Feature: How to Survive in a New HECM World

Written by Jessica Guerin, as originally published in The Reverse Review.

For the reverse mortgage industry, 2014 got off to a choppy start as the market struggled to adjust to new program guidelines. In the fall of 2013, HUD announced highly anticipated changes to the HECM program that would drastically impact how lenders in the space did business. The new guidelines—which limited upfront draws, reduced principal limit factors and promised the institution of a financial assessment of borrowers—effectively steered the industry away from a large portion of its traditional customer base.

Industry participants were left to figure out how to make a living with a different type of product, one that requires them to connect with more financially savvy consumers interested in leveraging their home equity to support retirement. As originators scrambled to reassess their business models, the HECM market took a sharp downturn with volume and revenues taking substantial hits.

While there are many longtime proponents of the product who adamantly believe in the HECM’s potential, some are uncertain about their ability to stay afloat in the wake of all this change. HUD’s new guidelines have drastically altered the business, and reverse professionals are wondering how they can survive in this new HECM world.

Feeling the Effects HUD’s program revisions have left a deep gash in the HECM market, and the industry has felt its effects. According to Reverse Market Insight’s John Lunde, the impact on HECM volume across the board has been significantly greater than anticipated.

“We originally expected about a 20 to 25 percent unit volume decline from lower principal limit factors and about a 50 percent initial UPB decline resulting from the unit volume declines in combination with initial utilization restrictions,” he says. “Actual experience has been quite a bit worse.”

Lunde says HECM application totals are roughly 40 percent less than they were one year ago. “That’s a pretty drastic impact. We expect to see volume recover from current levels as companies finish retooling marketing to work with the latest product guidelines, but [we’re] not sure what Financial Assessment will do to that outlook once implemented.”

Indeed, lenders big and small have reported a decline in volume since the new rules have taken effect. Mike Gruley, of 1st Financial Reverse Mortgages, says his company has felt an impact.

“We’ve seen a volume dip in units, but it’s a one-two punch, because then we’ve seen a revenue dip from losing the Standard fixed,” Gruley says. “The combination of the two is pretty tough.”

Jack Belles, of Reverse Mortgage of New England, also says his volume has dropped off under the new rules. “There are so many people who fall just outside the guidelines,” Belles says, adding that he turned down three seniors just that day because their funds fell short of the money to close. “A ton of people are being cut out… The people who are really hurting right now, unfortunately, most of those folks we can’t help anymore.”

Belles also says losing the HECM Saver product has been rough for his team. “Losing the Saver was huge, because we were doing a lot of Saver business. That was an easy sale, because it made the closing costs tolerable.”

Forget About the Old Days While it’s true that the program’s revamp has made it less amenable to those who may have needed it most, some say the key to adjusting to this change is letting go of what the program used to be. If originators continue to focus on what the HECM no longer offers, they may not be as effective in selling the benefits still available to borrowers under the new rules.

Paul Fiore, senior vice president of retail lending at AAG, says he reminds his sales team not to talk to borrowers about what the program used to offer. It doesn’t matter how much money the borrower could have gotten if he completed the loan process last year, Fiore says, it’s about the problems they can solve with the cash they can access under the program now.

“As a salesperson, focus on what you can sell and not what you used to be able to sell. So many people think about what they used to have,” Fiore says. “When you reminisce about the past, it usually makes the present irrelevant, and then you can’t sell the product as well. It’s still a great product that still helps a ton of people. Focus on that.”

Rethink Your Conversation with Potential Borrowers In order to effectively relay the benefits of a reverse mortgage in its current form, many insist that originators need to reassess the manner in which they approach potential borrowers. The new guidelines have steered the industry away from a needs-based clientele, meaning that originators will have to learn how to approach borrowers who would consider a HECM as a financial planning tool. Connecting with this type of senior requires a new approach and a different kind of conversation.

“I think everyone has to change their message,” Fiore says. “As an industry, we all have a responsibility to make sure people understand that the reverse mortgage is more of a planning retirement tool; it’s not just for the financially destitute. For everybody in this industry to grow and survive, we need to emphasize the positives of the product and what it can accomplish for people.”

Sherry Apanay, chief sales officer at Urban Financial of America, agrees that changing the conversation is a must. “I think that every originator out there today is going to have to look at how they’ve gone after the business and re-evaluate it,” she says. Rather than immediately launching into a discussion about the HECM’s benefits, Apanay suggests originators talk first about that particular senior’s financial needs. “You really have to start the conversation with the borrower about their finances. You have to talk to them, and not just about how a reverse mortgage can help meet their needs. You have to have a conversation about what their goals are and what they’re trying to achieve, and really look at the whole picture.”

Apanay says the changes are forcing the industry to tackle a challenge that has been discussed for quite some time. “We’ve talked for years in this industry about how we wanted reverse mortgages to be part of a retirement planning process, something that seniors looked to as part of their normal retirement planning,” she says, adding that now, with the new changes in place, “we’re forced [to look past] the low-hanging fruit. I think it’s really a great opportunity, because it forces us to start doing the extra work it takes to have that kind of conversation… It forces the market to move to where it has needed to move for a while.”

Focus on That 98% As the industry works on connecting with planning-oriented consumers, it has the opportunity to reach a wider customer base. The HECM market notoriously clings to a mere 2 percent penetration rate, despite economic statistics and aging demographics that suggest so many more seniors would qualify for and benefit from the product. With the new rules in place, originators have no choice but to work on expanding their reach.

“It’s time to reopen the dialogue with that 98 percent,” Gruley says. “That’s what the smart originator does.” He says originators should attempt to connect with all sorts of potential clients and interested parties, including financial advisors and Realtors. “Start communicating with the whole 100 percent, and maybe you’ll tap some of that 98 percent. Maybe that 2 percent doesn’t get served like it used to, but maybe it shouldn’t be served for all the reasons HUD has articulated. That continues to be our challenge, getting to that 98 percent. But that’s where our future is; I have no doubt about that.”

Gruley says the program revisions have given originators a major talking point when approaching different types of consumers. “You can use the new product developments to change the way people view and understand reverse mortgages,” he says. “[The guidelines] are a step in the right direction for our industry in its effort to communicate to the world that HECMs can be one of the best retirement tools available to the 62 and older crowd.”

Fiore agrees that the guidelines can help the industry reach a new demographic. “The goal ultimately with these safety measures in place is that people will look at a reverse mortgage differently. So you’ll touch the borrower who maybe previously had not [considered] looking into a reverse mortgage, and you make up for the loss of loans with increased interest from other people who may now look at the loan.”

But the change won’t be immediate; it will take time for the public’s acceptance of the product to turn a corner. “I don’t think it’s an overnight success thing,” Gruley says. “It’s going to be a transition and it will take time. It might be a year or more, and time will tell who is going to bear through it and who is not. It’s just basic sales: You go out and shake hands and kiss babies and get to know people and form relationships, and as the product gains acceptance, you’ll be in a great position to benefit from it.”

Keep Expenses Low In the meantime, companies will have to work on tightening up expenses in order to stay afloat in this low-volume environment. Until things turn around—which many agree may not be for a year or more—companies will need to watch their balance sheets and keep expenditures at a minimum in order to maintain profitability.

Lunde says many companies in the space are re-evaluating their processes in light of the program revisions in order to remain in business. “With the recent changes pushing down revenue per loan, people are refining their focus on methods that can fit within the new cost constraints and increasing their efforts to maximize efficiency with their spending,” he says.

Gruley says that with volume dropping, it’s especially important for small brokers and lenders to watch their balance sheets, but that some corners cannot be cut. “They’ve got to maintain their efficiencies and their profit margins in this low-volume environment, they just have to. They’ve got to keep their cost to produce low and they’ve got to control their expenses, but without compromising the support they give their salespeople. There’s no savings in cutting back on support for quality salespeople,” he says. “Having a quality team and supporting them is part of being efficient.”

Commit to Putting in the Work At the end of the day, many agree that those who will survive in this business are those who are willing to put in the extra work. With the program changes in place, it may require more legwork and more effort to find clients and help them obtain reverse mortgage loans, meaning that, for now at least, originators may need to put in longer hours to do the same amount of business as before.

“If originators want to survive, they’ve really got to look inward and find out if they’re cut out to invest the kind of time that’s needed,” Apanay says, adding that the new rules require originators to spend more time connecting with potential borrowers. “You’ve got to invest the time to really understand their full picture.”

Belles agrees and says the extra hours are essential to maintain profitability. “Everybody is working harder, because you have to look at so many more loans to get the same amount of business. It’s a numbers game,” he says. “I’m convinced there’s still business out there, you’re just going to have to work a lot harder for it. You’ll have to outwork everybody to keep your head above water.”

Keep the Faith While the current market environment may be challenging to navigate as the industry adjusts to a new way of doing business, it’s important not to lose focus on the value of the product and the help it can afford senior borrowers. Many professionals across the HECM space admit that this year—and perhaps even the year after that—will be challenging for the reverse mortgage industry. Still, all seem to agree that the HECM has tremendous potential, and many hold on to the belief that it will one day become a mainstream financial product.

Lunde says all the facts point to a promising future for the HECM program. “I continue to believe that the vast majority of households do not have sufficient savings outside of their home equity to pay for retirement, and the government simply doesn’t have the funds or willingness to meet the shortfall, so tapping home equity in some form will be the answer,” he says. “Our industry has to prove that we’re the best way for households to access that home equity for retirement.”

Lunde says if the industry can move the needle just a little in the way of public acceptance, that would still do a lot for business. “Even if reverse mortgages are the second or third option on a menu of choices, that would leave annual volume at least 10 times where we’re at today.”

Apanay also says she believes the product’s future is bright. “I’m very optimistic about the value proposition of this industry. Even with our limitations, even with our challenges with the changes that have come to the program, it’s still a great benefit for any senior who has a home,” she says. That said, Apanay does admit that the waters will be choppy for a while. “I think it will take a little time for all the dust to settle, for people to get comfortable wherever they’ve landed and with whatever new products come into the industry.”

Accepting all this change is part of the challenge, according to Fiore, who says that in order to adapt, reverse professionals must focus on what the product can do for seniors. “Change is constant,” Fiore says. “You never know what changes will be brought—some of them will be positive for your business and some of them will be worse—but if you believe in the product and you believe in what it can accomplish, if you focus on the good and present that, you can show how much this can help someone.”

While it’s clear that those in this industry maintain a strong belief in the benefits of the reverse mortgage program, no one seems to deny the fact that there is a challenging road ahead for professionals in the space. For those attempting to stick it out, it’s all about staying afloat in these turbulent waters until the tides shift and business rebounds.

“I do sense that there’s this mountain we need to get over and the promised land is on the other side,” Gruley says. “That mountain may vet out a lot of people, a lot of originators and a lot of companies that don’t want to climb it, but I think it creates great opportunities for those who are left.”

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