While the reverse mortgage industry saw strong business performance for most of the past year, with loan approvals mostly staying above 4,000 loans per month, HECM’s residential mortgage refinancing (HECM) transaction volume ran alongside other marketplaces. factors that are frankly external. Reverse mortgage controls do very little to commensurately expand the penetration of the HECM category into the broader mortgage business.
This was announced by John Lunde, President of Reverse Market Insight (RMI), during a presentation at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Summer Meeting this month. Other components working against the industry include the amount of loans given by the Federal Housing Administration (FHA), even as the number of age-appropriate borrowers continues to rise in the face of the often-cited demographic shift.
Reverse Mortgage Penetration Remains Stably Low
Lunde said two key players are helping to reduce the penetration of reverse mortgage products over time, despite the fact that the reverse mortgage business is generally productive in terms of primary numbers.
“Nobody wants their market share to decrease,” says Lunde. “But when we really start to dig a little deeper into it, we see that both numbers involved here are moving against us. The number of HECMs in service portfolios has been on a downward trend, mainly since the Major Limiting Factor (PLF) changed in 2017. At the same time, we continue to see an increase in the number of households meeting the established age criteria. So, for both of these reasons, we are actually seeing a decline in penetration. “
As for why this is happening, the appointment of the HECM – where the lender can transfer the HECM to the Department of Housing and Urban Development (HUD) when the loan balance reaches 98% of the maximum claim amount (MCA) – has increased. that does not actually exclude such loans from the broader penetration equation, he says.
“Overall, one of the things that has happened a lot lately and over the past few years is the loans to the FHA,” says Lunde. “It doesn’t really exclude them from the penetration equation. If we think of loans coming out of the service portfolio, yes, they are coming out of the lender’s service portfolio, but in reality they just go into the FHA service portfolio. One of these large numbers does not actually reduce penetration, but at the same time we think about “how do other, different factors manifest?” We are now seeing very low interest rates and are sharply increasing house prices. “
These two things will help service any reverse mortgage, but according to Lunde, it provides a special service to lenders looking to increase their refinancing volume.
“This is really amplifying and creating a refinancing boom similar to the way the forward mortgage world works,” he says.
How the refinancing boom affects penetration
According to Lunde, one of the key problems associated with relying on refinancing volumes is precisely the fact that the borrower base in the reverse mortgage industry does not grow, even if the business itself is growing in net terms.
“When we refinance as an industry, we can transfer loans from one provider’s portfolio to another, but we don’t add new clients as an industry,” he says. “We are not increasing our market share at all. [by doing that]… We may be serving our existing borrowers better, but again, we are not helping to create broader product awareness and establish a baseline that truly propels us forward in terms of becoming a mainstream financial product. ”
Becoming a more mainstream financing solution for eligible clients is of course a major concern of the reverse mortgage industry as it continues to seek new and fruitful educational partnerships to inform product development since the 2007-2008 financial crisis. There are clear signs of progress on this front in terms of the evolving reverse mortgage discourse outside of industry circles, but penetration remains low.
“We are in the 2% penetration range,” says Lunde. “Again, this is a little less than a couple of years ago. I don’t think anyone would argue that this is the right place for us. [in terms of our ability to] really gain a broad understanding and appreciation of the product’s strength in truly service […] a customer niche and a use case that really exists, especially when people are living longer. Most of their wealth is usually associated with their own capital. “
The average maximum claim amount (MCA) for all HECMs has skyrocketed over the past couple of years, according to RMI data, but the total share of reverse mortgage approvals consisting of HECM-to-HECM refinancing has also increased, explains Lunde. …
“We see that it has increased dramatically, [there’s a] a general upward trend across the entire chart, but a sharp increase over 2020, ”he says. “And in early 2021, it also coincided with a pretty sharp increase in the percentage of approvals that go from HECM to HECM. So we can see that some of what is behind this is actually [those] fundamental forces that are beyond the control of our industry. We just react to it a lot. And it’s that spike in home prices, coupled with low interest rates, is really helping to amplify that effect. ”
Senior Forward Participation and Ultimate Resource of Refinancing Borrowers
Keeping in mind the low prevalence of reverse mortgages, it’s also worth noting that many who would otherwise qualify for HECM are still in the traditional mortgage business, Lunde explains.
“For age-appropriate homeowners who may be eligible for HECM, around two-thirds of them already have a forward mortgage,” says Lunde. “So if we were talking about refinancing forward mortgages and not worrying about some of the eligibility requirements for monthly payments and income, we would have a huge established base to refinance. But given that we are at the 2% level, this is a completely different story. So one of the things to look out for and think about is the fact that we just don’t have that many loans available to refinance. “
The number of HECMs that can be refinanced will eventually be depleted as it is a limited resource of existing reverse mortgage clients who even have the option to refinance in the first place, he said.
“We cannot see a similar increase in HECM refinancing in HECM in the coming years without a significant increase in non-refinancing, if only for the reason that simply to support future refinancing,” explains Lunde. “This is just a warning and some numbers to better understand that, to be honest, there is no sustainable high growth rate here in terms of the HECM to HECM refinancing niche.”