The reverse mortgage business is facing sharply reduced volume and higher interest rates when compared to 2020 and 2021, but there are still signs that business conditions may be starting to improve, according to Omar Ennabe, co-founder and branch manager of Ennkar.
While it may still take some time for the industry to adjust to the new reality caused by the macroeconomic environment, there are similarities to draw between this and other down years.
Promising signs for the business
Like many lenders in the space, Ennkar is dealing with reduced volume compared to the height of the pandemic, Ennabe said.
“Volume is down significantly,” Ennabe said. “But we do see things starting to get a little bit better. The last six months have been tough, but we’ve made a lot of changes at Ennkar. We’ve scaled back our staff and our exposure to risk, so I think we’ve made a lot of smart moves to survive this market. It feels a lot like a prolonged 2018.”
The comparison to 2018 stems from disruptive reverse mortgage product changes handed down by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) in October of 2017, when lower principal limit factors and higher initial mortgage insurance premiums led to a more challenging sales proposition for the industry at that time. In turn, Home Equity Conversion Mortgage (HECM) endorsements reached record lows the following year.
The changes required many reverse mortgage companies to reinvent themselves, Ennabe said.
“That’s essentially what we’re doing again,” he said. “It feels like the exact same thing where we’re kind of reinventing ourselves for this new market environment. But this time, I think it’s going to last a little bit longer than it did in 2017 or 2018.”
That said, pricing and certain volume aspects appear to be shifting to more favorable positions, Ennabe said.
“The volume is starting to pick back up not so much in funding, but we are noticing an increase in the number of applications,” he said. “I think partly, having it come all at the end of the year [made loans] bad to write. Even in good market environments, you see applications dip down at the end of the year since everyone wants to wait until after the holidays. So, it’s that in conjunction with the rising interest rates and the lowering of the PLFs and bad pricing. It’s all just a culmination of bad events.”
Still, Ennabe sees 2023 as a year of progress, even if that means a break-even year for profitability, he said.
“I don’t think we’re going to see the industry grow because the Fed is raising rates a little too fast for the PLFs to keep up,” he said. “But I think that the demand is as high as ever and that there’s still a ton of people that need this product.”
Product development is also going to be a major factor in the resurgence of reverse mortgage business, Ennabe said. He cited the proprietary second-lien reverse mortgage product from Finance of America Reverse (FAR) as an example of a larger lender pushing to move the industry forward, but said that FHA may be able to do more to make the HECM product more appealing.
Seeking out customers who have never engaged with the reverse mortgage product or industry before will be key to industry growth, he said.
“New-to-reverse customers [make for a] a tougher sale,” he said. “I think that when you’re so used to making a payment or to doing things a certain way, to all of a sudden change is really challenging for people. Maybe for the last 40 or 50 years, you’ve had a mortgage payment, or you’ve refinanced or consolidated debt, you’ve made decisions in your life, but it’s always reverted back to the traditional approach: 30-year fixed, the 15-year fixed or HELOC.”
Cracking the code
While the prospect of eliminating mortgage payments might appear make the reverse mortgage concept easier, Ennabe said that old habits die hard and there’s a fear that the idea could be deceptive or too good to be true.
“It’s a tougher sale, but these are our clients for life,” he said. “You definitely build a stronger relationship with them and they remember you a lot more, but it does take longer to go from start to finish on a HECM, even on a HECM-to-HECM refinance. It’s not uncommon for a traditional reverse refinance to be closer to three or six months just because of the time it takes for them to talk to their family or to maybe consult with their legal counsel or a financial advisor. So these things take time.”
According to data compiled by Reverse Market Insight, there are indications that the share of new-to-reverse customers active in the space today is growing. HECM case numbers rose in January to 3,186, while equity takeout cases — which are classified as new reverse mortgage loans that are neither purchases nor refinances — increased 18.1% to 2,690. Comparatively, the number of H2H cases increased to 359.