Despite challenges there is reason for measured optimism
If you’ve been originating reverse mortgages for longer than a few weeks or paying attention to recent developments you’ve probably felt the impact of our collective dependence on a singulargovernment-insured loan and heard the dire warnings of a continued decline in loan volume. But not unlike most drastic proclamations of doom and gloom the truth lies between the extremes.
All which brings us to the question- is the reverse mortgage or HECM market in a continued downward trajectory? The number of FHA case number assignments issued for new HECM applications serves as an accurate leading indicator of consumer interest in the loan. The average number of HECM case numbers issued in both 2016-17 averaged nearly 7,000 per month. Predictably case numbers plummeted after last September’s rush to beat October 2nd HECM cutbacks in the wake of a record 20,408 new applications. Yet despite this aberration today application volume is steadily climbing an average of 9 percent in the first 3 reported months of 2018. Interestingly, if that trend were to continue
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In a June 6, 2018, RMD column RMI (Reverse Market Insight) pointed to the 17 endorsement rise in the monthly endorsement count of May 2018 over the month of April 2018 and stated: “… May might signal the nadir of the post-October 2 slump.” They added: ““This is the biggest sign yet that HECM volume may have bottomed following the substantial program changes that took effect Oct. 2, 2017….” But can a one month rise of just 17 endorsements support any assurance that April 2018 is the lowest monthly endorsement count after the 10/2/2017 changes to the MIP and PLF structures?
This would not be the first time that RMI has pulled the trigger before having sufficient data to a determination that recovery is underway. As a skeptic by training, this seems to be too early to say that the nadir in monthly endorsement counts after the 10/2/2017 changes is now behind us.
We could yet see endorsements fall into the mid 2,000 range but quickly rise back to over 3,000.
Any HECM application without a case number assigned by now will not result in a HECM which is endorsed in fiscal 2018. If those same applications get a case number assignment before June 1, 2019 if it gets to endorsement (about a 64.2% chance of getting endorsed) will be endorsed in fiscal 2019. What is clear is that the endorsement total for fiscal 2018 will be lower than fiscal 2017 but will it lower than fiscal 2016?
UPDATE!!
The CNA (case number assignment) production count for April 2018, was just posted by HUD. The last block in Shannon’s chart shows the CNA count for March 2018 was 4,606. April 2018 is worse at only 4,276 or about a 7.2% drop in CNAs.
If we use the modified annualized conversion rate for CNAs for May 2018 (the latest we have) of 64.2%, the CNAs will result in less than 2,800 endorsements in August 2018. Compared to the April 2018 endorsement count of 3,345, August 2018 may prove to be the nadir for monthly endorsement counts following the 10/2/2017 changes. However, I am expecting the endorsement count for each of the next 3 months of this fiscal year to come in at between 5% and 15% lower than the endorsement count for April 2018. The CNA count for May 2018 should give us a good idea what the endorsement count be for September 2019 will actually be.
Let’s hope April 2018 is the nadir that RMI predicts it will be.
Here we go once again with the optimism business. The optimists of 2010 were leading in cheers for predictions of 100,000 endorsements for fiscal 2011 at the 2010 NRMLA Convention. We all know how that worked out.
But leave it to the optimists, on the cover of the November-December 2013 issue of the NRMLA Reverse Mortgage magazine there it is written for posterity, 300,000 HECMs endorsed in fiscal 2018. (I think we will miss that one as well.)
We what is optimism saying today? The endorsement count for May 2018 “might signal the nadir of the post-October 2 slump.” See
https://reversemortgagedaily.com/2018/06/06/data-points-to-potential-bottom-for-reverse-mortgage-market-plunge/
I feel like James that the nadir is yet to be seen. As I often say: “A single point does not indicate a trend.” If a single point did indicate a trend, the drop in case number assignments for the month of December 2017 would have meant lower case number assignments thereafter. That was not the case then nor is the single count for endorsements for May 2018 indicative of a rise in endorsements for the rest of the year.
Now most will look at what I write as pessimistic; however, I believe that unless PLFs are dropped at the beginning of fiscal 2019, our average monthly endorsement production for fiscal 2010 will be higher than the average endorsement production for the six months ended September 30, 2018.
Shannon,
Good presentation as usual! My friend Jim Veale does a great job in pointing out the numbers and the statistics!
I don’t agree with Jim on when he says, “Any HECM application without a case number assigned by now will not result in a HECM that will be endorsed in fiscal 2018”!
I am almost positive we have another 30 days before we realize that to become a reality!
other than that, good video Shannon, great comment Jim!
John A. Smaldone
http://www.hanover-financial.com
John,
If you follow the trends on endorsements, there is a high correlation between the number of CNAs (Case Number Assignments) for a month and the number of endorsements four to six months later.
There was a strange belief that somehow the updating of the computer programs used by HUD had changed that rule of thumb from a four month lag to a three month lag a few years ago. Both the pull forward CNA production for April 2015 and the largest CNA production for any month, September 2017, showed that not to be the case.
While a few applications receiving CNAs after 6/11/2018 may get endorsed before 10/1/2018, it will only be a few based on a lot of endorsement history.
It is OK to believe what you want but endorsement history shows otherwise. Still I hope everyone has a great CNA production month through the end of June (just 19 days away).
Does not matter. But, we originators, are realizing the impact. Not just in volume but in revenue. Our own.
They really did it to all of us this time.
My total commissions are a fraction of what they were this time last year.
That is the reality.