The HECM industry is at a crossroads

Where we stand

It’s not just the housing market that’s poised for a big shift. So is reverse mortgage lending. While industry participants have typically concerned themselves with potential changes to the federally-insured Home Equity Conversion Mortgage program or state regulations another sea change is approaching the horizon.

There’s an old investing adage that says, “don’t fight the Fed”. In other words, wise investors align their financial decisions with the current monetary policy of the Federal Reserve. Mortgage originators of all stripes did just that. Mortgage lenders certainly did. 

For the last two…

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1 comment

The Positive Realist May 31, 2022 at 7:59 am

There are two things eating away at originator comp. The first is the shrinking pool of seniors eligible for reverse mortgages. The first source is interest rates and the second is the reduction in Fed financial assets

As the 10 year CMT rate rises, fewer seniors will qualify for Traditional HECMs, H4Ps, and HECM Refis. Proprietary reverse mortgages feel similar reductions in eligible and interested seniors due to rising interest rates.

The second and far less obvious source will be the reduction in Fed assets. As those assets are placed back into the market, supply in many categories of financial assets will swell. In normal markets when markets have greater supply, demand can be more easily satisfied. When supply exceeds demand, surplus is generated and prices normally fall. So will HECM premiums be reduced due to that melee? The answer is generally yes. Thus premiums are under pressure due to the rising number of HECM Refis with lower investment profits than expected and because of the supply of investor alternative asset acquisitions.

As the holiday neared, I did a graph showing total endorsements for the prior four years and four other endorsement categories as follows: H4Ps, Traditional HECMs, total first time borrower HECMs (i.e., the sum of H4Ps and Traditional HECMs), and then HECM Refis.

What stood out on the graph is that the (FHA) fiscal year ended September 30, 2021 had the lowest total first time borrower HECM endorsements of any of the other three years. ln fact from fiscal 2018 to fiscal 2021, first time borrower HECM endorsements dropped 13,402 for a 34.37% drop. Even when comparing first time borrower HECM endorsements in fiscal 2020 to those for fiscal year 2021, first time borrower HECM endorsements in fiscal 2021 were lower than that same total in fiscal 2020 by 4,724 endorsements for a 14.26% drop.

We hear from so many sources that Realtor and financial adviser referrals are all but carrying first time borrower HECM endorsements. If that is the case, perhaps, we would be better off without them and since every HECM endorsement we can, perhaps there is a new level of smoke and mirrors, sales management puff, and extreme optimism in the air we breath. In any case, as to first time borrower HECM endorsements, as the stock markets would say, we found ourselves in a period of correction on a year by year basis and in a strong BEAR market during the four year period when it comes to first time borrower HECM endorsements..

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