Due to current housing market conditions, possible future FHA lending limit reductions and the number of baby boomers becoming seniors, there exists a great opportunity for the introduction of proprietary jumbo reverse mortgage products. In the last 11 years, housing has arguably been through the steepest market rally followed by the biggest decline in our lifetime.
Following the peak, we took an “over the waterfall” three-year drop in home prices, exceeding 40 percent in many metropolitan areas. Beginning in 2003 the real estate market boomed as lenders expanded the subprime mortgage market to borrowers that could not afford the properties they were purchasing. Existing homeowners were able to dramatically increase their mortgage balance through “cash out” refinancings they could not afford. Remember the day traders in the dot-com bubble? They became speculative property flippers in the real estate boom. The frenzy continued until the market peaked in the second half of 2006. As an example, in late 2007 Countrywide was doing more than 150,000 appraisals a month, according to their head appraiser. Once all possible buyers were in, the real estate market crashed, as there were no more buyers left to continue the rally.
The mortgages these properties were based on were packaged into securities that also collapsed, causing a subsequent crash in the under-regulated derivatives market and leading to a worldwide liquidity crisis. Now, hopefully, we are in the process of forming a bottom in home prices and utilizing prudent underwriting standards.
How has this crisis affected the reverse mortgage client? Admittedly, many are underwater, but at least they remain safe in their home. The big bad foreclosure wolves are not huffing and puffing to blow their house down. Seniors with higher-valued homes, however, are underserved in the reverse mortgage market. In previous years, there were several different jumbo reverse mortgages available with competitive rates and fees, some with creative equity retention options.
Today, very few alternatives exist in this niche, but with expected changes in demand for a jumbo reverse mortgage, it could be an opportune time to launch a new product.
FHA limits have a direct impact on demand for jumbo reverse mortgages. If a 75-year-old homeowner has a $1,000,000 home, for example, they will compare how much they can get from a HECM to a jumbo. With a relatively high $625,500 FHA limit, the 75-year-old will have a higher HECM approval. If, however, our FHA limits are reduced to as low as $417,000 in October, the jumbo approval amount might exceed the HECM. Considering how many homes in the country exceed the $1,000,000 level, it’s easy to understand how demand for a jumbo could spike very soon.
Given the lower loan to value ratios typically offered by a jumbo product, it would present a relatively low risk to the investors.
It appears we are near the trough in home prices for several reasons. One involves the cost of building; the past five years have seen very few new homes being built. When construction resumes, there is going to be a “sticker shock” at the cost of new home construction. Commodity prices for materials to build a new home (copper, steel, wood, etc) are up 30 percent. The cost of new home construction will help support the price of existing homes.
Another factor is the cyclical nature of the real estate market, which of course is impacted directly by employment. According to a recent Bloomberg article (July 18, 2011) researchers at the Fed are reaching the conclusion that they are dealing with a mostly cyclical bout of unemployment. Fed forecasters say U.S. unemployment will return to its pre-crisis level of 5-6 percent by 2016. “Neither party has an awareness of the why or the wherefores of how to put America back to work again. It is becoming obvious that the 2012 election will be fought on a battlefield of job creation,” says Bill Gross, Manager of Pimco Total Return Fund. Indeed, this is truly a key in solidifying the housing market.
So if the cost of materials and unemployment are primary components of future home prices in general, what will have a more profound influence on the reverse mortgage market? I can almost hear Paul Revere: “The boomers are coming! The boomers are coming!” Baby boomers will cause the number of seniors to double from roughly 40 million to 80 million over the next 20 years. We need to come up with products to cater to this tremendous opportunity before us.
In the political arena, there’s a creeping realization that everything is suddenly in play, both out of political necessity and intergenerational fairness. Budget negotiations between Congress and the White House include wrangling over $350 billion in potential Medicare and Medicaid savings over the next 10 years. We’ve heard from the Tea Party, now just wait until the 80 million-strong “Gray Party” speaks up! Clearly the need exists for reverse mortgages to help pay for future medical needs for the booming senior population. The market will need products to accommodate seniors 55 and older. As an example, one pays 33 percent less for long-term care insurance at age 55 than at age 70. We need to provide parallel financing to help the seniors purchase these types of products and fund their future medical care.
With Bank of America and Wells Fargo exiting our market because of problems not related to our industry, there is an opportunity to hire good producers to fill the void created.
Speaking of banks, there is a tremendous opportunity to educate and represent the smaller community banks and credit unions that have many seniors as customers.
This is a time for good independent shops that have survived this market and believe in the industry to join forces and provide a national distribution network with a wealth realization far better than they could achieve on their own. This is also a great time to provide propriety products and services not possible individually, and enjoy a greater profitability due to the size created.
Presently we are back to 2003 home prices, but this time around is very different. In 2003 we were doing four times the number of reverse mortgages that we are doing today. Today more than 50 percent of the people looking into getting a reverse mortgage have too large an existing mortgage for us to be able to help them. They want to get a reverse mortgage, but we can’t do the loan because so many of the new borrowers coming into the market refinanced a conventional mortgage at some point during that dramatic market upswing four to seven years ago. We would need an additional 25 percent appreciation in home prices to be back to the volumes we were doing in 2003. Given that the Fed doesn’t see employment returning to historical norms for four or five years, now is the time to create proprietary jumbo products to increase reverse loan volumes and service the growing baby boomer market.