Many participants in the reverse mortgage industry appear to agree with a core idea: the boom that the business has seen recently in refinance volume is generally good especially if it helps out borrowers, but growing the proverbial “pie” of borrowers is something that will ensure the long-term success and viability of the reverse mortgage product category.
While specific people within the industry have different feelings concerning whether or not the business will be able to adequately appeal to enough new borrowers in the future, many seem to share a consensus concerning exactly what heightened refinance volume means for the fortunes of the overall business, and what the industry should do in response to those realities once the inevitable refinance boom fades into the background.
RMD conducted outreach across the entirety of the reverse mortgage industry, from major lenders to smaller ones, loan originators, brokers and analysts to share collective perspectives on what the current state of the refinance market is, and what it could mean for the future of the industry for the rest of 2021 and beyond.
Strengths and weaknesses of refinancing reverse mortgages
One major lender that is seeing a refinance bump like many others is Reverse Mortgage Funding (RMF). The attitude there is a pretty straightforward one: borrowers need to be served, and if that means that they are seeking out a reverse mortgage refinance, then they are going to need a lender to help them accomplish that.
“Similar to other companies in the space, refinance activity is playing a strong role in RMF’s overall activity,” says David Peskin, president of RMF. “Clearly, if borrowers can save on interest expenses or receive additional proceeds given the current home values, it makes sense for them to refinance. This scenario is no different from the forward mortgage space.”
There is a similar attitude from other major lenders, including HighTechLending according to its president, Don Currie. There is a particularly strong component to refinance business in the reverse mortgage arena, particularly since the borrowers being served already have a high level of familiarity with the specifics of the loan category. Still, it shouldn’t be the centerpiece of a reverse mortgage lender’s offerings, Currie says.
“HECM-to-HECM is a great business as your clients are familiar with reverse and the learning curve is relatively vertical, and the gestation period is much shorter,” he says. “However, it should not be your primary business model for a few reasons. One is that the pool of clientele is limited and many of us are target marketing to them making it a very competitive market. This will eventually lead to high cost to produce the closed loans.”
Investors may not react positively every time to pools of refinances, Currie says, since such loans have a few specific elements working against them.
“Our investors do not like just buying pools of HECM-to-HECM as the borrowers are maybe older, and the life of loan is diminished making it not worth as much as loans for younger borrowers,” he says. “If we only focus on older existing reverse borrowers, the profitably paid by our investors will be reduced overall industry wide.”
Not necessarily a cause for concern
However, one broker operating at the national level doesn’t necessarily think that there is a blanket cause for concern for reverse mortgage professionals, since there are other components that can help make reverse mortgages an attractive option for new borrowers going into the future. This is according to Scott Harmes, national manager of the C2 Reverse division of C2 Financial Corp.
“We’re not necessarily being really aggressive about going and getting [refinance] business, but when there’s a bonafide benefit, we’ll handle it with the borrower,” he says. “There is a huge advantage for bringing new borrowers into the market, and that is this sizable increase in [home values]. In 2018-2019, we’ve seen real estate values double since 2008. Now, I think we’ve seen them go up by 150-200% since 2008-2009.”
This means that a senior who has not done a cash out refinance since the recovery of the late 2000s market crash —which could be a sizable portion of seniors — will now have a reverse mortgage option available to them that perhaps was not available to them in previous years.
“So, that means that any senior who has not done a cash out refi since say 2010 probably has enough equity to be equity-eligible for either a HECM or a proprietary reverse mortgage,” Harmes says. “And that means a lot more new borrowers available to us because of that increase in equity.”
What higher refis say about the business, and the trends in the data
The trends regarding refinance volume could come with a bit of a silver lining in terms of potential lessons that the industry can learn about business in the future according to Patty Wills, national retail sales manager of reverse mortgages at Open Mortgage.
“We see the need to increase HECM penetration as a renewed opportunity to revisit some reverse mortgage fundamentals, in addition to our internal reviews of customer service and communication of all reverse mortgages,” Wills tells RMD. “We look forward to working with HUD/FHA through NRMLA and other means to make the HECM process less seemingly complex and more understandable to the general public. We cannot break through this market until we are no longer continually told our product is too complicated.”
Reverse mortgage industry analysts over the past several months have been sounding the alarm about the high level of refinances — and the potential existing loans that will be eligible for a refinance — being a stagnant, non-renewable resource for the reverse mortgage industry as a whole. However, according to recent data compiled by Reverse Market Insight (RMI) and shared with RMD, the trend of reverse mortgage refinances has only grown as the year has gone on with no sign of slowing down in the immediate future.
The industry for the entirety of the year has been operating at a threshold of over 4,000 HECM loans per month in raw volume, which is a pretty strong track record in comparison to previous years especially after the 2017 changes to principal limit factors were handed down by the Federal Housing Administration (FHA).
However, as noted by analysts recently and confirmed by RMI data shared with RMD, refinance volume has only grown to take up a larger share of total reverse mortgage volume nearly every month in 2021. The period between January and February is the only point this year that saw refinances drop from month-to-month, with January’s rate of 36.5% of total volume outdoing February’s total of 35.3%, in the neighborhood of 1,500 loans.
Since March, refinance volume has only grown to take on a larger share of total HECM volume. March’s percentage rate of refis stands at 39.7% of total HECM volume. In April, that figure grew to 41.3%, while May saw 44.3%. June is rather surprising, though, since refinance volume took up 49% of HECM volume for the month, totalling over 2,000 loans of the month’s 4,158 figure.
While the industry and some of its stakeholders describe a renewed need to bring additional borrowers into the fold of the industry, we’ll have to see just how long the rate of reverse mortgage refinances can rise over the course of the next several months. As with all things, time will tell.