I have recently noticed increased market discussion about the causes and effects of various changes in HECM production levels. The opinions out there seem to vary in regard to the significance of these events and how they will shape our market. Perhaps one of the most interesting aspects of this discussion is related to the idea that an increase in underwriting denials could be a contributing factor to reduced pull-through and endorsement rates.
I think this situation invokes the old chicken-and-egg question: While I concur that underwriting is a contributing factor to lower production levels, I am not so sure that it directly caused this noted drop in production. It left me to wonder: Which came first?
The Borrower Pool Expands
There is no doubt that the HECM product is maturing. Longer life expectancies and the growing number of baby boomers are increasing the number of eligible reverse mortgage borrowers. Previously, forecast statistics suggested that only 2 percent of eligible borrowers have engaged the product; this is bound to change soon.
Market indicators suggest that the product’s maturity, coupled with changes in senior financial stability profiles and property value fluctuation, have negated the previous assumption that the HECM is a niche product for desperate borrowers. The result of this analysis supports the idea that there is a much broader pool of potential borrowers. Additionally, it appears that this increased number of potential borrowers has been fueled through consumer education efforts, increased lender participation, secondary market product confidence and increased consumer acceptance.
While the basic tenants and guidelines for the HECM program have remained the same, recent events and new data have certainly influenced lenders and HUD to increase additional safeguards for potential borrowers, and they have done so by issuing further guidance and clarification.
An Increase in Underwriting Denials
When addressing the chicken-and-egg question, we need to examine if this increase in underwriting denials is a reaction to changes in our workforce preparedness, meaning that it’s a reflection of our inability to adequately pre-qualify and originate eligible borrower loans.
Media reports of lenders building large retail origination forces and wholesale relationships raise a concern. Previously, a large part of product training, knowledge and skills was delivered to the workforce by large bank and financial services institutions. The deep pockets of these companies allowed the focus to be on development of the workforce and provided for a considerable portion of in-depth product and program education, training and development.
With the exit of many of these larger entities, does the movement of once second-tier lender companies to primary spots mean that we will lose
Rapidly growing loan volume in a competitive market is a common business strategy employed to offset the costs of expansion. When this is a company’s focus, it’s difficult to step back and consider infusing additional capital upfront to address all of the costs associated with strategy implementation— including workforce development. This could be the root of the problem.
The Chicken or the Egg?
Regrettably, I believe a more granular analysis of underwriting denial factors will reveal loan eligibility and quality flaws in the loan origination process, and it will indicate that flawed aspects of a loan file are ignored, left instead to be remedied in underwriting. My sense is there will be a connection between increased underwriting denials and a lack of skill and knowledge among members of the workforce, which prevents them from adequately identifying eligible borrowers.
In taking the volume approach and ramping large sales and operations forces quickly, are we pushing files too far through the system before a decision is made due to the inability to recognize file issues upfront? My vote is yes.
In conclusion, the age-old question doesn’t tell us whether the chicken or the egg came first, but when it comes to reverse mortgage underwriting, I can tell you that I believe that a lack of proper workforce training led to the increase in underwriting denials that we are seeing in the market today.