Reverse Market Insight recently published their first ReverseIQ Newsletter which provides a great analysis of North Carolina State Employees Credit Union (NCSECU) reverse mortgage product. When you have a competitor that is offering a private label reverse mortgage product with a fixed rate, 1% origination fee, and no mortgage insurance or monthly servicing fee… how do you compete with that?
If you take a look at RM Insights analysis of the product they show you that the product is unsustainable even with the lower cost structure and its non-profit status typical of credit unions. As credit unions continue to get into the reverse mortgage business, originators need to understand their products and how to compete with them.
A 62 year old borrower illustrated in the NCSECU product guide receives $670 per month on a $200,000 home. If the borrower finances the closing costs and lives out a 21 year life expectancy, he will have received $173,010 in total draws. Using those numbers, home prices must appreciate at a compound annual growth rate (not simple) of 1.7% per year just for NCSECU to earn a yield equivalent to its current CD rates on offer, assuming a 7% closing cost to sell the home.
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While that home price appreciation figure is very reasonable, the credit union is assuming all the home price risk while capping their offsetting return uncomfortably close to their current CD yield. In our humble opinion, that seems to be cutting it extremely close given the other inherent risks in these loans. Essentially, the credit union is creating a very low ceiling on its net return while at the same time assuming substantial interest rate risk (fixed rate with tenure payments), home price risk and duration risk. This last item may not seem like a big issue at first glance, but the idea that a credit union is lending long term at fixed rates using short term deposits as collateral is exactly what got the S&L industry in trouble a few decades back.
Looking at the table above, imagine what would happen if interest rates rose 2.5% from the historically low current levels – suddenly every single loan written at current rates is losing money in any home price appreciation environment. It is not unreasonable to think that this situation would prompt the one hidden risk to the borrower: the risk that a lender might not perform because they cannot fund their monthly payment obligation to the borrower. A HECM would be backstopped by the HUD guarantee, but the credit union product provides no such protection.
It’s a great deal for borrowers who qualify (with one hidden risk), but at the expense of NCSECU’s broader membership and anyone else that might invest in this product. Among potential investors, even the state pension fund has a fiduciary responsibility to manage assets for the benefit of its beneficiaries, and it’s extremely difficult to imagine this product meeting that test.
Check out the rest of the report which shows that over 1,000 originators entered the industry in the first six months of 2008 (86% growth) while volume grew just 5%.
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