The Ugly If our core mission is to liberate imprisoned home equity for the senior mass market, allowing them to maintain some level of financial independence and lifestyle integrity as they redefine retirement throughout their ever-longer lives, we have at best massively underachieved. However we choose to measure it, our 25-plus-year effort has produced a miniscule penetration of eligible households, and the unmet needs of many remain unaddressed. Significantly, the market is growing much faster than the industry today. But in the spirit of positive thinking, this represents an opportunity, not a failure.
The Bad The industry is struggling to escape its current predicament. We have lacked true nationally recognized brands since the exit of the mega banks. We effectively have a single current product, new and improved but more limited than before, that is heavily commoditized, and there is no real opportunity for lenders to differentiate themselves from one another other than price.
We suffer a fundamental imbalance between supply and demand. The HECM is now tougher to qualify for, and has utilization limits as well, resulting in reduced unit and dollar volumes and creating shortages in supply. At the same time, artificially low prevailing interest rates have created great investor demand for the product. There are simply too many companies chasing too few loans. The value of the loans originated, resulting from the higher yields and shortage of supply, drives up the back-end value (loan sale premiums) paid by investors. These are not dollars charged to the consumer, nor can these dollars be redirected to benefit the consumer. Raising principal limit factors would simply make the loans worth less to investors, raise FHA insurance fund risk to unacceptable levels, and reduce dollars available to cover the cost to produce.
This is a slippery slope. Volume is the key, so salespeople are in great demand. But low volumes in the current marketplace dictate that salespeople in general cannot originate sufficient volumes at normal payouts to earn a living. They must therefore earn more dollars per loan with their established volume. The strong sale premiums thus camouflage a root issue with the relative cost of the current upfront origination process. Companies are overpaying originators (dipping heavily into the back-end value) to retain critical sales forces. That leaves no margin for broker shops, branches and lenders (that are not also issuers/servicers, and therefore have no back-end to access).
This is a “Red Ocean strategy” at its worst, and the noise distracts from the need for transformation. Competition is unlikely to allow reduction in originator compensation, and that would be the wrong answer anyway. We must drive increases in volume, for the sake of customers with unmet needs, and to bring some balance back to industry economics. That would alleviate the need to cut margins in order to overpay on too few loans, offering better total compensation to originators while restoring industry margins.
The Good Still, we have much to be excited about! The underserved and underpenetrated senior market is the business opportunity.
Industry representation continues to be outstanding, the only constant in an otherwise rapidly changing industry. After years of playing defense, we are on the offensive now, telling our positive story rather than reacting to political sound bites and issues that too often result from misperceptions.
The Extreme Summit initiative has produced “the new reverse mortgage,” and is proactively rebranding the entire industry, the product and the customer. This is a whole new story, which should work well for HECMs while setting the stage for various proprietary products to come.
Industry participants have morphed positively as well. After the original industry leaders exited the space, a new group has emerged to assume the mantle of leadership. New investors and sponsors have already entered the fray, introducing critical brands, capitalization, liquidity and credibility to the industry once again. Others continue to study and contemplate entering our business.
This is producing new product introductions, featuring both new whole loan and security investors. Today’s industry participants are heavily invested in distribution, but have too little to sell. The key to reaching the mass market is a much broader product menu, built around customer segmentation. This must include innovative reverse mortgage products, but should not stop there. It should also include other liquidity tools (such as life estates, equity shares, and life settlements).
We must continue to change the industry dialogue, reject business as usual, and embrace the “Blue Ocean” to thoughtfully and systematically transform the industry.
