The reverse mortgage industry is in a generally healthy place, but an increased level of refinance activity for Home Equity Conversion Mortgages (HECMs) could create a potential issue in terms of serving repeat customers continuously due to the current low-rate environment as opposed to appealing to new borrowers. That’s not to say that HECM-to-HECM refinances are inherently bad if they’re serving the needs of borrowers, but the level of refi volume on total HECM volume is pronounced.
This is according to John Lunde, president of Reverse Market Insight (RMI) who appears as the guest on the latest episode of The RMD Podcast, which is available now.
Lunde, who helps keep the reverse mortgage industry informed with highly detail-oriented data analysis tools breaking reverse mortgage volume down by an abundance of tracking metrics, spoke about the state of the industry and where we’re currently at now that it looks like the nation is starting to overcome the most difficult period of the COVID-19 coronavirus pandemic.
Refinances: not inherently a bad thing if the borrower is helped
The reverse mortgage industry should always keep the benefit of the borrower at the front-of-mind when looking at potential options that can be beneficial to them, including a HECM-to-HECM refinance, he says.
“I look at refis as potentially helping the borrower,” Lunde says. “At the end of the day, I think the borrower needs to be the focus of everybody else involved in the industry. What are the benefits that the borrower is going to achieve, and then how does everybody else operate around that in a sustainable fashion? I think when the borrower’s home value has gone up pretty significantly when interest rates have dropped, they can pursue a refinance that may not even cost them money out-of-pocket.”
On top of that, there is a scenario Lunde can paint where refinances are viewed simply as a healthy part of a maturing industry and product offering, he says. Still, that should not necessarily take away from an industry focus on finding new customers, he says.
“Obviously, we don’t want to be churning and over-refinancing customers and creating more benefit for the originator than for the customer themselves,” Lunde explains. “That’s always going to be a little bit tough with respect to the current environment, where we have such low interest rates that provide additional borrowing capacity. And then also, obviously at the same time, over the past year we’ve seen a pretty dramatic rise in home prices in some areas, that really creates the potential for additional benefit on the consumer side.”
The industry shouldn’t ‘lose sight’ of new borrowers
Those are the broad strokes of the potential benefits and detriments of heightened levels of refinance activity in the reverse mortgage industry, but the business should also make bringing new borrowers into the fold a priority, he says.
“If you’re an originator or [a part of] any company involved in the industry, we can’t afford to lose sight of new customers,” Lunde says. “The fact remains that we have a very low share of the potential customers for this product. And, there simply are not that many potential borrowers to refinance. This is a fundamentally different position than the forward mortgage world, where it’s a very mature industry. There’s virtually unlimited customers to refinance, and we’re not in that position. We have a long way to go, and a lot of work [remaining] to get there.”
A longer-term perspective of the work involved to get the industry to a more mature place that serves more customers and expands the field of potential borrowers must remain “fundamental” to anyone’s strategy if they get involved in the reverse mortgage business, Lunde says.
Pandemic progress for reverse mortgages
The reverse mortgage industry at-large, however, has shown progress in terms of volume levels now when compared to the state of the industry in the period immediately preceding the onset of the COVID-19 pandemic, Lunde says.
“I think we have made progress, I don’t think there’s any question there,” Lunde says. “And some of that hard work I was referring to earlier in terms of acquiring new customers, doing work with other stakeholders and other potential advocates for the industry and financial planners, Realtors, and just the mainstream perception of the product, there’s been a lot of hard work done on all those fronts. But that being said, there’s probably more work in front of us than there is behind us.”
The general increase in volume observed by the industry also brings another stark total when it comes to comparing newly-originated HECMs with the volume on the refinance side, Lunde says.
“We’re a little over 2% penetrated in terms of potential customers, and that’s been going down over the last couple of years, partly because of refinances,” Lunde says. “So, we’ve been having good volume, but with a growing share of that being refinances. In 2019, refis were 8% of HECM endorsements. And in Q1 2021, they were 37%. So, that’s a pretty dramatic difference.”
Higher penetration rates are needed
When thinking about what those figures do in terms of expanding the reverse mortgage customer base, refinances are net neutral, Lunde says. While reiterating that refis on their own are not negative, the current penetration rate for new customers should still be prioritized since it’s currently at a notably low level and has remained there for some time.
“Inherently, we can’t lose sight of the fact that we really need to get much, much higher than a 2% penetration rate to really have an effect and benefit,” he says. “Another analysis we’ve done in thinking about how the industry grows its installed base is [looking at] what is correlated with higher volume, and what is correlated with more customers being served. The strongest correlation that we’ve found – and this is a very simple level of analysis – but thinking about the more companies that are involved with this industry, that’s historically associated with higher volumes.”
One of the ways this can be addressed is if the reverse mortgage industry becomes home once again to the major banking institutions that left it behind over a decade ago, but more work likely needs to be done in order to convince larger banks to return to the space, Lunde says.
Listen to the full conversation with John Lunde in the latest episode of the RMD Podcast.