“If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience”
– Playwright George Bernard Shaw
Shaw’s quote should have been heeded by many economists, real estate agents, and many mortgage professionals. It wasn’t.
When confronted with the potential of a housing bubble or reset one year ago the common chorus from market professionals was, “this time the market’s different”, referencing the improved credit underwriting standards and loan quality in the wake of the 2008 housing crash. Yes, today’s market is different, not merely because of improved loan quality, but because of a massive 40%+ artificial surge in home values thanks to unprecedented amounts of stimulus, money-printing, and a near-zero federal funds rate.
The point is we shouldn’t be surprised at the state of today’s housing market. Not one bit. What we can do is glean a few valuable lessons along the way. Lessons such as:
- Refinances of existing reverse mortgages were great but also fraught with risk in that valuable energy was directed away from attracting first-time borrowers.
- In most cases refinances provided a bonafide benefit to homeowners who wanted to tap into a portion of their home’s higher value providing an additional source of cash flow. It also eroded secondary market pricing.
- A red-hot housing market should have triggered the warning bell that it was time to plan for a more frugal lending or real estate market.
- Markets are cyclical. What booms nearly always busts.
- Repeat lesson #4.
- Home values were never based on real market fundamentals such as local home price-to-income ratios.
- Real estate market watchers Zillow, Redfin, and Core Logic repeatedly cheered on a collapsing market and some remain bullish on 2023 housing prices to this day! Some had a clear conflict of interest having purchased homes en masse which shaped their narrative.
- Work-from-home arrangements and migration left urban areas vulnerable to cooling demand, increased inventory, and falling home values.
- Despite rising interest rates and falling home values, millions of Americans over the age of 62 could potentially qualify for a reverse mortgage.
- When discouraged, repeat lesson #9.
- A massive surge in home appreciation is (1) not normal, and (2) should warn that an impending reset or rebalancing of the market is on its way.
In the end, most mortgage professionals, though significantly impacted, weren’t surprised. In fact, some even put contingencies in place for today’s market.
What matters are the lessons learned and taking concrete steps to attract first-time HECM borrowers. What lessons would you add to this list? Leave your input in the comment section below.
3 Comments
Shannon – great points. I go back to what is always important, digging in, asking the deep questions and really understanding the clients movitivations. Sometimes its needs and sometimes its wants – often the cllient is not sure what they need. It is our job as professionals and advisors to Discover, Educate and provide a solution and options that the clients understands and can take action on. Regardless of the market conditions!!
You said it best…dig deep and ask the questions that uncover the need (or lake thereof).
Please believe me when I say this is one of those “you were told about this looming situation over 18 months ago but did nothing in preparation” comments. When asked how originators were preparing for a mass reduction in HECM Refi volume the answer given was generally that the industry would do what it always does, bounce back. Few of these industry “experts” believed that HECM endorsements would fall by almost 40% over last year’s average volume of about 5,400 HECMs per month. Yet for the last three months volume has been pathetic for an industry that would easily bounce back leaving some to ask if the low endorsement volume were some kind of problem at HUD. Despite the warnings, hubris prevails.
So when this flattened ball bounce BACK? It was telling when yet another story about a new norm was released by another provider of information on our industry. Let us wait for the HECM Refis to fall to their historical percentage to total HECM endorsements before calling the volume during the last three months “a new norm.” About a decade ago, the same thing happened and when volume fell lower, the same prognosticator had declared two more “new norms” in rapid succession. Another lesson not learned.
Learn the lesson from Mark Haines, a deceased CNBC host, when he correctly called that the stock market had bottomed back in 2009. In the world of stocks, that moment is remembered as the Haines Bottom. Why be so impatient and get it wrong over and over again? Mark kept doing his analysis and determined the market had yet further to fall until his historic announcement. Just food for thought.
Then we have those who tell us that financial advisors are the future of this industry. Such talk grew in the early years of NRMLA. It then drifted off into nothingness. It rose up 4 years later, only to go once more into oblivion. Then came 2012 with several articles discussing the potential use of reverse mortgages in financial planning. After over a decade the footprint of increased volume due to referrals from financial advisors is virtually nonexistent. In October 2022, the expected beneficiary of these endorsements, the Traditional HECM, only had 2,590 endorsements. The month before only had 2,245 Traditional HECM endorsements. HUD has yet to provide the breakdown for November 2022.
Last month we heard once more how H4P could be a prominent product in our industry if just…. In its thirteen year history, H4P endorsements have yet to reach 2,700 endorsements in any fiscal year. Worse, volume is stagnant with little signs of picking up. Last fiscal year the industry reached an eleven year high for HECM endorsements yet H4P only had 4 more endorsements than it did the year before.
An old adage goes like this: insanity is doing the same thing over and over again and expecting different results.