The reverse mortgage industry is currently going through some new challenges brought on by a more volatile rate and market environment, as well as broader economic uncertainty which has not spared the business. Because of that, it might be easy to become so focused on the here-and-now that certain context might be lost about where the product category has been, and even where it could go in the future.
To that end, industry analysts at Reverse Market Insight (RMI) recently walked members of the reverse mortgage industry through some of that history — from the middle of the 2008-2009 financial crisis, through the aftermath of 2017 product changes up through the COVID-19 coronavirus pandemic — to offer important context to what is currently being seen in the marketplace.
This is according to a presentation by RMI President John Lunde and Director of Client Relations Jon McCue given at the National Reverse Mortgage Lenders Association (NRMLA) Eastern Regional Meeting this week in Baltimore, Md.
Product changes and impacts on volume
Lunde began by giving an overview of the trajectory of endorsement volume between 2008 and 2019, respectively the “peak” and “trough” years for industry activity. In 2008, the industry hit an all-time high of 115,000 Home Equity Conversion Mortgage (HECM) endorsements, and over a period of 11 years, that figure steadily declined until 2019. That year finished at 32,000 HECM endorsements, a 72% drop from the peak year.
When diagnosing where this drop likely came from, Lunde had two observations: product changes and reputational challenges that came from practices in the late 2000s.
“Most of those [volume drops] saw PLF reductions or different forms of restrictions really tightening up the box on the underwriting side,” Lunde said. “Some of that was very well-needed. In 2008, certain borrowers were told they’d never have to pay their property taxes and insurance again, and that was clearly a challenge for us for several years. That’s something we moved past both at the product level, as well as from our perspective and perception. All of that is really fixed.”
Such issues simply are no longer part of the conversation, and the guidelines are far clearer today than they were in those days, Lunde explains.
The loss of major financial institutions
Another major impact on the business during that period that isn’t discussed as much these days is the loss of major distribution channels that occurred with the exit of major financial institutions from the industry, Lunde explains.
“The other big impact that happened a while ago and that we tend to forget or gloss over is that we lost a lot of major distribution and brand names early in that period,” Lunde says. “And so thinking about what the loss of some of those big names do, I personally think that’s still one of the things that [can help] in getting us to the next step.”
Bank of America exited the reverse mortgage industry in early 2011. That same year, Wells Fargo staggered its exits from the wholesale and retail channels of the business across a few months. At the time Wells Fargo had exited the retail channel, it was the largest lender in the business, logging 16,213 units in 2010. In 2012, MetLife followed suit by exiting the industry.
Regarding those exits, having another longstanding and ubiquitous financial institution engaged in the industry would likely be a boon to the entire business, Lunde explained.
“[Currently many of us likely] don’t work for a big brand with major distribution, a huge retail branch network, 150-plus years of name recognition and maybe 10-plus million customers already in their customer base that might fit this profile,” he said. “Even if we don’t have all those, if those kinds of companies are involved in the industry, it really does help everyone else. You’re not in a place where competition is the main thrust.”
While 2019 was a “trough” year, 2020 saw a sizable recovery in the market due to the impacts of the COVID-19 coronavirus pandemic. As has been well-documented, a highly favorable rate environment and large increases in home price appreciation (HPA) led to larger total volume years in 2020 and 2021, respectively. A major driver of this recovery over the past two years came from HECM-to-HECM (H2H) refinance transactions.
Now that the “refi boom” has cooled, looking solely at the numbers of new customers engaged in the business is key. On that basis alone, Lunde says, the numbers of new customers in 2021 remains similar to the same figure from 2019, which saw low endorsement volume.
“While refis have been great, we also [need to ask] how we can get to those next borrowers,” Lunde says. “Not the same borrowers again, though we should definitely serve them. When a refinance makes sense, great. But, we can’t lose sight [of the fact] that this industry needs to grow. That’s the only way to succeed as a whole industry and as individual professionals.”
Refi booms understandably provide demonstrable business opportunities for the industry, but a focus on new borrowers will help ensure ongoing viability, Lunde explains.
“We are much more interest rate-sensitive based on those 2017 product changes, so we need to adapt to the idea that, just like in the forward world, refi booms are great,” he says. “But, there’s a reason there’s a refi cycle. They’re more interest rate-sensitive. Yes, we still have the tailwinds on the property prices side, but we need to always continue to keep the focus on the more basic [goal of] adding new customers to this world.”