An improving economy and housing market have the HECM poised for growth
If you have been originating reverse mortgages for over ten years, congratulations. You survived the Great Recession and housing crash of 2008 and lived to tell the story. While some are concerned we are entering another housing bubble, the good news is that home values in several markets have reached new highs that set in 2006. Despite the controversies swirling in the wake of the presidential election economic growth accelerated to an annual rate of 2.6% from April to June according to government statistics. With an ever-growing need to fund retirement, a modest growth in the GDP, and increased consumer confidence, will a rising tide lift all boats?
Measuring success and potential market growth is a tricky business where hindsight is truly 20/20. Looking back at the pre-recession boom in reverse mortgage growth and housing prices alone would be akin to one comparing their high school 100 yard dash times to their speed in middle age. As mentioned last week, our industry’s loan volume, and the prospects of economic growth for that matter must be viewed historically.
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As some know, I believe the correct description of the pattern of endorsements over the past five years comes from Dr. Larry Summers, former Secretary of the Treasury under President Clinton and current professor in economics at Harvard. His view of secular stagnation is very relevant to our endorsement situation today. The industry just is not maintaining sufficient demand to keep us at 70,000 endorsements per year. I subscribe to this interpretation despite being a conservative in 2017.
Google states that the word “secular” in secular stagnation is used in contrast to cyclical or short-term, and suggests a change of fundamental dynamics which would play out only in its own time. Dr. Summers made a very interesting observation about this condition in a blog on September 8, 2014: “Secular stagnation in my version, like that of Alvin Hansen, the economist who coined the term in the 1930s, has emphasized the difficulty of maintaining sufficient demand to permit normal levels of output.” Dr. Alvin Hansen advised FDR on Social Security and the creation of the Council on Economic Advisers. As a widely read Professor at Harvard, Hansen is credited as introducing, popularizing, pragmatizing, and defending “The General Theory” of Lord John Maynard Keynes, a British economist and for that Hansen is known as the American Keynes.
The title of the Summer’s blog is: “Bold Reform is the Only Answer to Secular Stagnation.” One of the chief causes of Secular Stagnation is a lack of growth in the segment of the population which is most critical to demand. We should see demand increase over time beginning no later than 2020, the year Baby Boomers begin turning 74 (the average historic age of the youngest HECM borrower at closing). As to bold policy, a higher regulated product makes the institution of such policy difficult at best. The problem is leadership in our industry can only be described as passive to reactive. The need is NOT for a change in leadership but for a change in its approach in moving forward to a far more proactive approach.
The mistake of allowing fixed rate Standard HECMs to fester cannot be undone but should be rebuffed where seen. Unfortunately no one is doing this in regard to the obvious overuse of fixed rate HECMs in H4P production. It is time for industry leadership to step forward AND in this way show that we do not want our borrowers to be unnecessarily harmed from the “mistaken” recommendations of our own originators that lead to negative arbitrage.
The point is secular stagnation DOES “play out, only in its own time” [sic] unless we take the opportunity to turn it around earlier, perhaps much earlier. Trying to weed out the voices that see and communicate the facts about secular stagnation is anything but productive or proactive in moving FORWARD.