California weathers private-label drop to remain dominant reverse mortgage destination

DBRS Morningstar examines private vs. HECM reverse mortgage originations

Reverse mortgage companies do not commonly break out proprietary, private-label reverse mortgage origination data. However, from other data sources, the trends seen in the proprietary market can become clearer, which recently occurred during a reverse mortgage market presentation conducted in June by DBRS Morningstar.

As is true for the Home Equity Conversion Mortgage (HECM) product, California has been commonly seen as the leading state for proprietary reverse mortgages. While the state does maintain a reasonably substantial lead, data shown during the presentation reveals that a notable drop in business for the product type took place between 2021 and 2022.

“We know that California makes up the bulk of the prop[rietary reverse mortgage] market,” said analyst Joe Morgenstern during the presentation. “However, I do want to point out that specifically, we can see California dropping fairly substantially. In Q1 2021, [California] started out [accounting for] nearly 90% of all proprietary volume, and by Q4 of 2022 — in more recent data — it’s dropped down to nearly 73% of overall proprietary production.”

Similar trends are also playing out on the HECM side, Morgenstern said, but the drop on the side sponsored by the Federal Housing Administration (FHA) has been “less dramatic,” he explained.

“One reason proprietary products have such a large portion of market share in California and some of the other similar Western states is due to the higher home values and higher property values in general, many of which would be above the HECM lending limit,” he said. “And so, a proprietary product may have been more advantageous for that borrower. So that’s part of the reason why we see this distribution.”

California, Florida, Texas and New York also contained the largest numbers of HECM active buyouts (ABO) in the industry, based on data and classifications by DBRS Morningstar’s own rating classifications. Those four states contain nearly 40% of all ABO volume, Morgenstern said.

The highest share of non-performing or inactive ABO loans come from Florida, New York, Puerto Rico and California, respectively.

“Puerto Rico has made its way into the top four states mostly due to the foreclosure moratoriums that delay the liquidation of the collateral quite a bit,” he said. “And some of that has to do with both COVID as well as some natural disasters that Puerto Rico has faced in the last few years. And so that’s going to that’s going to delay the foreclosure timelines fairly substantially.”

Puerto Rico’s reverse mortgage borrowers were found to have been disproportionately impacted by the damages of 2017’s back-to-back hurricanes, Irma and Maria, with recovery efforts extending well into the COVID-19 pandemic period.

In terms of active proprietary loans, California continues to make up nearly 60% of the total market, Morgenstern said, with an active unpaid principal balance (UPB) of $685,600. Falling far behind are the next most prominent proprietary states including Florida (6.1% with UPB of $428,600), New York (4.6% with UPB of $427,400) and Texas (3.1% with UPB of $292,600).

“The top four states comprise about 75% of the overall market,” he said. “Despite the shift in distribution, California, Florida, New York and Texas all remain in the top states for props.”

However, there are also other factors making the distribution for proprietary reverse mortgages unique when compared to HECMs. Beyond marketing efforts that zero in on these states’ generally higher home values and balances, proprietary distribution is also impacted by licensing and legislation. Unlike HECMs, proprietary reverse mortgages are not available in every state, he said.

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