Recent data reveals a major market shift is underway
The winds of change are blowing hard. Some may call it a deluge as several economies across the globe teeter on the edge of recession, the housing market has substantially cooled, and interest rates surge as the Federal Reserve attempts to stomp out the flames of inflation. Amid such upheaval, it comes as no surprise that the HECM lending landscape is directly impacted.
Here are some hard facts to ponder. June RetailHECM endorsements were the highest we’ve seen since 2009 with 5,937 units. And June’s monthly totals exceeded all but the most recent month’s endorsement volumes in the last 12 months. All seemingly positive indicators of robust loan activity. But are they? If we look closer we will find the early indications that a major market shift is underway. A historic shift.
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The most recent edition of FHA’s Single Family Production Report reveals two developments, both of which confirm the direct impacts of surging interest rates and softening home values. First is the HECM application activity. 5,339 case number assignments for new HECM applications were recorded in the month of May; that’s fifteen percent less than the previous month and thirty-six percent less than March’s record of 8,307 applications.
Second, May HECM-to-HECM refinances applications fizzled falling 28% in just one month. In fact, with 1,508 refinance applications received in May refinance activity was the lowest we’ve seen since the early days of the Covid-19 pandemic in the spring of 2020. Consequently, the days of refinance-fueled growth of HECM endorsements are behind us just as they are for traditional mortgage originators and brokers.
HECM refinances acted as a steroid artificially pumping up reverse mortgage volume for over a year and a half. That dependency on refinances cannot be overstated as nearly half of the endorsements in June 2021 were refinances as reported by New View Advisors in September 2021 summary.
Annual fiscal year endorsement volumes bounced back from 2019’s low as the cost of borrowing plummeted and principal limits climbed. Endorsements rose 34% in 2020 and then by another 18% in 2021. If FHA case number to endorsement pull-through rates remain stable we could see the year-to-year fiscal year 2022 HECM endorsements close up by 24% than 2021.
The latest HECM Snapshot reports are quite revealing and lay bare the need for organic net-positive growth in new customers. Going back to the spring of 2020 we can see the direct impact of the Fed’s slashing of interest rates and home price appreciation. Only 18% of HECM endorsements in May of 2020 were HECM-to-HECM refinances. However, that percentage continued to climb with a few minor retreats until it peaked in July 2021 with over half or 52% of all HECMs endorsed being refinances of an existing HECM loan.
Who could have guessed that a worldwide pandemic would turn into a boon for mortgage lending? Thanks to Federal Reserve’s intervention it was a short-term benefit that will leave long-term costs to pay. Now with the pandemic behind us, we face the consequences of trillions of dollars in government stimulus, cheap money, and the ensuing irrational surge in home values.
All this leaves us facing two facts; future growth will depend on engaging net-new borrowers, not refinances and interest rate headwinds will be amplified by HUD’s 2017 reduction of principal limit factors. Regrettably, inflation and financial hardship will be the forces that will motivate tens of thousands to at least consider a reverse mortgage or revisit tapping into their home’s value to stabilize their monthly cash flow. Will those hardship-driven inquiries replace the volume generated by refinances? That’s a question only each of you collectively can answer in the coming years.
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5 Comments
Keep in mind that if you are drawing an income from a hecm line of credit the increase in the intrest rate just gave you a raise. The increase in intrest rate will support a higher withdrawal rate due to the fact that the growth rate and the intrest rate are linked together
Sergio,
Yet not all HECMs have a line of credit.
As the rate in the increase in the HECM line of credit is tied to the note rate of the HECM, so is the Unpaid Principal Balance. However, the HECM line of credit is merely a contingent asset of the borrower while the HECM UPB is a real nonrecourse debt of the borrower.
Finally, no reverse mortgage provides income to anyone, other than the lender or other owner of mortgage note. What you call income is debt proceeds. So what is the difference? Income is not repaid to the payor while debt proceeds must be. Beyond that HECM proceeds incur compounding interest as well as ongoing and compounding FHA MIP. Income may have income tax consequences but HECM proceeds always have interest and FHA ongoing MIP accruing and compounding on them, that is until the proceeds plus the total accrued interest and ongoing FHA MIP are paid in full.
Shannon,
Once again you describe the macro market well.
After nine full months of fiscal year 2022, total HECM endorsements to date are greater than for the full twelve months of fiscal years 2018, 2019, 2020, and 2021 and fiscal 2022 sill has 3 months of endorsement activity to report. We have also seen the highest modified and annualized 12 month trailing conversion rate in June 2022 since June 2009. June 2009 also has the highest 12 month trailing total for any month following March 2012.
Total HECM endorsements for fiscal 2022 should exceed the total HECM endorsements for each of the fiscal years following fiscal 2011. The total HECM endorsements for this fiscal year are projected to be somewhere between 61,000 and 64,500 HECM endorsements.
Yet fiscal 2022 is quickly becoming our past. The vast majority of the HECMs we have closed since May 31, 2022 will be part of the total HECMs which will be endorsed in fiscal 2023. The future is not nearly so bright. Optimistically HECM refi endorsements are expected to be less than 25% of what they were in fiscal 2022. If the ten year CMT keeps rising, expect fiscal 2023 to be one of the worst years for HECM endorsements since fiscal 2003 when HECM endorsements totaled less than 18,100.
Like you, I have heard the anecdotes about HECM volumes not decreasing and other such rumors but HUD stats speak for themselves. At one lender, the AEs are reaching out to originators to get their applications to them as quickly as possible. To replace lost HECM Refi volume will take some time since first time borrowers are most reluctant to get a HECM than those wanting to refi their HECM.
Knowing the unreliability of rumor and anecdote, the propriety reverse mortgage picture is somewhat of a mystery but those with some insight expect to see a reduction in the number of different proprietary offerings next fiscal year.
Shannon,
As usual, a very powerful message!
The Reverse Mortgage can play a huge role for millions of seniors through these negative economic times.
We just need to scream our message from the rooftops!!!
All my best,
Mike
Thank you, Michael. Good to hear from you.