While the reverse mortgage industry managed to buck a broader business trend during the pandemic by increasing both Home Equity Conversion Mortgage (HECM) and proprietary reverse mortgage loan production since March 2020, broader economic challenges in America and around the world are starting to affect the economic posture of businesses everywhere.
To get a better idea of how emerging realities like inflation and a tightening of Fed monetary policy could impact the reverse mortgage business, RMD sat down with president of top lender Reverse Mortgage Funding (RMF), David Peskin, to see how the business could react and respond in the near- and long-term.
Building new business, refis with higher rates
The reverse mortgage business has been benefitting from a boom in HECM-to-HECM (H2H) refinances for most of the pandemic period, presenting issues for the creation of new business. Current economic realities unfolding may soon change that, Peskin says.
“With rates rising, it’s going to have an impact on those lenders that were focusing only on H2H, and not really building new business, new distribution or new referral partners,” he says. “It’s evident that as a rates climb, borrowers are going to qualify for less proceeds. At the same time, they’ll have a higher rate, so it makes less sense to refinance unless there’s some tremendous home price appreciation since they did their last loan.”
Even then, however, borrowers and lenders will have to ask if it still makes sense to pursue a refi with a higher rate, he says.
“Those are things that we, in the reverse mortgage business, always try to take a look at,” he says. “Just because you got access to more proceeds, it doesn’t always make sense to do the loan if it’s going to cost you or the family more in interest on your existing loan.”
With the current environment leading to rising rates and widening spreads, the result is often uncertainty which has an impact on margins, Peskin explains. Making adjustments is key to thriving when these issues emerge in the reverse mortgage business, and RMF is aiming to adjust where needed. As of yet, the company’s overall volume does not appear to be heavily impacted, he says.
“As far as volume is concerned, our volume still looks strong, which is great,” he says. “But we continue to diversify and look for new channels to originate loans. And then, of course we look to continue to expand our Equity Elite product. We’re doing more and more Equity Elite business than we’ve done in the past. It’s becoming a higher percentage of our business. I think that’s an exciting opportunity for us any industry as a whole.”
The Equity Elite proprietary reverse mortgage product line has had a renewed focus at RMF, with the lender recently lowering the qualifying age to 55 in certain states and streamlining borrower qualification. While the HECM lending limit recently rose to $970,800 as of January 1, Peskin does not see any slowed momentum in the company’s proprietary offerings thus far, he says.
“Even with the rise in the maximum claim amount, you’re still talking about a small percentage of the loans that now have an option to go with proprietary or a HECM,” he says. “But again, with rising rates, proprietary products start to look more attractive, in some cases, in terms of overall proceeds. And of course, the costs on a proprietary loan are a lot less than they are on a HECM. So, when rates are starting to get closer together in terms of the line of credit product, and your closing costs are a lot less on a proprietary product, it starts to look a lot more attractive.”
H4P as a source of new business
With a recently-renewed conversation emerging around HECM for Purchase (H4P), Peskin described an H4P product environment that remains complicated due to low uptake and the reticence of relevant referral partners in the homebuying space.
“[H4P] has always been a challenge just given there’s been a lot less of a focus on it,” he says. “And there’s been, with low interest rates, a lot less attention because you can get a much better rate with a conventional loan than you could on a HECM. Obviously, you’re dealing with a different market, and a lot of builders tend to shy away from a reverse mortgage just given that there are a lot of nuances when it comes to a purchase.”
One way that the reverse mortgage business might be able to do more purchase business is through proprietary product offerings, Peskin says.
“Obviously, proprietary products run more like a forward conventional loan, so they’re a lot easier to do on a purchase,” he says. “But things are starting to change with FHA. Now that our rates are rising, I think you’re going to start to see builders look for new ways to sell homes as rates rise but offset the higher payment or someone spending less. Obviously a HECM fits that perfectly well, but this assumes these builders even have supply.”
Economic realities, rising rates and costs
The reverse mortgage business is not immune to the realities of rising interest rates, which can affect the business by affecting costs on facilities, operating lines and wages, Peskin explains.
“Those costs have risen,” he says. “And then, of course, if interest rates start to rise or there’s pressure on margins, you can see overall profit margins start to look a little bit differently than they did before. So, you really have to approach the business intelligently in this new environment, especially with loans in your pipeline.”
As rates rise, managing the loans in an existing pipeline is important to ensure that money is not lost on them, and can often happen in the forward world, Peskin says, if there isn’t a strategy in place to compensate for that. The speed at which rates are changing also introduces a bit of a wild card.
“Normally, when rates rise slowly, it’s not an issue,” he says. “But we’ve seen some really big moves in interest rates, so it does play a bit more of a significant role [in the reverse mortgage business].”
Look for more from RMD’s interview with David Peskin soon.