As we prepare to say goodbye to 2023, the reverse mortgage industry is on the cusp of new change. This year has seen the consolidation or exit from the space of several major lenders — including its biggest leaders — as volume has been challenged by a high interest rate, low loan-to-value (LTV) environment.
While reverse mortgage volume is down, the tens of thousands of borrowers who took advantage of the Home Equity Conversion Mortgage (HECM) product leaned on some of the most common use cases from recent history, with a few new surprises. This is according to the Federal Housing Administration (FHA)’s Annual Report to Congress, detailing usage and demographic details of the HECM program.
Reverse mortgage endorsement activity
While 2022 saw a record number of HECM endorsements, 2023 saw a precipitous drop-off. The total HECM endorsement count for fiscal year 2023 stands at 32,693, roughly half of the record total observed in 2022: a year that saw the dissipation of a HECM-to-HECM refinance boom that pushed the industry to new business highs not seen since around 2011.
Most industry participants who have spoken to RMD over the past year have singled out the rate environment as a primary culprit of the drop-off, with analysts warning throughout 2022 that industry companies should reorient themselves to going after new-to-reverse customers as opposed to a focus on refinances.
Others still have indicated that 2024 could be a stronger year for reverse mortgage business. Recent indications from the Federal Reserve show that the rate environment could improve, while the HECM limit for 2024 has risen to over $1.1 million. Industry veterans have pointed out that these factors could lead to more favorable terms for borrowers, and leads that had to be turned away earlier in 2023 may find themselves qualifying for a HECM loan more easily in 2024.
The HECM maximum claim amount (MCA) only modestly decreased from 2022 levels, from $498,210 that year to $490,396 in fiscal 2023. Generally strong levels of home price appreciation likely account for this softer MCA impact, according to FHA. However, the MCA has increased consistently since 2013, with 2023 marking the first drop of any kind during that time.
“Rising average maximum claim amounts coincide with higher appraised values on homes occupied by HECM borrowers,” the report said.
Once again, the biggest demographic served by the HECM program in fiscal year 2023 were single females, who comprised 39.4% of all borrowers. Single males comprised a far lower share, making up 20.82% of borrowers. 35.25% of loans served multiple borrowers, likely in the form of married couples or cohabitating family members.
In terms of the racial demographics of borrowers in 2023, more than 66% of all HECM borrowers were white. 6.58% of borrowers were Black and 4.84% were Hispanic. Less than one percent (0.89%) of HECM borrowers were Asian, while only 0.38% of borrowers were Native Americans.
When offering perspective on the 2024 HECM limit, the partners of New View Advisors commented on the racial composition data as detailed in the report. This data, they said, illustrates “an additional divergence over time as HECM lending limits rise; for those who reported race, the share of HECMs serving minority borrowers versus white borrowers has decreased,” they said earlier this month.
Borrowers can voluntarily choose whether or not to report their race, FHA explained, which could obfuscate some of the details on this data.
One very stable factor among HECM borrowers in 2023 concerned borrower age. This year, the average age of a HECM borrower rose modestly to 74.84 years, from 74.29 years in 2022. The only time in the recent history of the program that the average borrower age dipped below 72 years was in 2013.
Endorsements by mortgage purpose, rate options
“Traditional” use dominated this year’s endorsement metrics, meaning first-time borrowers engaging with the HECM product for the first time. Roughly 80% of HECMs in fiscal 2023 are labeled as “traditional,” according to FHA.
Refinance activity dropped severely, and nearly accounts for the total volume reduction for the program overall observed between fiscal years 2022 and 2023. While in 2022 the refi rate comprised 48.9% of all HECM endorsements, the refi figure dropped to only 13.9% of all endorsements in fiscal year 2023.
“Refinance transactions allow existing homeowners to tap into subsequent increases in home value; however, higher interest rates reduce the amount borrowers can extract and the compounding of higher interest reduces at a faster rate the equity available to a borrower, which may have further discouraged refinance activity during FY 2023,” FHA said in the report.
An overwhelming majority of HECM endorsements consisted of adjustable-rate mortgages (ARMs). 97.87% of all HECM endorsements in fiscal year 2023 fell into this category, with negligible use of both annual adjustable and fixed rates.
Fixed rates made up over half of HECM endorsement activity in fiscal year 2013, but the trend away from that option partially stems from “a result of policies implemented in FY 2014, including eliminating the option of future draws and a reduction in the amount of principal made available to the borrower,” FHA explained.
Geographic data, payment plan options
Once more, the three leading states for the HECM program based on fiscal year 2023 endorsement data were California, Florida and Texas, respectively.
“HECMs are more geographically concentrated than FHA-insured forward mortgages,” FHA said in the report. “California remains the state with the largest share of HECM production by far, at 27.12% of FHA’s total FY 2023 HECM endorsements based on total [MCA].”
The top five states, which also include New York and Colorado, represented more than half (51.56%) of new HECM endorsements in fiscal year 2023, putting determinative pressure on these states for HECM program performance, FHA explained.
“As a result, future HECM performance will most likely be more reliant on economic factors such as house price appreciation in these specific states, particularly in California, where the share of HECM Maximum Claim Amount is 2.81 times greater than that for Florida, the state with the second highest share of HECMs,” the report said.
Consistent with all measured data since fiscal year 2009, the HECM line of credit was once again far-and-away the most preferred disbursement option for borrowers, roughly comprising more than 95% of all HECM endorsements in fiscal year 2023.