Within the next 30 days, the reverse mortgage industry will likely have lost its most popular product.
The Department of Housing and Urban Development promised Congress in December that the fixed rate HECM standard will become a thing of the past this month and many wonder if the business will lose its identity as a result.
The elimination of the industry’s most popular product leads to one big question: Will borrowers continue to choose reverse mortgages if the standard upfront full draw is no longer available?
On the surface, this would appear a dramatic shift in the business, but it may not necessarily mean such major change for originators or the borrowers served by the product.
The product changes
The fixed-rate product currently comprises about 70% of new reverse mortgage loans, indicating a strong shift from two years ago when the adjustable rate product was the only one available. HUD has since introduced the HECM Saver, a very large majority of which are taken at an adjustable rate, but still comprising only a fraction of total reverse mortgages.
Originators will have to shift to a market with a markedly different product mix, but analysts say volume will likely remain at a stable level.
“Removing the fixed Standard product is not a direct effect on volume from consumers (in comparison to a principal limit factor reduction that would have a direct impact), as it would seem very likely that borrowers simply use the ARM if that’s what’s available,” says John Lunde, president of Reverse Market Insight. “That might be a bad assumption if borrowers truly feel strongly enough about wanting a fixed that they wouldn’t take the loan if fixed isn’t available, but before fixed was prevalent in 2009 onward that didn’t seem to be an issue.”
Last year proved a struggle for the overall industry loan total, which amounted to just shy of 55,000 loans for the fiscal year ending September 30. The downturn from 2011’s total of more than 60,000 loans is attributed largely to the exit of MetLife from the reverse mortgage business, as well as sustained low home values nationwide.
The peak year for reverse mortgages, however, saw a total of more than 100,000 loans, and this at a time when there was no fixed rate option for borrowers. There’s confidence in the market that the adjustable rate product is a viable one, but it will prompt change in terms of marketing and product economics, with originators having to shift accordingly.
“It will have an indirect impact because it will reduce revenue on the average loan that is available for marketing,” Lunde says. “If originators are not able to market cost effectively at the lower revenue levels of ARM product, then we’ll see fewer loans if all else is equal.”
Lenders have supported the change with a statement of support coming from Walter Investment Group—owner of Reverse Mortgage Solutions and Security One Lending—following the letter from Galante, who has since received Senate support for confirmation as FHA commissioner.
“We are very much in favor of changes in the reverse market that make marketplace stronger for the long term,” said executive vice president Denmar Dixon on a call with investors in late December. “We see significant growth in the base market overall not affected by this change, since there are other products available to address the need.”
In spite of the current product balance and having to make changes in terms of product marketing, independent lenders too say that long-term, the modifications will be welcomed. “The changes to the program that are coming from HUD are good,” says John Mitchell, founder and CEO of Reverse Mortgage USA. “It solidifies the program long-term.”
The secondary market for reverse mortgages has been strong over the last 18 months, and the business got a real shot of liquidity when Walter Investment Management and Ocwen announced they would get into reverse mortgages. This week, Walter also announced it would be acquiring Security One Lending in an all-cash deal.
The introduction of big balance sheets to the landscape which formerly comprised just a handful of lenders led by Urban Financial Group and Reverse Mortgage Solutions is a very positive change.
But while HMBS traders say there is always demand for Ginnie Mae reverse mortgage securities, there is some concern that volume could suffer, impacting demand in the year to come.
“Volumes continue dropping, but with greater velocity and this ultimately affects sponsorship in capital markets,” says Jeff Traister, managing director for Cantor Fitzgerald. “With smaller volumes, there is less incentive for Wall Street traders and investors to focus. This affects liquidity and pricing to originators. This behavior takes time to filter through the system but is likely to occur.”
In 2013—and beyond
Ultimately, the outlook is strong for the market despite the upcoming change, supported in large part by a rapidly growing demographic of people who are 62 and older in the United States as well as home price recovery expected to continue through 2013 and beyond.
Up more than 4% in 2012 according to the housing industry benchmark S&P/Case-Shiller index, home prices will be the key to forward momentum, with the demographics only getting stronger in 2013.
Those factors will outweigh the short term change, according to industry leaders.
“We believe the fundamentals are as strong as when we first looked at the market,” Walter executives told stakeholders in December. “The demographics are very much in favor of this product. There is still significant level of equity in homes that can be addressed by the reverse product and it is still very underpenetrated.”
Outside influences are likely to push the business forward in 2013, analysts say.
“The population is increasing at a rapid clip,” says Doug Kelly, IBISWorld analyst. “The demographics are the most favorable growth opportunity for the industry. There may be concerns among smaller lenders about higher regulations, but they will lead to greater transparency.”
Kelly projects the business seeing an uptick in 2014, once the housing market recovery takes hold.
“Over the five years to 2017, IBISWorld anticipates that seniors and financial advisors will increasingly take out reverse mortgages as a viable financial planning tool to cover higher living and medical expenses and make up for the gap left by poor performance by retirement income alternatives such as retirement plans and interest income,” Kelly wrote in an industry report published in December.
Written by Elizabeth Ecker