The Origins of the HECM Bounce-back

Premier Reverse Closings

Are we on a trajectory for long-term organic growth? To answer that question we will examine the breakdown of reverse mortgage loan transactions.

The reverse mortgage industry has endeavored to diversify its product mix away from being overly-dependent upon the HECM and shift toward more private or proprietary loans. At one time some proclaimed their expectation that private loans would account for the majority of reverse mortgage loan volume.

However, that ideal business model has not materialized- perhaps in part to demographics, the COVID-19 pandemic, and historically-low interest rates. Another factor could be the modest percentage of seniors with high-valued homes when compared to those with homes closer to the national median home price. 

Beyond the product mix of HECMs and proprietary mortgages are the transaction types of traditional HECMs (the first HECM for a borrower), HECM for purchases, and refinances of existing HECM loans.

Throughout most of 2020 and early this year, two forces have accounted for a significant jump in HECM originations: financial anxiety generated from the pandemic and HECM-to-HECM refinances. 

The Clear & Present Driver of Endorsement Growth

One thing is clear; refinances of existing HECMs have accounted for the lion’s share of HECM endorsement volume growth. A random sampling of medium and large retail lenders in December 2020 found several with 50% or more HECM endorsements coming from refinances of existing HECMs. Not surprising considering home appreciation has allowed many homeowners to harvest more ‘equity’, and today’s low rates are providing principal limit factors at, or in some cases, below the interest rate floor.

While refinances play out in both traditional and reverse lending, the long-term strategy for market growth can be found in the expansion of our market among eligible homeowners, financial advisors, and real estate professionals. Being mindful of the long-game several brokers and lenders have kept pushing hard to expand relationships with outside professionals amid the refi boom knowing that the fruits of their labors will be realized whether home values are hot or tepid.

 

 

 

 

2 comments

Ray Antonelli February 23, 2021 at 6:30 am

The reason refi’s are so popular is because those clients are MUCH more receptive to discussing a reverse mortgage than the typical prospect

Reply
Jack Mark Guttentag February 23, 2021 at 11:53 pm

The HECM market will thrive when HECMs become integrated with the other major components of retirement plans: annuities and financial asset management. Here are some examples of synergies made possible by integration:

Homeowner Retiree Is Asset Short: The option now available for retirees with limited financial assets but significant home equity is a HECM tenure payment. An option that generates more spendable funds over a lifetime uses part of a HECM credit line to draw current payments, and part to purchase a deferred annuity. [Note: under existing rules, the retiree must have enough cash to pay for the annuity because insurers will not accept deals funded by HECMs]

Homeowner Retiree Has Significant Financial Assets: Instead of having to nurse asset draws over a lifetime of unknown length, the retiree can draw monthly payments from his assets for a pre-set period, say 10 yes, which would be supplemented by a HECM term payment over 10 years. Some or all of the assets not needed during the initial period would be used to purchase a deferred annuity that kicks in after 10 years.

Financial Assets Held by Homeowner Retiree Are High Yield But Highly Volatile: Instead of the common practice of shifting the portfolio into safer but lower-yielding assets, a HECM credit line could be used as a reserve against shortfalls in asset yields.

Partial retirement: Increasing numbers of potential retirees are looking to retire in stages. Draws on a HECM credit line can offset reduced income during the period of partial retirement. Financial assets are allowed to grow through that period, and the cost of an annuity is reduced if payment is deferred until then.

the challenge is to put these pieces together. I am working on it.

For HECM lenders to play an active, as opposed to a passive role in this process, they need to get HUD to rescind the rule preventing HECM lenders from participating with other financial institutions. HUD should be willing to do it if the combined transaction would be in the best interest of the retiree, and if the other institution involved in the transaction was providing competitive terms.

As a further inducement, all integrated transactions result in life-long monthly payments, which should reduce claims on the reserve fund arising from borrowers who are unable to pay their taxes or maintain their homes. It is the stand-alone HECM that makes it possible for a homeowner to exhaust their equity in a year.

A final thought. If HECMs are integrated and lenders want to be an active part of the process, their loan officers will have to become retirement advisors. And some may find it useful to be licensed as annuity providers.

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