For anyone actively working in the mortgage industry, it’s no secret that reverse mortgages have taken a brutal hit in the last two years. The U.S. Department of Housing and Urban Development issued major program changes at the end of 2017 that effectively limited the amount of proceeds and the number of people who could qualify for the loan. The result had lenders across the space enduring sizable volume drops and subsequent gashes to their bottom lines.
Many of the professionals who have dedicated their careers to helping seniors access their home equity remain optimistic that things will turn around. After all, the demographics are on their side. But there has been little improvement so far, with recent data revealing that for several months, volume has been stuck at a near 36% low.
The current situation has some wondering what comes next. This is an industry that is no stranger to controversy and change. It has withstood countless guideline revisions, damaging news headlines, impactful compliance changes, powerful public misperception and misleading media coverage.
But is it different this time around? Will this once-resilient industry finally cave after government regulation has effectively rendered the business unviable?
The Federal Housing Administration has, time and again, asserted its belief that this product provides a vital service to the growing number of older Americans who may benefit from accessing their home equity to age in place. But can the lenders in this space survive under the new stipulations that the FHA has inflicted?
Will the industry find its footing so that lenders can continue to offer seniors access to their equity, or, is it in danger of facing extinction as it becomes so marginalized that it will eventually cease to exist?
The 10/2 changes
In late August 2017, the FHA surprised the HECM industry by announcing considerable changes to the reverse mortgage program, designed to shore up the losses the program was causing to its flagship Mutual Mortgage Insurance Fund.
Several new rules were put into play, including a reduction in the principal limit factors that determine proceeds and an adjustment in mortgage insurance premiums that made the loan more expensive for some borrowers.
The rules took effect on October 2nd that year, and now that they’ve had two years to settle, their damage is clear.
David Peskin, president of Reverse Mortgage Funding, a top-five lender in the space, calls the new rules devastating, in part because so many changes were made at once with little time for lenders to adapt.
“This was a pretty significant hit,” Peskin said. “I mean, you had several major things happen all at the same time. You had the removal of the [interest rate] floor, which brought on margin compression, because in order to maximize proceeds to the borrower, you have to give the lowest possible margins. It took a lot of the profits out of the business while volume was dropping.”
“It was sort of a World War III, so to speak, because there were so many changes that took place all at the same time,” Peskin continued. “It was major destruction.”
John Lunde, president of Reverse Market Insight – which publishes regular data tracking HECM endorsement volume – details the level of destruction.
Lunde said his analysis pinpoints a 47% drop in loan count and a 12% reduction in initial unpaid principal balances, leading to an industry-wide revenue hit that totals – or even exceeds – 50%.
“Given that the industry is largely paid on UPB and fixed rates, and with margins dropping at the same time, I’d say the initial estimate of 50% reduction in revenue for HECM business has been met or exceeded,” Lunde said. “Part of that has been offset by the increase in revenue from proprietary loans, but I’d wager we’re still at 50% or worse.”
Faced with a potential revenue hit this huge, each major player was forced to reassess their business models – tightening expenses, slashing budgets, retooling marketing, expanding offerings. It’s been a master’s course in business survival, with the most able students quick to adapt, innovate, rebrand – anything to avoid going under.
When looking at the top 10 players in the market, it’s evident that each one took a unique approach.
For the top two – American Advisors Group and Finance of America Reverse – the answer was a complete rebrand, moving away from being a sole provider of reverse mortgages and emerging as a company that offers “holistic retirement solutions.”
As Lunde succinctly observed, the new rules “pushed more participants to re-consider whether reverse is an industry or a product,” calling this revised mindset – and subsequent step away from a reverse-only focus – “a huge shift.”
For AAG, this meant bringing on traditional mortgage products that were marketed to address the specific needs of seniors, as well as real estate services for those looking to relocate in retirement.
AAG CEO Reza Jahangiri said that while the 10/2 changes were super disruptive, they also spurred necessary change.
“It’s clear now that 10/2 was the catalyst for transforming the industry as a whole,” he said. “It underscored the need for both significant measures to reform and stabilize the economics of the HECM program, but also to create additional vehicles for home equity extraction for seniors.”
Jahangiri said AAG was discussing a change to its business model long before the new rules came into play.
“We were not achieving the velocity and market penetration needed to change seniors’ mindsets about activating their home equity by being 100% HECM-focused,” he said, adding that the company began laying plans for a new model in 2015.
“We made the decision then to transform into a product-agnostic solutions business, because of all the issues associated
with being a mono-line distributor of a government product,” he said. “Today, we offer a wide range of products and services to help seniors maintain their quality of life in retirement through the responsible use of home equity.”
Finance of America Reverse launched its own rebrand not long after.
The lender pledged a commitment to helping seniors build a financially stable retirement, announcing a partnership with Silvernest, an online service that pairs older homeowners with qualified housemates.
“In order to be a good long-term partner to our borrowers and truly change the conversation about reverse mortgages, it’s critical that we become more than a just a lender,” FAR President Kristen Sieffert said at the time.
Another major lender, Synergy One Lending – which operates under the name Retirement Funding Solutions – took a different tact altogether, announcing a merger with Mutual of Omaha Bank.
The move was widely applauded by members of the HECM space because it created a reverse mortgage channel for a major lender, potentially tapping into a greater consumer base. The reverse mortgage industry hadn’t seen a big player dip its toe in HECM waters since MetLife and Wells Fargo shuttered their reverse operations in 2012.
“Our origination force now has a clear and comparative advantage in their markets as their clients have a degree of trust around the brand,” Synergy One President and CEO Torrey Larsen told HousingWire at the time. “Mutual of Omaha Bank sees an opportunity to extend its brand, extend its capital resources and grow both the overall market as well as our company’s market share.”