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.”