What a snowstorm can teach us
On my way to the studios to record this episode, I braved the roadways successfully, only to experience a major setback just feet from my destination. The storms of life can often catch us off guard, but how we prepare and respond is what matters most.
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Even as Shannon fights the harsh cold and stormy environment, the industry suffers lost heat that only comes with reduced production in endorsed HECMs. Despite all the anecdotes of better times right now for the industry through both HECM endorsements and proprietary reverse mortgage closings, the numbers are telling a very different if not troubling story. So if you don’t want your blood to start getting colder, I suggest you stop reading right here.
For the last two months, the HECM count provided by HUD remains reliable but does not tells us how many closed HECMs HUD could not process as of both January 31, 2019 and February 28, 2019 due to the federal government partial shutdown. As many know, the combined endorsements for December 2018 and January 2019 were just 3,400, yielding a total of 9,044 endorsements for the first four months of this fiscal year. If that last number is annualized, there would be less than 27,200 endorsements for fiscal 2019. Yet few project the actual outcome as being that grime despite the federal government partial shutdown.
Even with the federal government partial shutdown, preventing an accurate picture as to HECM endorsements for either December 2018 or January 2019, HUD has told us that there was no impact to the HECM case number assignment picture due to that same shutdown since the system for creating these HECM case number assignments was unaffected by the shutdown. Using the four month lag rule of thumb for the average HECM to go from case number assignment to endorsement along with 1) the case number assignment total for the seven months ended December 31, 2018, and 2) the modified and annualized conversion rate of 63.8% for fiscal 2018, we can get a handle on the approximate endorsement total for the first seven months of this fiscal year. Through the seven months ended December 31, 2018, there were 29,389 HECM case numbers assigned.
From modified and annualized HECM conversion rate for fiscal 2018 of 63.8%, we can anticipate a total of about 18,633 endorsements for the first seven months of fiscal 2019. If that picture holds, total HECM endorsements for fiscal 2019 can be expected to be about 32,000 endorsements for a drop of 16,000 in total fiscal year endorsements from fiscal 2018. That is over a 30% reduction. (That estimate makes me feel colder than I already do.)
BUT there could be help on the way, if the trend in total monthly HECM case numbers assigned during the last few months were up. So what is the trend?
Following the 10/2/2017 changes, the first time HECM case number assignments reached more than 4,000 for a single month was the month of February 2018 when they reached 4,241. The HECM case number assignments began to rise very gradually until August 2018 when that month’s count reached almost 5,000 (actual total was 4,978). From August 2018, the picture has dramatically changed showing a drop of 17% in total case number assignments to 4,134 for September 2018; rising slightly to 4,230 for October 2018; falling down to 3,801 for November 2018; and finally dropping by 16% to just 3,194 for December 2018. The total case number assignments for December 2018 is the second lowest such total since the October 2, 2017 changes, when the case numbers assigned for October 2017 were were just 2,750.
Last fiscal year was the worst fiscal year for endorsements in 14 fiscal years. Just to get back to the total of 48,359 endorsements for fiscal year 2018 is expected to require almost 29,800 endorsements produced in just five short months for an average of about 5,960 endorsements per month. Backing into the approximate total HECM case numbers needed from January 1, 2019 to May 31, 2019 comes to about 47,000 HECM case numbers assigned in that five month period for about 9,400 HECM case number assignments being assigned per month. We not seen that kind of HECM case number assignment production since May 2009, almost 10 years ago (sounds impossible).
Some questions arise. Will we see a month with even fewer HECM case number assignments than 2,750? Could fiscal year 2019 have less than 37,829 endorsements sending us back to totals not seen since fiscal 2003? The answer to both of these questions is a most likely “Yes.” When will the current downward trend in HECM case number assignments turn around? Hopefully, before by June 1, 2019. Could proprietary reverse mortgage closings make up a close to 10,000 drop in HECM endorsements during fiscal 2019? That drops into the real of the improbable (if not, impossible). But what makes this story so very troubling is that the loss in HECM endorsements for fiscal 2019 could exceed 20,000 endorsements.