REQUIRED READING: Reverse mortgage originators and servicers may do well to forget some of what they know – or think they know – about the business, in order to succeed in an atmosphere of new challenges that may result in a landscape that is markedly different than the one they entered.
Falling property values, rising business costs, fraud and greater regulatory scrutiny are among the biggest changes affecting reverse mortgages today. The single largest reverse mortgage program, the home equity conversion mortgage (HECM), is a Federal Housing Administration (FHA) offering that insures lenders against potential losses.
Against the aforementioned headwinds, the government is accelerating its controls through a ‘broader programâ�¦necessary to ensure the success of the HECM program into the future,’ according to David Stevens, FHA commissioner and assistant secretary of the Department of Housing and Urban Development (HUD).
For example, HUD proposed an increase in the annual mortgage insurance premium from 0.50% to 1.25% and a further reduction in the principal limit factors (PLFs) – the maximum loan amount – of as much as 5%, depending on the age of the borrower. That's on top of the 10% reduction in PLFs that was implemented last fall, at the beginning of fiscal year 2010.
The FHA is seeking a $250 million appropriation as further protection against reverse mortgage losses – a request that may well be turned down for fiscal year 2011. If it is not provided, the PLFs will be cut even more. ‘Without the budget request, we would be forced to reduce the PLFs by an additional 21 percent,’ Stevens said in a press statement.
This would reduce the amount of funds available to seniors by more than 30%, or an average impact of $23,000 to $27,000 per borrower, he calculated.
The federal government's role in the reverse mortgage market will remain crucial for some time, even as private financial backing expands. Private-label securities, structured properly, eventually will return, riding a wave of demand for reverse mortgage-backed securities. Therefore, the mortgage banking industry must develop a viable primary and secondary market for reverse mortgages that does not rely so much on federal involvement.
For now, though, HECMs are the only game in town, and any additional rules – especially cuts to the PLFs – will render those government-backed loans less available to many seniors who need to access their home equity.
Equity is the name of the game today, with declining home prices already having a big (and negative) impact on once-booming reverse mortgage origination volume. New government underwriting guidelines will likely slow the reverse mortgage market's stellar growth.
According to an industry survey, of the loans booked last year by the three largest reverse mortgage portfolio lenders, one out of five HECM borrowers would have been unlikely to qualify for their loans had the new underwriting guidelines been in effect all year, because the home equity available to them would have been less than what was owed on the property. Obviously, under even tighter underwriting criteria proposed for fiscal year 2011, even fewer seniors would qualify for loans.
One of HUD's concerns has been borrowers who default on their taxes and insurance. Servicers are working to put delinquent borrowers on a payment plan; as it appears that some originators have failed to clearly communicate borrowers' responsibility to keep their taxes and insurance current. HUD is expected to announce details soon regarding proposed changes to the counseling protocol so that senior borrowers will be counseled on their financial obligations to keep their taxes and insurance current.
In addition, as the popularity of the HECM program has grown, so have public reports of financial crimes against seniors using the program. In April, the Financial Crimes Enforcement Network, an agency within the Department of the Treasury, released a guidance to assist financial institutions in guarding against fraud schemes perpetrated against senior citizens who use the FHA's HECM.
There are incidents of senior borrowers having their loan proceeds stolen from them, and some have unwillingly participated in schemes to obtain fraudulent loans. Oftentimes, these schemes are perpetrated by people seniors trust, such as family members, caretakers and loan officers. Reputable loan originators and servicers must be alert in order to guard against attempts to take advantage of these vulnerable customers.
The good news
Where does that leave the reverse mortgage market? Clearly, the business is changing. Yet it can also be rewarding for those who are up to the challenge.
In addition to the social benefit, the fundamental financial logic behind future growth in the reverse mortgage business remains convincing. Currently, there are 34 million Americans aged 65 or older. By 2030, that number is expected to more than double, to 71 million, or 21% of the population. Moreover, there are presently more than 12 million seniors in the U.S. who own their homes free and clear, owning an estimated $4 trillion in equity. That is a lot of collateral to be tapped. What's more, the industry has achieved only 2% market penetration.Â
So, there's clearly a lot of room to improve, but for whom and how? The reverse mortgage business is still largely a ‘cottage’ industry, with exceptions like Bank of America and Wells Fargo, and other big lenders are also starting to take notice. For example, Quicken Loans recently moved into reverse mortgages through One Reverse Mortgage, an existing company it acquired and retooled.Â
Big commercial banks have an advantage over independent reverse mortgage lenders in that they can avoid some of the high marketing that independent lenders require. Unlike independents, banks can piggyback reverse mortgage messages onto their other products. They can also use their lists of existing customers, such as retirees and retirement account holders, to better target reverse mortgage marketing.
Independent originators do not have those advantages. Independent lenders rely heavily on more expensive channels, such as television commercials and direct mail. But as those methods produce ever-diminishing returns, independents must innovate and improve their marketing. They will have to diversify away from traditional marketing channels, such as mail.
The reverse mortgage market is now at a place where participants' skills and ingenuity will be tested to see if they can survive in this new world. It will not be an easy task, but the potential is great for those who hold to the course.
Robert D. Yeary is chairman and CEO of Reverse Mortgage Solutions Inc. in Spring, Texas, and is a director of the National Reverse Mortgage Lenders Association. He can be reached at firstname.lastname@example.org.