The Big Bump?

What’s a realistic outlook for 2020? The past may tell.

If there’s one word that characterizes the HECM industry and its originators it would be resilient. Despite the housing crash of 2009, the massive overhaul with product cutbacks in 2013, and the momentous changes in October 2017, reverse mortgage originators have largely remained optimistic.

If we’re to look to the future, ironically the past is the best place to begin.

The fiscal year 2014 ended with a 14-percent drop in endorsements following the elimination of the standard fixed-rate HECM, PLF reductions, the introduction of first-year distribution limits, and two-tiered upfront insurance pricing.

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The following fiscal year was quite a different story. Lenders and originators alike retooled their approach and acclimated to the new ‘norm’ and in the process 2015 saw a total production bump of 12-percent.

Then came the Financial Assessment. For the first time, HECM borrowers had to undergo detailed financial underwriting. Many needs-based borrowers who were house-rich and cash-poor didn’t meet the new criteria beginning the end of April 2015. Subsequently, FY 2016 endorsements dropped nearly 16-percent which is actually quite a feat considering the wide-ranging impact of the new complex and rigid Assessment.

2016 was a relatively uneventful year for changes to the Home Equity Conversion Mortgage, and as a result, total endorsements in the following fiscal year of 2017 rebounded by over 13-percent. It became clear that endorsements were establishing a pattern of recovery, change, and retraction. What economists have commonly referred to as ‘secular stagnation’.

Then came what most refer to as the ‘October 2017 changes’. The fiscal year 2017 ended with a bang. HUD slashed principal limit factors and increased the upfront FHA insurance rates at two-percent of the home’s value (capped by the lending limit). The de facto ‘saver’ strategy was effectively eliminated for those who needed little upfront cash from the loan. In addition, the interest rate floor was lowered from 5-percent to 3-percent which further cutback the cash available to borrowers in a low-interest-rate environment. The fiscal year 2018 closed down twelve-percent. However, the repercussions of October 2017 didn’t end there. Despite rising home values and any additional sweeping changes to the program, the fiscal year 2019 culminated with 35-percent fewer HECM loans than the previous year.

All which brings us to the question- will we see a significant rebound in loan volume in 2020? The answer is dependent upon three factors: (1) overall housing prices and interest rates, (2) additional HECM changes, and (3) the uptake of private reverse mortgage loans.

Many have assuaged their concerns and buoyed their confidence with the introduction of more proprietary reverse mortgage loans and anecdotal reports of increasing sales. The challenge, however, is that we have no means by which to measure the adoption of these new loans as we lack an anonymous central repository of monthly loan volumes.

In conclusion, somewhere between optimism and pessimism, and between exaggeration and hard data is a clearer picture of what 2020 may bring. In the meanwhile, rest assured your best asset is your resilience. Something you have proven repeatedly in the last decade.

1 comment

James E. Veale, CPA, MBT January 7, 2020 at 2:37 pm

Stagnation is never a healthy sign for an industry, no matter what its cause(s). Yet the secular stagnation experienced during fiscal years 2013 through 2018 showed signs of the kind of collapse that took place last fiscal year. First, the pattern was almost an economics’ textbook perfect picture of peak to valley stagnation. Harvard economic professors Alvin Hansen and Larry Summers (former US Treasurer) would have a lot to say about such an almost perfect pattern but that is Dr. Summers domain (Dr. Hansen has been deceased for years now), not mine.

Yet there is another key phrase missing from the immediately preceding paragraph and that is “downward sloping.” In this particular type of stagnation, peaks are not as great as the ones that precede them and valleys become deeper and deeper. This is a clear sign of wear and diminishing potential that only spelled difficulties for increased HECM endorsement activity in the future. Fiscal 2019 is the case in point for HECMs. The enormous percentage loss in fiscal year HECM endorsement totals at 35.3% is unprecedented in the history of the HECM program.

Leadership in the industry has questioned the use of the phrase “secular stagnation” by declaring that it is not helpful to the industry. Yet if it took as long for the medical community in 1918 to respond to the “Asian” or “Spanish” flu, we could have seen the kind of percentage drop in population that was witnessed in fiscal 2019 by our industry when it came to fiscal year endorsement totals. Rather than questioning the use of the term, industry leadership should have taken six years of warning to heart and worked to find a cure. It did not so as a result, we saw an enormous drop in endorsements during fiscal 2019. Some leaders seem to want to cover up the current condition of HECM demand up with misdirection about where HECMs are heading while others promote exaggerations about the rise in proprietary reverse mortgages.

To be clear, HECM endorsements and case number assignments are clearly showing improvements in this fiscal year but for how long? Most of the improvement is in the growth of HECM Refis which HUD has been playing games with for months. On one hand, HUD talks about eliminating them and then turns around to us and says it does not mean it. So the question becomes is the current rise in HECM endorsements but another growing peak in a new saga of HECM endorsement stagnation? Riding on the backs of increased HECM Refi volume, there appears to be a chance that HECM endorsements will rise to about 36,000 in fiscal 2020. That is in line with the downward sloping hill to valley secular stagnation experienced in the industry during fiscal 2013 through fiscal 2018. Perhaps the stagnation of the 2020s will start from a valley position. That would not be surprising if true. Or perhaps we will see a new form of stagnation. In any case, the current HECM environment tends towards stagnation of some kind.

If someone can cite why we should not expect some form of endorsement stagnation for the next few years, please rise up and speak. No one is predicting that situation yet but there are certainly signs that is the direction we are headed.

Cures? They are several changes that would help but they are all treated as worthless by those who can make or help in making these changes . For example, pushing out and finding new Blue Ocean is the one that both Dr. Hansen and Dr. Summers stressed. Then there is making financial assessment less draconian. Some in industry leadership have privately declared that trying to choke out all risk of technical default during origination was a big mistake as to growth. Then there is the old standby favorite of both Shannon and me, geocentric Principal Limit Factors. None of these suggestions by themselves will cure stagnation but each of them would help; together, a cure could be in hand. The biggest enemy is time.

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