The data is in and it tells us more about what’s happening in our industry, why, and what we may expect in 2023.
It wasn’t the news we were hoping for. 2,185 Home Equity Conversion Mortgages were endorsed last month. What does the latest HECM data tell us and what can we expect in the coming months? After 11 years of commentating on reverse mortgage lending, I can safely say the answer is somewhat complex.
Reviewing February’s endorsements one HECMWorld reader, Jim Veale, observed…Â
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in a comment that February’s endorsement total was the lowest, we’ve seen since January 2004 with three exceptions: December 2018 with 1,750 endorsements, January 2019 with 1,649, and April 2020 with 1,620 endorsements due to staffing issues in the first days of the COVID-19 pandemic. This an interesting observation and one that shows that for our industry to regain its footing it must attract new first-time HECM borrowers amid higher interest rates and uncertain home values.Â
On a positive note after four consecutive months of declines in new FHA case number assignments for new HECM applications in September through December, January posted a 16% increase in application activity. However, this may be a seasonal trend as we saw the same surge in application volume from December 2018 to January 2019 and also from December 2017 to January 2018. It’s a positive development that should be taken with a giant grain of salt as one month does not constitute a trend.
Digging a bit deeper the January edition of FHA’s Single Family Production Report tells us several things. First, the present HECM-to-HECM refinances volume has receded to 9% of our previous high watermark of 3,848 refinance applications recorded in August 2021. Also, from October to January, an average of 2,800 first-time case number assignments were recorded. This 5-month average is lower than any other 4-month period going back to the earliest available production reports dating back to 2013.
12,038 HECMs have been endorsed so far in Fiscal Year 2022 from October 1st through January. If that trend was to hold through September 2022 we would see about 36-40,000 HECM endorsements in the fiscal year 2022. That trajectory would leave us with more endorsements than the fiscal year 2019 but still short of the boom in HECM activity during the years 2020-2022 which were turbocharged by low interest rates and rising home values. In essence where we find ourselves is somewhere between the post-October 2017 HECM changes which curtailed proceeds and the pandemic boom.
What we can acknowledge is that we’re in the middle of an economic and business cycle. In our first episode of this year, we examined at the 10-year business cycle theory which purports most industries and businesses have six good years, followed by two great years and then two terrible years. From fiscal years 2012-17, HECM endorsements were generally stable and resilient bouncing up roughly 15% one year and falling by nearly the same percentage the next. A seesaw of some sort but a sign of our industry’s resilience. Then followed the two ugly fiscal years of 2018-19 which reflected the impacts of the heavy-handed HECM curtailments of October 2017. 2020 brought a massive economic stimulus enacted at the beginning and throughout the COVID-19 pandemic resulting in three consecutive years of growth with 2022 endorsements exceeding all previous endorsements dating back to 2012.Â
All things considered, we find ourselves charting a new course between the extremes of a HECM curtailment and bygone ideal economic conditions for both traditional and mortgage lending.
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4 Comments
I started originating RM’s in October 2004 (now retired) so I saw some down markets along the way. Even with the drastic changes of October 2017 originators were able to make a living as lenders cut pricing to leave a little meat on the bone for borrowers . . . but in the current down market pricing has worsened due to significant cuts in yield spread premiums available in secondary markets. With a 3.06% rate floor, 10-year Treasury rates topping 4% and reduced premiums from investors, the resulting low loan amounts with high costs have rendered the product quite unattractive to all but desperate borrowers. I believe action by HUD to raise the rate floor and/or loosen up PLF’s will be required to return the industry to being an attractive place for originators to build a career, but HUD seems quite uninterested in doing anything different while enjoying a growing surplus in FHA’s MMI Fund and plummeting risk of deficiencies. Maybe proprietary products will gradually fill the void and perhaps this is what HUD is hoping for. Life moves in cycles so I expect the tide will turn eventually to the benefit of those who can weather this storm.
Greg,
If HUD has confidence in today’s PRMs (proprietary RMs), I have very little. While they are great for lenders and originators, the public has shown little confidence in them and for good reason. Since most PRMs are fixed rate to the extent unneeded cash must be invested, there is a huge propensity toward negative arbitrage at today’s rates. To the extent they are adjustable rate, the lines of credit are more like HELOCs (or worse) than HECMs. PRM borrowers beware.
In Irvine, CA in 2007, the NRMLA Western Regional Conference focused on the thriving (much better ANY time since) PRMs. The lines of credit were much more like HECM LOCs than today’s PRM LOCs (lines of credit). The growth rate in 2007 on the most popular PRM line of credit eventually was a fixed 5%. At the Conference, a former NRMLA chairperson openly touted her idea of the future for PRMs. She predicted that by the end of that decade, HECMs would be just 25% of all RMs closed in a calendar year. I remember the host turning to the FHA Commissioner and asking him what he thought of that. He smiled and said that FHA would be pleased if that were the case.
While the MMIF reserves for HECMs are 11 times what is required, we substantially disagree on almost everything else. Table 6 of the Independent Actuarial Review of the HECM portion of the MMIF for fiscal year 2022 shows that the independent actuaries predict that the NPV for the cohort of HECMs endorsed in fiscal 2022 is a negative $255 million while FHA shows that same outcome as a positive $796 million for a difference of $1.051 billion. While FHA shows the future NPV as negative for the cohorts of HECMs endorsed in fiscal years 2009 through 2012, the Independent Actuaries only show one, the fiscal year 2022 cohort.
So whose job is it to get FHA off the dime to avoid incurring future negative NPVs using the structure of the HECMs endorsed in fiscal 2022? It is NOT that of the Independent Actuaries. They are hired to provide an opinion, not direct HUD on what it should be doing. If anyone has that job it is those originating HECMs, particularly Mortgagees.
Passively waiting for FHA to get the job done is the plague of this industry and is an equivalent to malpractice. When NRMLA is asked about these issues, historically we have been told that NRMLA is in negotiations over these matters. Historically little changes, especially after the 10/2/2017 changes went into effect (except for the contingent second appraisal requirement).
As the only person who has ever gotten both the Independent actuaries and FHA to approve an increase in the Net Worth of the HECM portion of the MMIF ($7.1 billion in the Independent Actuaries’ Review for fiscal 2020), I believe that we need to move forward on this issue in the next 180 days so that any changes can be incorporated into the fiscal 2024 book of business. I have also had the Independent Actuaries agree to changes in other reports that were immaterial in amount but not subject matter.
Because of my experience in fiscal year 2020 and no one else taking action with the independent actuaries on an obvious discrepancy in cash and cash equivalents between the amount reported by HUD in its report to Congress and the amount reported in the Independent Actuarial Review, it is important that any proposed changes be addressed by those who to a large degree understand the MMIF. Many seem to believe they understand the MMIF but the opinions published in spring and summer 2009 in Reverse Mortgage Daily on the Obama OMB’s reaction to HUD’s projection on the impact to the MMIF from the HECMs to be endorsed in fiscal 2010 prove just how very few actually do. As a CPA, even the opinions expressed by members of the board at NRMLA were embarrassing in 2009, especially by those who should have known better (here I intentionally exclude Peter Bell who was generally on point throughout this debate and Steven Irwin who was not at NRMLA until 2010).
I am skeptical about how this year will turn out in terms of HECM endorsements in light of what industry leaders have and are predicting. It is now time to be realistic.
Unless February had a huge turnaround in HECM case number assignments (that none of us know about), It is highly unlikely that the industry will see this fiscal year even 60% of the HECM endorsements we saw in fiscal 2022 of almost 65,000. Applications receiving case number assignments after June 15, 2023 will only have minimal impact on the HECM endorsement count for the fiscal ending 9/30/2023. That just leaves some percentage of 1) the applications with case numbers assigned in February (that HUD has not yet released), 2) the inventory of unclosed HECM applications with case numbers assigned as of 1/31/2023 that have not fallen out, and 3) the applications that will receive case number assignments in March, April, May, and one-half of June to close and get endorsed before 10/1/2023 to increase the current year-to-date fiscal year total of HECM endorsements of 14,233.
With the ten year CMT showing no signs of dropping substantially in the next three months, a low HECM endorsement total for this fiscal year seems even more likely than when predicting under 40,000 HECM endorsements for this fiscal year in November 2022. I never expected to see under 30,000 HECM endorsements for any fiscal year following fiscal year 2022 ESPECIALLY in the sixth month of this fiscal year.
While we could hit 34,000 total HECM endorsements this fiscal, based on current trends, we are far more likely to see just 29,500 HECM endorsements, making it the worst fiscal year for HECM endorsements in two decades BUT for now that is mere speculation.
Shannon, thanks for the call out. I really, really wish we were talking about a forecast of 70,000 HECM endorsements for this fiscal year. The 10 year CMT, the home appreciation rates, the stats.so far this fiscal year, the PLFs, and the expected rate floor are all working against even reaching 40,000 HECM endorsements. So like you wrote: “What the HECM…?”
It has been disappointing to see such passiveness in the industry regarding gaining more first time HECM borrowers, particularly when it comes to lenders. As to HECM Refinancing, the proverbial hand writing has been on the wall for well over a year. So where are the programs teaching TODAY’S HECM originators the marketing skills and insight needed to make this transition with as little loss in HECM endorsements as possible..
Although I do not agree with him fully. Scott Gordon of Open Mortgage has been right to say that the loss of experienced HECM originators has been a cause for our currently low HECM endorsement totals. It could easily be the largest cause. So why haven’t lenders picked up on this and seen how few of TODAY’S HECM originators have originated in an environment where the dominant products endorsed were those for first time HECM borrowers or even determined how long it has been since even their most experienced originators have originated in that environment.
Without a substantial commitment in time and finances to retraining TODAY’S HECM originators by the remaining lenders, the turnaround in HECM endorsements could be much longer than anticipated. It is now way beyond the time that lenders should be sitting on the sidelines. They should be redirecting their efforts from training us on how to bring in applications from referral sources and put a substantial effort in retraining us to adapt to SUCCESSFULLY reaching out to potential first time.HECM borrowers.
Where is the evidence that applications from referral partners have added more than a trickle of HECM endorsements. Despite how some companies have overemphasized H4P, there is not even ONE fiscal year where H4P endorsements have reached 2,700 endorsements. In fact, H4P endorsements are about where they were five years ago.