Robust Refi Enterprise, Curiosity Charges Aren’t Rising the Reverse Mortgage Viewers
While the reverse mortgage industry has been doing strong for most of the past year, with approvals largely staying above 4,000 loans per month, the amount of refinancing transactions has been home equity conversion mortgage (HECM) -to-HECM refinances among others Frankly, market factors controlling the reverse mortgage industry are doing very little to extend the penetration rate of the HECM category to the broader mortgage business.
That is what John Lunde, President of Reverse Market Insight (RMI) said, during a presentation at the National Reverse Mortgage Lenders Association (NRMLA) summer virtual meeting this month. Other components antagonizing the industry are the loans made to the Federal Housing Administration (FHA), even as the number of age-appropriate borrowers continues to grow as part of an oft-mentioned demographic shift.
Reverse mortgage penetration remains stubbornly low
Two metrics are helping reverse mortgage product penetration to decline over time, even though the reverse mortgage business is generally productive in terms of raw numbers, Lunde explains.
“Nobody wants their market share to decrease,” says Lunde. “But if we really start to drill a bit, we’ll see that both of the numbers involved are moving against us. The number of HECMs in the servicing portfolios has basically declined since the Principal Limit Factor (PLF) was changed in 2017. At the same time, we continue to see an increase in the number of old-age private households. For these two reasons, we actually see that penetration is falling. “
In terms of why this is happening, the assignment of HECMs – with the lender being able to assign the HECM to the US Department of Housing and Urban Development (HUD) when the loan balance reaches 98% of the Maximum Claim Amount (MCA) – has increased, which such credit isn’t really removed from the broader penetration equation, he says.
“In general, there has been a lot of FHA lending recently and in recent years,” says Lunde. “Actually, that doesn’t remove them from the penetration equation. If we think about loans exiting the servicing portfolio, yes, they are coming from a lender’s servicing portfolio, but they are actually only moving into the FHA’s servicing portfolio. One of those big numbers doesn’t really reduce the penetration, but at the same time we think about how the other, different factors happen? We are currently seeing very low interest rates and soaring property prices. “
These two things will help service any reverse mortgage, but it is particularly beneficial for lenders looking to top up their refinancing volume, Lunde says.
“That really hurts and creates a refinancing boom not unlike the way the world of forward mortgages works there,” he says.
What a refinancing boom does to penetration
One of the main problems with reliance on refinancing volume is just that the reverse mortgage industry’s borrower base isn’t growing even as the business itself grows in terms of raw numbers, Lunde says.
“When we refinance as an industry, we may move loans from one servicer portfolio to another, but we as an industry aren’t adding new customers,” he says. “We are not expanding our market share at all [by doing that]. We may be able to serve our existing borrowers better, but here, too, we are not helping to create more mainstream product awareness and an installed base that really takes us further towards becoming a mainstream financial product. “
There is of course a lot of interest in the reverse mortgage industry in becoming a more established financial solution for eligible clients as it continues to seek fruitful new educational partnerships to communicate how the product has done since the 2007-2008 financial crisis. There is demonstrable evidence of progress on this front in light of the evolving reverse mortgage discourse outside of the industry, but penetration remains low.
“We are in the area of the low 2% penetration,” says Lunde. “And that’s a little less than a few years ago. I don’t think anyone would say this is the place for us [in terms of our ability to] Gain a widespread understanding and appreciation of the product’s performance […] a customer niche and use case that really exists out there, especially since people are living longer. Most of their assets are usually tied up in their home equity. “
The average maximum exposure amount (MCA) for all HECMs has risen sharply in recent years, according to RMI data, but the full proportion of reverse mortgage endorsements from HECM-to-HECM refinances has also increased, explains Lunde.
“We see that this has increased significantly, [there’s a] general upward trend across the chart, but a sharp increase from 2020, ”he says. “And in early 2021, that was also accompanied by a pretty sharp increase in the percentage of endorsements who are HECM-to-HECM Refis. So we can see that part of what is behind it is real [those] fundamental forces that are beyond the control of our industry. We just respond to it in many ways. And those are the steeply rising home prices in connection with the low interest rates that really amplify this effect. “
Senior stake in Forward and the finite resource of refinancing borrowers
Also, given the low prevalence of reverse mortgages, it’s worth noting that many who would otherwise qualify for an HECM are still in the traditional mortgage business, explains Lunde.
“In terms of age-appropriate homeowner households that might be eligible for HECM, about two-thirds of them are [have no] Mortgage, ”says Lunde. “So if we were talking about refinancing forward mortgages and not worrying about some of the monthly payment and income qualification requirements, there would be a huge installed base for the refinance. But since we’re at that 2% rate, it’s just a different story. Therefore, one must keep an eye on the fact and consider that we simply do not have that many loans available for refinancing. “
The amount of HECMs that can be refinanced will eventually run out as they are a limited resource for existing reverse mortgage customers who even have a chance to refinance, he says.
“We cannot see a similar increase in HECM-to-HECM refinancing in the next few years without a significantly larger volume of origination without refinancing, even if it is just to support future refinancing,” explains Lunde. “It’s just a word of caution and a few numbers to better understand that there isn’t a highly sustainable, high-growth number here for a HECM-to-HECM refinancing niche.”