When I was in business school in Florida, we reviewed a case about an Eastern Airlines flight that crashed at night into the Florida Everglades, killing the majority on board. At the time it was the deadliest domestic airline crash in U.S. history. There was nothing wrong with the airplane; it was only 4 months old. It happened because all of the crew’s attention was given to one small problem, at the expense of flying the aircraft.
Flight 401 was on a routine nighttime approach to Miami International Airport when the pilots realized the landing gear lock indicator light failed to illuminate. The pilots asked to abort the landing and be assigned a circling pattern while they sorted out the problem. Air traffic control assigned a pattern at 2,000 feet over the Everglades. The pilots put the plane on autopilot and set about determining whether a bulb had burned out or the landing gear failed to extend. The cockpit voice recorder clearly revealed that the crew was having difficulty changing the bulb and was frustrated because of a jammed cover.
As this was going on, one of the pilots inadvertently knocked the autopilot and the plane began to descend so gradually that the pilots failed to perceive what was happening. The plane descended slowly for several minutes as the pilots worked on the bulb and examined the landing gear. An altitude warning alarm went off but the crew was too distracted to notice. Three other indicators were also showing that the plane was on a slow descent into the swamp. All went unnoticed because the pilots lost track of their primary mission: flying the plane. With its left wing dipping, the perfectly fit plane crashed into the darkness of the Everglades and became history.
Ten years later, across the continent at an executive development program through McGill University Management Institute in Montreal, Quebec, Canada, case studies were an educational tool again. Only two students were U.S.-based and all all case studies were European or Canadian, except two: Mary Kay, a business school classic at the time, and the Eastern Airlines Everglades crash.
After a decade working in banking organizations where regulatory and reporting distractions can be epic, this time I better understood the concept. The urgency of near-term issues can cause an otherwise competent team to lose sight of the core mission and allow a perfectly fit business to drift into the ground. Attending to ancillary matters can be crucial and time-sensitive, but in all cases the core mission must receive first priority… or risk losing the entire enterprise.
What does this have to do with reverse mortgages? A lot. It has to do with the state of the reverse mortgage industry. Washington has garnered unprecedented influence. Reporting and re-reporting have become critical priorities. The CFPB is reporting that consumers are confused by our product without speaking to a single consumer. Regulations are changing daily. New laws have been passed but not codified. Disclosures are being changed, revamped, gutted and revamped again. New reverse mortgage examination guidelines are being finalized. Human and capital resource allocations for managing regulatory compliance are enormous. Regulatory uncertainty has become the norm. Responding to the innuendo, hearsay and undocumented accusations in the press are routine duties. Big banking and insurance companies are dropping out. Big nonbanking companies are dropping in. The SEC isn’t sure about Ginnie Mae sale treatment rules. The FHA says it will be making more changes to the program, but what? Politicians want a piece of the action. The distractions are endless and nearly all time-sensitive. However, little of this has to do with improving the outlook for millions of households whose retirement plans are dependent on reliable access to their own accumulated housing wealth in retirement.
Meanwhile, the reverse mortgage industry altimeter as measured by households served has been gradually declining for three years. As it drifts downward, changes in the production mix are occurring. Some simplistically interpret the shift to lump-sum, closed-end products as motivated entirely by self-interested providers. The reality is that open-ended line-of-credit production is simply declining at a faster rate than closed-end lump sum. There is much more to it. Banks with traditional line-of-credit businesses have been driven away by regulation. Consumers are badly battered by the “great recession.” Boomers are entering retirement with greater housing debt and other debt. Consumers wish to lock in the lowest level of interest rates in decades; only the lump-sum product can do that. The government tells consumers that variable rate mortgages are bad. No product innovation has occurred to update or enhance the relative competitiveness of the open-ended product following the introduction of a fixed-rate alternative in 2008. New businesses focused on retirement planning and housing wealth have been slow to develop under the current regulatory cloud. Both types of HECM loans are declining, but open-ended products are falling faster. The left wing is dipping.
Through policy, regulation and industry trends, the HECM is being recast as an alternative product to a traditional transactional mortgage product. It is not. This transactional mindset is destructive to the long-term viability of the tool. The home equity conversion industry was built on the open-ended line-of-credit product. The three highest production years for the HECM product were fiscal 2007 to 2009. The full-draw product existed for less than half of that period. Little or almost nothing has occurred to enhance the open-ended product to draw consumers who wish to use the tool as part of a comprehensive retirement strategy. The collective attention of the industry is focused elsewhere.
Pew Research estimates 10,000 people turn 65 every day, and this is expected to continue for 20 years. Moreover, the Center for Retirement Research at Boston College estimates 53 percent of households are “at risk of not having enough to maintain their living standards” in retirement. At the same time, according to the census, the homeownership rate for 65- to 69-year-olds is 82 percent. Pew Research estimates that 65 percent of older homeowners have no mortgage. Further, contrary to popular belief, median housing equity increased 57 percent in the 15-year period between 1984 and 2009. It now accounts for 44 percent of total wealth of the retirement age group, versus 39 percent in 1984.
These are overwhelmingly compelling statistics about the future role of housing wealth in retirement planning! It is time for intense focus on product design and delivery systems to best serve the consumers that can greatly benefit from the tool: the people building a comprehensive financial plan for retirement. Yet, as an industry we are bogged down and distracted by administrative and legacy issues, such as resurrecting the fixed-rate standard product at the expense of adding bureaucracy and administrative overlays to all products (initial draw restrictions); continuing a 10-year debate about non-borrowing spouses; and debating whether assumptions regarding pre-crash losses will turn out to be accurate. We need to move forward with progressive, consumer-oriented product enhancements to facilitate use of the tool in the ways that it was originally designed: as a retirement tool, not a transactional mortgage.
While we must attend and respond to the concerns of regulators, politicians and the FHA, the industry must, at the same time, return to a consumer-driven focus and product innovation based upon consumer requirements. What is the highest and best use for this product? Where does it best fit in the retirement planning process? How can the product be better designed for this purpose? How can this product be better positioned to improve the risk profile for the FHA and investors? Are the processes appropriate for the targeted user? If we focus on the consumer and get that equation 8
right, it will lead and guide the path for all industry decision-making and benefit all stakeholders, including regulators.
Observations and opportunities for the long term: *A HECM is not a transactional mortgage banking product. It is a financial management product. The more the industry and its regulators drive to pigeonhole the product in the context of the transactional mortgage marketplace, the less consumer value the industry has and the closer to the swamp the industry becomes.
*A focus on progressive retirement solutions wins. The singular focus on short-term issues risks driving the industry into the swamp.
*Open-ended product enhancements that serve all constituencies and reflect current market conditions are needed: -This might lead to a hybrid product that provides an initial draw with a fixed interest rate and market rate draws thereafter. The circumstance of consumers demands this product. -Ease of access: Streamline the process for low-utilization (low-risk) users versus the one-size-fits-all approach. Low-risk, mainstream consumers are being discouraged from using the product by the growing complexities. -Create FHA mortgage insurance cost advantage for low- versus higher-risk products. The present model provides the opposite incentives. -Evaluate price advantaged open-ended product without automatic credit line growth feature.
*Closed-end product enhancements that serve all constituencies and reflect current conditions are also needed: -Develop closed-end products that don’t mandate that the consumer take the maximum proceeds—whether they want it or not. Enable a more flexible, risk-balanced use of the tool while providing the consumer advantage of choice.
The reverse mortgage industry has clearly arrived at an intersection in its future and, potentially, its viability as an FHA program at all. Moving forward, there is no question that housing wealth will remain an essential element of the retirement planning equation for a large proportion of households. The question is whether the current reverse mortgage industry is able to move beyond preserving the status quo, recapture its focus on the consumer and attain meaningful changes in the product design. Concurrently, it must also address the immediate Washington-based issues. To me, that defines a leadership imperative.