Where we stand
It’s not just the housing market that’s poised for a big shift. So is reverse mortgage lending. While industry participants have typically concerned themselves with potential changes to the federally-insured Home Equity Conversion Mortgage program or state regulations another sea change is approaching the horizon.
There’s an old investing adage that says, “don’t fight the Fed”. In other words, wise investors align their financial decisions with the current monetary policy of the Federal Reserve. Mortgage originators of all stripes did just that. Mortgage lenders certainly did.
For the last two…
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years refinance transactions have been the rage as the central bank slashed interest rates in the effort to stave of a recession due to Covid-19 shutdowns and stay-at-home orders. However, by late April after a series of rate hikes by the Fed, mortgage refinance volume collapsed to 68% less than it was one year ago. Can we expect the same for HECM refinances?
Quite honestly it’s too early to tell. FHA’s March HECM snapshot shows that 48% of all HECM transactions were for refinances. In the same month, 40% of FHA case number assignments for submitted HECM applications were for HECM-to-HECM refinances. What’s notable is that are nearly 10% fewer applications for a refinance than in January of this year and that may actually be good news.
In March traditional non-refinance and purchase applications accounted for 59% of all case number assignments. That’s a notable increase from January when only 50% of case numbers were for traditional and purchase HECM applications. Anecdotally this seems to indicate with fewer refinance opportunities available originators returned their focus to finding new first-time HECM borrowers.
To even the casual observer it’s quite obvious that rising interest rates and flattening home values will splash a modest amount of cold water on both traditional and mortgage lending volumes. However, reverse mortgage professionals have a unique advantage over traditional mortgage lenders. While unfortunate, inflation will thwart the ability of many middle-aged Americans to adequately save for retirement. While retirement deposits decline home equity will continue to accrue with the forced-savings plan which required mortgage payments require; all to the homeowner’s benefit; a benefit which they may be able to tap into using a reverse mortgage.
It would be both prudent and desirable to see non-refinance HECM volume continue to increase to replace what was once a reliable source of funded loans. After all, like the seasons bring hotter days and chilly nights, HECM refinances will become the notable exception rather than the rule. Despite rising rates and uncertain home values, our turbulent economy is increasing the necessity for additional cash flow. And that is where we ultimately stand.
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1 Comment
There are two things eating away at originator comp. The first is the shrinking pool of seniors eligible for reverse mortgages. The first source is interest rates and the second is the reduction in Fed financial assets
As the 10 year CMT rate rises, fewer seniors will qualify for Traditional HECMs, H4Ps, and HECM Refis. Proprietary reverse mortgages feel similar reductions in eligible and interested seniors due to rising interest rates.
The second and far less obvious source will be the reduction in Fed assets. As those assets are placed back into the market, supply in many categories of financial assets will swell. In normal markets when markets have greater supply, demand can be more easily satisfied. When supply exceeds demand, surplus is generated and prices normally fall. So will HECM premiums be reduced due to that melee? The answer is generally yes. Thus premiums are under pressure due to the rising number of HECM Refis with lower investment profits than expected and because of the supply of investor alternative asset acquisitions.
As the holiday neared, I did a graph showing total endorsements for the prior four years and four other endorsement categories as follows: H4Ps, Traditional HECMs, total first time borrower HECMs (i.e., the sum of H4Ps and Traditional HECMs), and then HECM Refis.
What stood out on the graph is that the (FHA) fiscal year ended September 30, 2021 had the lowest total first time borrower HECM endorsements of any of the other three years. ln fact from fiscal 2018 to fiscal 2021, first time borrower HECM endorsements dropped 13,402 for a 34.37% drop. Even when comparing first time borrower HECM endorsements in fiscal 2020 to those for fiscal year 2021, first time borrower HECM endorsements in fiscal 2021 were lower than that same total in fiscal 2020 by 4,724 endorsements for a 14.26% drop.
We hear from so many sources that Realtor and financial adviser referrals are all but carrying first time borrower HECM endorsements. If that is the case, perhaps, we would be better off without them and since every HECM endorsement we can, perhaps there is a new level of smoke and mirrors, sales management puff, and extreme optimism in the air we breath. In any case, as to first time borrower HECM endorsements, as the stock markets would say, we found ourselves in a period of correction on a year by year basis and in a strong BEAR market during the four year period when it comes to first time borrower HECM endorsements..