortgage space: opportunity.
“So what does that really mean, as far as actual active loans? Well, we’re looking at roughly around 27 million age eligible, 62-plus households that own a home,” McCue says. “So, we’re looking at 2.3% of that, [which means] we’re right around 634,000 active reverse mortgages right now on a national scale.”
This translates directly into opportunity for the industry, since the product applies to homeowners over the age of 62 (or 60 for some proprietary reverse mortgage offerings), and emphasizes how high the proverbial ceiling on reverse mortgages could be, he says.
“The biggest thing to look at is it means that right now, the reverse mortgage industry has a product that more than 97% of the market currently does not have,” he says. “What other industry do you know that has a product that over 97% of your consumers don’t have? The selling opportunity here is astronomical. If we compare this to some other industries and products that are similar, for one we can look at homeownership rates in the U.S.”
While education is absolutely paramount for the continuation of the reverse mortgage industry, it’s also necessary to acknowledge what can be shaped by the industry, and what cannot be. This is according to John Lunde, speaking later with RMD.
“I think a lot of what needs to happen is out of our control: time, volatility of the stock market and housing prices, etc,” he says. There’s also a significant element in simply seeing the generational shift away from pensions and so much more responsibility sitting on individual shoulders that reverse mortgages can help.”
Still, the industry’s ongoing educational efforts should keep moving unimpeded, Lunde added.
“I think the things the we could be doing are being worked and should continue: B2B approaches to realtors, attorneys, financial advisors, etc.,” he said.
What this means for the reverse mortgage business right now
At the end of the day, the low level of utilization has few direct comparisons in the housing sector, and looking at other forms of business participation that seem “low” can help to bring priorities for the reverse mortgage industry into greater focus, McCue says.
“So, we’re at 2.3% [penetration] as an industry,” he says. “The homeownership rate right now, as of 2019, we’re sitting at 65%. A little over 65% of homeownership. If we want to look at another financial product or another thing that many people who work enter into, we can look at employer-sponsored retirement programs. And right now, [based on] the latest data that we have from the US Bureau of Labor Statistics, 94% of union workers, and 67% of non-union workers currently have access through their employers to an employer-sponsored retirement plan.”
Looking further at that data illustrates that 90% of those union workers and 77% of those non-union workers are participating in employer-sponsored retirement plans, which could be attributed to familiarity, he says.
“These are all financial products [which] people are already participating in, and the margin for growing those segments are less,” McCue says. “Now, people can participate more, but at the end of the day, these are well-established programs that people are already in.”
What reverse mortgage professionals can do
Seeing such a low participation rate from senior homeowners can likely be disheartening for people in or adjacent to the reverse mortgage industry, but it would be unwise to avoid the lessons that can be learned from the current participation level, McCue says. It comes back to one of the core elements that reverse mortgage industry professionals have long sought to enhance: product education.
“With the penetration so low, we have a lot more education to do than these other examples,” he says. “People understand how a forward mortgage, buying a home works. People understand, to some degree, about the employer-sponsored programs or other retirement programs. But, this is kind of a mystery to so many. So, we need to be much more consultative in our efforts, expect longer sales cycles. People don’t quite understand [that reverse mortgages] take a much longer time.”
The involvement of educational processes is not news to any reverse mortgage professional, but continued refinement and leaning into the more consultative approach granted by things like longer initial consultations and counseling sessions can help to get the industry over the barriers of information, McCue says. Further drilling down on the educational component of the business can make a big difference, as can bringing other customers in.
“Don’t be afraid to bring new people into the industry,” he says. “We have so much opportunity here that bringing new entrants in shouldn’t [bring] fears of displacing others out. We shouldn’t be afraid of losing a loan. If anything, bringing people in is going to help with education, and it’s going to help speed things along. We need to welcome new entrants into the market, because there is so much work to be done, and the more help that we can get, the better.”
Industry outreach in the here-and-now
When reached later, McCue explained further to RMD about what could be holding higher market penetration back, positing that reaching out to the first-time borrower is essential.
“Through September 2020 endorsements, the industry is currently at 22.54% refinance on only 33,196 endorsements,” McCue tells RMD. “Nearly a quarter of all originations are refi. We have actually seen our penetration number slowly decline from 2.4% to the current 2.3% as we have FHA retiring loans, and the industry isn’t replacing them at a fast enough pace right now.”
Taking the current climate into account as it pertains to the way the COVID-19 coronavirus pandemic has affected all aspects of the American economy will be key to reaching new borrower segments, he continues.
“We need to take the opportunity given to us by this recent pandemic to reach out to trusted financial advisors, real estate agents, forward loan officers, and yes, the borrowers themselves,” McCue says. “We don’t need to talk about the doom and gloom of what is happening, but we can use examples of how a reverse mortgage has helped those who have one during these challenging times. If we don’t act fast on this opportunity, we could miss a very valuable window.”