Wednesday, 07 May 2008 19:54

Articles - Industry Stats

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    In a world full of investors, you have undoubtedly heard the disclaimer, “past performance is no guarantee of future results”.  Of course, you probably also noticed this typically follows a large chart and table trumpeting past performance statistics.  You may wonder why the seeming contradiction, but I’ll venture a guess that in looking at an uncertain and unknowable future, the past is often our best foundation for guiding future expectations.

    In that vein, I’d like to ask a simple question about our industry.  What can past performance tell us about the future of our industry?  In particular, I’d like to focus your attention on two important topics that will play a major role in shaping the near term success of originators and by extension, the growing group of supporting vendors.

    We’ve all heard about how the number of companies selling reverse mortgages has expanded rapidly in recent years.  Even if you haven’t seen the figures, you’ve undoubtedly felt it first hand in increased competition for customers.  So let me put some numbers around this for you:

    The graph above tells the tale of our market, illustrating how unit volume growth has outpaced active lender growth in some years and vice-versa in others.  Last year the growth in the number of lenders was 40% higher than volume growth, the highest gap in recent years, triggering a perceived shrinking of the opportunity among lenders and leading to declines in marketing and sales conversion rates.  The challenges have clearly grown for originators, so what opportunities and risks exist today?

Risks

1) Home Value Declines
    In many ways, the proprietary products which have been introduced in our industry to date have filled the ‘jumbo’ product niche above the federal lending limits.  With a substantially lower LTV curve in place in most proprietary products than HECM, borrowers typically don’t see additional cash until home values are 150-200% or more of the lending limits.

    There is evidence from the table that declining home values against mostly stable lending limits has incrementally contributed to a shift in volume toward HECM, although the much clearer factor behind this has been an illiquid secondary market.  Even in the higher value market of California, the trend has been significant and sustained as home values fall from the peaks seen in 2005/06.

    The larger implication of this shift is more striking – that HECM is taking up a larger share of the potential transaction volume of existing ‘jumbo’ focused proprietary products, even if the secondary market were operating at full capacity.  For the foreseeable future, HECM will continue to dominate the industry unless and until a conventional conforming product is created to compete against HECM at the lower home value segments.
2) Anticipated Higher Loan Limits
    Everyone is hoping for higher loan limits on the HECM, but what would the actual impact of such a change be?  The tables below show the impact on the previous table for both $417,000 and $550,000 national loan limits.

    These tables make it crystal clear that increased loan limits will have a larger impact on HECM market share than any home price decline and potentially more than the current secondary market issues.  While it is not clear when legislation may pass or what the final form of loan limits and origination fee changes might be, originators should expect and prepare for continued HECM dominance in this landscape.

    Where in the past we’ve seen proprietary products make up the lion’s share of profits at many companies, the combination of factors limiting the proprietary jumbo opportunity is a major factor affecting business planning around the industry.  In a capped HECM origination fee world, the industry runs a significant risk in losing profitability on a macro level without a realistic proprietary product outlet.

Opportunities

    Where there is risk, there is also opportunity, and two of the most immediate opportunities you’re likely to find today revolve around the two risks highlighted above.  Increased lending limits will almost certainly lead to a mini boom of refinance business for those ready to take advantage.  Whether you focus on retaining your previous customers or farming other lenders’ portfolios, this opportunity isn’t likely to knock twice.  The HECM expected rate floor, limited home price appreciation and other factors are combining to ensure that future refinance opportunities are significantly more modest than the present wave.

    Second, as borrowers with home values previously above the lending limits are able to access more cash, a significant number of transactions will have the numbers work where they previously were too little to payoff existing obligations and/or meet the liquidity needs of the borrower.  Reviewing old leads and re-running the numbers for each using the new loan limits and current interest rates is a prime way to garner new business while keeping costs associated with lead generation down.
 
    Lastly, product innovation remains a large opportunity although likely not an immediate opportunity for most market participants.  Whether through a HECM competitor, bundling, or re-invigorated jumbo pricing, the continued lack of penetration in the vast senior marketplace remains a crucial indicator of product gaps in our industry.  The outsize profitability of the early jumbo products points the way toward large rewards for successful innovators, although the risks and costs of failure can be daunting.

    In closing, as each of us confront these risks and opportunities every day, it’s crucial that we also keep in mind the overall perspective of the industry beyond the immediate landscape.  Each day our growing industry is helping more and more customers fulfill their financial and lifestyle objectives.  This history of performance should be intensely satisfying to all of us, no matter what our future holds.  If there’s one thing that’s certain, it’s that everything changes and today’s competitive challenges will give way to tomorrow’s rewards for successful innovators.

About John Lunde: John Lunde is President and founder of Reverse Market Insight, the premier source for market intelligence and analytics services in the reverse mortgage industry.  RMI clients include multiple top ten reverse mortgage lenders and servicers, as well as some of the largest financial services firms in the world.  Find out more at www.rminsight.net or call 949-429-0452.