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.”
The proprietary solution
Individual strategies aside, there is one common means of survival has been heralded by all reverse lenders, and that is the proprietary reverse mortgage.
Unlike the FHA-insured HECM, these privately insured reverse mortgages cater to homes with values that exceed FHA’s maximum lending limit of $726,525 – which is why they are often called jumbo reverse mortgages. And, they don’t come with the costly mortgage insurance that sometimes turns would-be borrowers off from the HECM.
While proprietary reverses have been around in the past, they largely disappeared when the housing bubble burst. Only one lender – Finance of America Reverse – had a product on the market before 10/2.
But now, a wave of new products has emerged, with four more lenders bringing non-agency offerings to market, and FAR doubling down by issuing three iterations of its offering with features not seen on a HECM.
For most industry observers, this proprietary market holds all the promise.
“I think it’s going to be very much like what the non-qual did for the forward market, which became a very liquid market,” Peskin said. “I think because the closing costs on proprietaries are so much less than a traditional HECM, it opens up the door to borrowers who were staying away because of those costs.”
Mark Browning, a long-term participant in the reverse mortgage space and 2018 vice chair of the National Reverse Mortgage Lenders Association, said non-FHA reverse mortgages are no doubt part of the industry’s long-term solution.
“FHA loans as a category are operationally clunky for both the consumer and lender,” Browning said. “HECMs are no exception. Over recent years, I have tried to underscore the imperative to improve the consumer experience. New non-FHA tools are likely to be the most expedient route to that objective and to attaining growth expectations.”
While there is no cross-lender data available on just how well these proprietary loans are performing, some analysts insist their volume is growing.
Mike McCully, partner at New View Advisors – which tracks the capital market performance of HECM and proprietary reverses – said the new non-FHA products are already eating up a solid chunk of overall reverse mortgage volume.
“New View Advisors believes proprietary reverse mortgages are likely to make up HECM’s dollar volume shortfall,” McCully said. “Origination volume for 2019 is on an annual run rate of $1 to $2 billion. As much as 40% to 50% of total origination dollar volume today is in non-agency production. We only see that improving over time.”
The road to proprietary success
Although the advent of a more robust proprietary market is welcome news for the industry, most agree we have a ways to go before it grows into solid competition for the FHA’s HECM. But the potential is there, should certain obstacles be overcome.
First, significant volume – which will create meaningful investor interest – is needed.
“I have long expected non-HECM products to be a big part of getting to a much larger volume of loans,” Lunde said. “I think eventually that will mean competing directly against HECM as forward mortgage products compete against FHA products, but I believe the path to that is to find sufficient volume outside of the HECM underwriting box to sustain investor interest.”
Lunde said that means continuing to develop proprietary reverses that fall outside the HECM’s reach, like higher home values, property types not supported by the FHA, and younger serving borrowers who are not quite old enough for HECMs.
“All those things and more eventually aggregate enough consistent demand and performance history to prove out non-HECM products for investors. At that point, there will be support for products designed to compete directly against HECM on process and eventually on pricing,” Lunde continued. “No idea how long that whole journey takes, but it’s measured in years rather than months.”
McCully added that more successful securitizations of proprietary loans on the secondary market will spur investor interest.
“Empirical proof that non-agency proprietary reverse mortgage securitizations are successful gives confidence to investors in the asset class, which enhances bond execution,” McCully explained. “Good bond execution passes down to originators, which in turn allows for improvement in the proprietary loan offered to consumers. Better products increase origination volume, which increases securitization frequency, which increases liquidity for investors, which helps to further improve bond execution.”
The need to educate
But while proprietary products may eventually help unlock some of the reverse mortgage’s potential, the fact remains that the public is largely unaware of their existence. On top of that, long-held misperceptions about reverse mortgages in general continue to hinder public acceptance.
Without breaking through that barrier, reverse mortgages – proprietary or otherwise – won’t ever gain much traction.
Kent Kopen, a California-based Certified Reverse Mortgage Advisor with United America Mortgage, said the 10/2 changes may have forced the education issue.
“If there’s a silver lining, it is that reverse mortgage originators have to be more educators than transactional sales people now,” he said. “We have a long way to go on the educational front.”
Kopen said he frequently encounters people who have deep-seated misconceptions about the loan.
“When I tell people the government has been insuring this product for 30 years, they don’t believe me,” he said. “And if they stay engaged long enough to understand the product – at a level where they can explain it to their neighbor – their next question is always: Why don’t more people know this or why don’t more people get one?”
Dan Hultquist, VP of Organization Development at Finance of America Reverse, said misconceptions are rampant, but the problem runs even deeper.
“Beyond the common myths that the bank gets your home and the product sticks the heirs with a bill, homeowners have always been hesitant to view housing wealth as a nest egg that can be leveraged for retirement cash flow,” Hultquist said, adding that homeowners are largely unaware that their home equity can be converted into non-taxable retirement cash flow.
But is there a way that we can get in front of the problem? One expert seems to think so.
“Education, education, education,” said Sherry Apanay, FAR’s chief sales officer.
But it won’t be easy.
“It’s going to take the industry addressing criticisms head on, acknowledging the perceived short-comings of the available reverse mortgage loan programs,” Apanay said. “And, at the same time, being able to effectively communicate the many benefits and ways a reverse mortgage can provide solutions and improve retirement outcomes for many.”
Of course, tackling the industry’s long-standing education problem is easier said than done. Still, most professionals in the space hold on to an optimistic vision of the future.
“Demographics is destiny,” Kopen said. “We forget that because it moves slowly. Are all pensions soon going to be safe and fully funded? No. Are people going to live longer than they think or want? Probably. Is the majority of most peoples’ wealth their home equity? Yes. Will people want to continue living in their own home in the future? Yes.”
“Wealth will get tapped, regardless of where it’s positioned,” Kopen added. “Because of that, I think the future of the reverse mortgage industry is bright.”
Peskin said it’s the possibility afforded by the non-agency market that gives him hope.
“Is it wasn’t for the proprietary product, I might have a very different outlook on the future,” he said. “I think it will take another couple of years to gain some traction and to become very liquid, but I think you’re going to start to see a very different business in the next two years because of the introduction of proprietary products and securitization of these products.”
Jahangiri agrees with the vision of a more diverse reverse mortgage market.
“We envision broader home equity extraction vehicles for seniors and greater collaboration with the financial services industry on holistic solutions specifically designed for the senior demographic as well as new forms of distribution,” Jahangiri said.
“We need to focus on new innovative technology tools, products, marketing and distribution models,” he added. “Doing the same thing we have been doing will not work.”
Live Well Financial shutters origination operations
Live Well Financial has ceased originating loans, the company announced on its website Friday. The homepage message said only that it would not be originating new loans as of May 3, 2019, “due to unexpected circumstances,” a surprise move that took some wholesale partners by surprise.
Live Well Financial originated traditional and reverse mortgage loans as well as FHA and VA loans. It also operates a servicing arm. No word yet on whether the company will continue to service loans or if it will sell off that business and close completely.
Virginia-based Live Well is a long-time player in the reverse mortgage space, most recently coming in at No. 7 with 305 loans year to date and 3.1% market share.
It is also an issuer of reverse mortgage securities, coming in No. 7 in the first quarter of 2019 with 22 pools of HECM-backed securities with an original aggregate amount of $85.6 million. But late last year, the company sold off a sizable portion of its portfolio to Reverse Mortgage Funding in what was perhaps a sign of things to come.
In September, Executive Vice President Bruce Barnes told HousingWire that the lender was on the brink of releasing a major upgrade to its lending platform, promising an elevated experience for both its customers and originators.
Barnes said the new focus on technology and mortgage automation was a bid to retain market share as business in both forward and reverse mortgages was down. But the technology never officially launched, and it appears the lender may have buckled under the pressure.
The forward and reverse mortgage lender and servicer also filed a notice with the Virginia Employment Commission informing the state of its closing and subsequent layoff of 103 employees in Richmond, Virginia.
According to a letter penned by the company to the state that was obtained by HousingWire, Live Well will terminate most, if not all, of its employees working in its Virginia office, including CEO Michael Hild.
The letter breaks down the eliminated employees by position, with mortgage loan originator and underwriter making up the largest number of layoffs at 10 apiece.
In the letter, Paula Foster, Live Well’s vice president, controller and human resource director, said conditions outside the lender’s control led to the decision to permanently shut down all of its operations in their entirety. Prior to this revelation, it was only clear that the company would halt originations and cease funding new loans. Now, it appears its servicing business and mortgage securities issuance will shut down as well.
“Due to sudden and unexpected developments in the markets for certain financial assets the company uses as collateral for certain credit facilities that provide this liquidity, these lenders have reduced significantly the amount of liquidity they make available to the company,” Foster said.
“This reduction in credit availability combined with challenging conditions in the markets for mortgage loans, which were conditions outside of the company’s control, along with related regulatory issues, have resulted in the company having insufficient available cash to continue operations,” Foster continued.
“Despite the company’s exercise of commercially reasonable business judgment, it could not reasonably foresee these circumstances and therefore was unable to provide 60 or more days notice of the closing and related layoffs,” he added.
While the letter said that employees working outside of Live Well’s Virginia headquarters would be also affected, it did not provide specifics on layoffs in other states. Live Well has offices in San Diego and Lansing, Michigan.