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.
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.