There is not an overabundance of publicly-traded companies operating in the reverse mortgage arena, however it’s hard to ignore an emerging narrative that has appeared after many public companies – including among two which operate in reverse – have posted their second quarter 2021 earnings: reverse mortgages are a bright spot.
Both Ocwen Financial and Finance of America Companies – the parent organizations of Liberty Reverse Mortgage and Finance of America Reverse (FAR), respectively – each emphasized that while the traditional mortgage business is wrestling with what the “new normal” will look like after a tumultuous year brought about by the COVID-19 coronavirus pandemic, each company’s dedicated reverse mortgage segments are getting more general emphasis in presentations that may not have come had the forward market been performing at a higher level.
In other words, this appears to be a unique moment for the reverse mortgage industry that stakeholders across the spectrum should take notice of.
Forward mortgage company earnings are down in Q2, as is the profit outlook
Taking a closer look at a slew of publicly-traded traditional mortgage companies paints an interesting picture: originations generally — and mortgage revenues commensurately — are largely down. Companies like Guild Holdings and loanDepot saw originations decline, and even a major institution like JPMorgan Chase saw its mortgage fee revenues decline, all in Q2, 2021. Direct-to-consumer originations at Rocket Mortgage were essentially flat in Q2, according to an earnings report. (Rocket, then known as Quicken Loans, hastily exited the reverse mortgage business just prior to the start of the pandemic in February, 2020.)
Wholesale lender Homepoint disclosed a $73 million net loss in the second quarter of 2021, and speculation among mortgage industry observers is that the business is beginning to “normalize” after a favorable rate environment and outstanding home price appreciation over much of the past year has started to show signs of evening out. Things may actually get worse going into the third quarter of 2021, but the signs of a slowing traditional market have been apparent since the end of last year.
A report from the Mortgage Bankers Association (MBA) in June described how independent mortgage banks and certain mortgage subsidiaries of chartered banks saw an average net profit of $3,361 on each loan they originated in the first quarter of 2021, down from a reported gain of $3,738 per loan in the fourth quarter of 2020.
Additionally, the Federal National Mortgage Association (FNMA, or “Fannie Mae”) quarterly Mortgage Lender Sentiment Survey saw lenders’ profit margin outlook decline in the Q2 2021, marking the third consecutive quarter of pessimism when it comes to mortgage profits according to reporting by HousingWire Managing Editor James Kleimann.
Additionally back in April at the MBA‘s spring virtual conference, speakers warned that narrowing mortgage profit margins could make for some difficult conversations between executives and loan officers regarding LO compensation.
Public companies operating in reverse choose HECM emphasis
Ocwen Financial, parent company of PHH Mortgage Corporation and Liberty Reverse Mortgage, has actually long emphasized its reverse business as a profitable endeavor prior to a general recovery and return to overall profitability. Most recently in its Q2 2021 earnings, the company posted a net loss of $10.2 million, but gave significant lip service to the contributions to profitability made by Liberty as well as its recent acquisition of Reverse Mortgage Solutions (RMS)’ reverse mortgage servicing platform which will allow Liberty to operate as an end-to-end reverse mortgage service provider.
“Reverse volume is up 47% year over year,” said Ocwen Financial CEO Glen Messina on the earnings call. “Pre-tax income in reverse originations is on average about six times out of forward. And in addition to growing overall reverse volume, we are focused on driving retail originations, which are the highest margin in reverse. Retail reverse volume is up 150% year over year in the first half as compared to the same time last year.”
The recently-shared results of Finance of America Companies, which announced it was going public late last year upon a merger with a special-purpose acquisition company (SPAC), saw total revenue for the quarter decline by $119 million, translating to a loss of 23% quarter-on-quarter to $389 million largely due to lower revenue on traditional mortgage originations.
However, a great deal of attention in the earnings presentation was paid to FAR, which posted major gains and contributions to profitability for the parent company.
“Our working segment was not immune to the industry dynamics, and we saw declines in revenues aligned with our peers. In contrast, we saw substantial growth in our reverse, commercial, and lender services segments,” said Finance of America CEO Patti Cook in an earnings call on Thursday morning. “Both reverse and lender services generated record revenue in the quarter, and in combination, revenue growth from these three businesses offset a portion of our mortgage revenue decline.”
Cook explained some of why the reverse segment did not see the same kinds of profitability dips as the traditional mortgage business in Q2 in the earnings’ accompanying press release.
“Importantly, the reverse business is less correlated to the direction of interest rates than the forward mortgage market, and we believe the segment is well positioned to generate strong and sustainable growth,” she said. “Baby boomers are increasingly looking to age in place, and our reverse mortgage products enable this demographic to tap into the equity accumulated in their homes to fund or supplement their retirement savings.”
It should also not be forgotten that investment firm Ellington Financial continues to tout its investment in reverse mortgage lender Longbridge Financial, giving special attention to the profitability of the lender in its portfolio.
A time of change
As has been well established, the exit of major banking institutions from the reverse mortgage industry has done a lot of damage to both the reputation and the visibility of the business over much of the past decade. However, the industry should likely take heart at what has been taking place recently. The very few companies that have their proverbial “hands” in both the forward and reverse mortgage businesses are more recently choosing to emphasize the performance of reverse in comparison to the diminished performance of traditional mortgage business, which reflects positively on reverse mortgages.
That’s not to say that reverse mortgage headwinds are non-existent, of course. They’re just different. Analysts have correctly pointed out that reverse mortgage refinances — which make up as much as 40% of Home Equity Conversion Mortgage (HECM) volume, according to some estimates — are in a boom period currently, but that does not necessarily bode well for the industry in terms of ongoing success.
Certain industry participants are split on what the refinance boom actually means for the reverse mortgage industry going forward according to outreach from RMD, but many recognize the need to grow the proverbial pie by continuing to serve as many new borrowers as possible. What the industry continues to do with favorable demographics as well as confidence from mortgage executives observed recently, as always, remains to be seen.