As lenders prepare for the “new” reverse mortgage landscape including marketing a product with more rules and requirements than ever before, the market for non-agency reverse mortgages is beginning to take shape.
With a temporary extension of higher loan limits set by the Federal Housing Administration, the opportunity for a proprietary reverse mortgage has existed largely in the jumbo market, for homes valued well above the current loan limit of $625,500.
Yet with recent changes to principal limit factors for Home Equity Conversion Mortgages (HECMs), cutting the amount for which borrowers can typically qualify by around 15%, lenders say they are taking a new look at the potential for additional products and new opportunity.
The challenge lies in finding an investor.
“In the end it’s the investor that drives this process,” said Michael McCully, partner with New View Advisors, during a National Reverse Mortgage Lenders Association conference panel earlier this month. “If not for Ginnie Mae coming into the market [when Fannie Mae retreated], we would not have a HECM to sell. We need investors for proprietary loans.”
The chicken and the egg
Without a product to sell, it’s difficult to inform investors of the opportunity. Yet without the investor, it’s difficult to get a product off the ground.
Educating investors is a first step toward creating a viable product, those in the market say. Recent headlines have raised uncertainty among investors, such as the recent FHA draw from the Treasury to cover losses associated with HECM loans.
“We’re going to have to convince the investment community these securities will perform well over time,” McCully said.
Yet there are some positive signs of among the investment community. Recently, three private reverse mortgage interest-only (IO) securities traded in the secondary market at better levels than expected, said Bryan Faron of Brean Capital.
“The easiest way to pilot a proprietary product is for the originator to work alongside the dealer community,” Faron said during the panel discussion. “It’s important to create the underwriting guidelines along with investors.”
What will it look like?
The only example currently in the market is Generation’s jumbo reverse mortgage, the Generation Plus. The loan is “ideal for seniors who own higher-valued homes with appraised values between $500,000 and $6 million,” Generation says on its website. While Generation doesn’t have current plans to change its offering, there are some indications of what new non-HECM reverse mortgages might look like.
“A proprietary product doesn’t have FHA insurance, so insurance has to come in the form of excess spread and extra equity. [In other words], the interest rate is higher, and the loan-to-value is lower,” McCully said.
Creators of a new product will likely take cues from FHA as to structuring new products and protecting their investors.
“The last thing we want is for a proprietary product to be originated and then tarnish the reputation of the industry,” Faron said. “So it’s good to take elements from the FHA product such as counseling, non-borrowing spouse protections and tax and insurance set-asides.”
In terms of the actual borrower amounts, the sweet spot lies somewhere above the current FHA lending limits, but likely with a lower loan to value ratio. Loan limits have been temporarily extended through 2013, but are expected to return to $417,000 upon sustained economic recovery.
“The sweet spot is somewhere around $800,000,” Faron said. “Actual PLFs will be less but the proceeds versus what they would see [with a HECM] will be higher.”
The question of when
Several lenders are rumored to be working on new products and seeking an investor for when the product rolls out. One such company, American Advisors Group, says it is working toward the release of a new product early next year.
“We’re adding new origination models,” AAG President Reza Jahangiri told attendees of a NRMLA conference panel during the annual meeting. “We’re getting ready to launch a proprietary product in [the first quarter] of 2014.”
AAG has been mum on the details, but says it is bullish on the opportunity the current market presents.
“The higher home value borrower is going to see a significant cut in what they qualify for,” said Paul Fiori, Senior Vice President of Retail Lending at American Advisors Group. “Once the lending limit drops back to $417,000, the impact will be even greater. There’s an opportunity to sell a proprietary product in that market.”
The potential is made greater through referral channels that have recently begun to gain traction in reverse mortgage products, he said.
“Both financial planners and the purchase market would do well with a proprietary product,” Fiori said. “Having a jumbo product provides a planner or realtor more to offer. The opportunity for growth in the space absolutely exists. At AAG we are looking forward to having another product choice to have in the future.”
Whether new products will come to market in early 2014 remains a question of the investor, but lenders are sure of the new opportunity it presents.
“We need to go back into the market and re-educate investors that in fact these securities are sound,” McCully said. “We are restarting a market that has been dormant for a long time.”