Trending Tuesday – HECMWorld.com June 1, 2020 at 3:59 pm

[…] May HECM endorsements jumped over 200%. But is that the full story? […]

James E. Veale, CPA, MBT June 1, 2020 at 11:45 pm

To show how the industry is full of myths, one floating around the industry was that there is such a magnetic pull toward proprietary reverse mortgages (PRMs) that there were almost no HECM endorsements in April. In other words the demand for proprietary reverse mortgages today are so competitive with HECMs that HECM endorsements are shrinking. This myth is about 13 years old and belongs to 2007, not 2020 unless it is true that those who fail to heed the lessons of history will repeat its follies.

When one is predicting future HECM outcomes, there are two primary pieces of data that are helpful in approximating HECM outcomes near term. The first are the Case Number Assignments (CNAs) using the industry’s 4 month rule of thumb that says it takes four months for the average endorsed HECM to go from CNA to endorsement. The other is the modified but annualized conversion rate (MACR) performed each month.

Recently some statistics were run on the MACRs for the 96 months in the last eight years. Of the 96, only one was more than 3 Standard deviations from the average and it was more than 3 but less than Standard Deviations from the average. Five MACRs were more than 2 but less than 3 Standard Deviations from the average. The vast majority of the remaining MACRs were less than one Standard Deviations away from the average while the remainder were more 1 but less than 2 Standard Deviations from the average. That means that MACRs are a reliable factor in predicting the number of HECM applications with case numbers assigned that will turn into HECM endorsements.

As to CNAs, no HECM can not be legitimately endorsed if the related application has no CNA. Why the industry does not rely more on CNA data to predict HECM endorsement short term volume is odd at best.

HOWEVER, we need to be aware that the endorsement positive take away from the May HECM endorsement story must be tempered with the fact that 72% of all growth through the first six months of fiscal 2029 did not come from Traditional HECMs or H4P but rather from the most volatile source of HECs, HECM refis. Worse the breakdown of CNAs for March and April shows that there is a strong likelihood that any increase in HECM volume in July and August 2020 over July and August 2019 will come from HECM Refis because over 92% of the increase in HECM CNAs for March and April 2020 came from applications indicating that they were for HECM Refis.

If our fiscal 2020 growth is substantially coming from HECM Refis, it is highly probable that we will see that kind of growth, then sometime in fiscal 2020 we will growth start to dissipate, making fiscal 2021 yet another fiscal year with total HECM endorsements less than the total for fiscal 2020 but most likely greater than the HECM endorsement total for fiscal 2019.

Few if any HECM applications with case numbers assigned after last Sunday (May 31, 2020) will reach endorsement in fiscal 2020. Few applications with case number assignments dated after May 31, 2020 are expected to be endorsed in fiscal 2020 but if endorsed, they should be endorsed in the first six months of fiscal 2021.

The expected HECM endorsement volume for fiscal 2020 is predicted to be about 39,000 which would be an improvement of 7,726 for a percentage increase of about 24.7%. It is also expected that the HECM increase for this fiscal year will exceed the loss in proprietary reverse mortgages.


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