The Last Word
Wednesday, 30 September 2009 16:00
Another year is almost done, and we’ve all been so busy fighting fires it feels like yesterday we were talking about 2009 in a future tense. The past year has been all about cash: who has it and who doesn’t, for an exceedingly long list of reasons. The universal theme behind many recent client conversations is all about how regulators, legislators, warehouse lenders, secondary market investors and even wholesale lenders are all impacting their cash picture.
You are probably already intimately familiar with some of the forces that have recently impacted profitability in the reverse mortgage industry, but for humor let’s run down the list:
Negatives
Origination Fees: First on the list of cash reducing news items, lower origination fee caps impacted many originators by immediately reducing revenues by 19% on a $362,790 loan, even factoring in the higher premium potential of fixed rate loans we’re seeing today. Importantly, this gap is barely recovered on a per loan basis from higher lending limits, with a $625,500 loan showing projected revenue almost dead even with a $362,790 loan under the old caps.
Marketing Response Rates: What happens when direct mail response rate goes from 1% to 0.3%? Or lunch seminars have twice the attendees but no applications? What if both of these happen at the same time? Ouch. In recent work with clients we’ve seen this to be more the rule than the exception, and it’s squeezing everyone where it already hurts. A client we highly respect recently mentioned that the ‘secret sauce’ for originators is the ability to generate leads. We absolutely agree and if there’s one ingredient that’s critical to brewing up your own lead generation ‘secret sauce’ that someone might buy someday, it’s learning from your past performance. We’ve seen plenty of originators leave the business because marketing costs per funding were skyrocketing, but by analyzing their campaign data it’s clear they’ve been doing the same thing despite decreasing returns for years, ignoring nuggets of success in their own campaigns they could have capitalized on if they actively managed their campaigns before their cash ran out. Knowing how to use your own performance to sustain and grow your success is key as this business continues to get more competitive.
Warehouse Lending: HECMs are now insured by one arm of Uncle Sam, but were mostly purchased by a GSE for 20 years and now are bundled into securities insured by a federal agency. On top of that, the resulting securities offer 200+ bps above prevailing comparable term rates with no credit risk. What’s not to like for a warehouse lender? Fortunately or unfortunately, the shortage of warehouse lending has almost nothing to do with the specifics of the reverse mortgage business. It’s one of the easiest ways for institutions short of capital to decrease their lending activities quickly, so our proverbial reverse mortgage baby is sitting outside in a pool of bath water. The good news is that as institutions are stepping back into warehouse lending activities, reverse mortgage is becoming better understood as a favorable niche in the warehouse lending business, so this issue is already improving.
Positives
Loan Limit Increases: Not only did loan limit increases raise the total UPB on which revenues could be earned, but it also incrementally increased the market size by allowing higher value homes with larger mortgages to pay off those liens where lower loan limits were insufficient. It also touched off a dramatic refinance wave for both HECM to HECM (6,300 loans and counting) and even a few proprietary to HECM loans, again increasing volumes and revenues for originators. Through July, 28% of the total volume for 2009 was above $362,790, and it’s a safe bet that a majority of those loans wouldn’t have happened without the lending limit increases last year.
HECM for Purchase: The future gift, which really hasn’t seen as much activity as the potential analysis indicates. Undoubtedly, the industry will take time to tell the story to realtors, homebuilders and other business sources who were previously underwhelming in their volume potential and thus largely overlooked by originators in their education and networking efforts. While we’ve only seen about a thousand loans under this program thus far, our analysis shows 10,000+ annual loan volume potential from this niche, even if we assume only 5% of senior homebuyers would use a reverse mortgage. We think the reverse mortgage preference for senior homebuyer financing will rise significantly over time, but regardless of how long that takes it’s a great incremental source of business for lenders.
GNMA HMBS: A gift that benefits the select few with the good fortune to already be GNMA approved at the start of the financial collapse. We’ve done plenty of work on this subject with clients and while most of our work in this area is confidential, we can say without a doubt that lenders need access to this and similar liquidity sources that will develop over time. In order to do that you need to track and understand important trends like termination rates, loan losses above FHA insurance and foreclosure timelines.
Conclusion
After so many changes in the past year, the obvious question is “what’s next?” We don’t own a crystal ball, but we’d argue the first question you attempt is rather “how did each of these changes affect my business this year?” If you can answer definitively then not only do you have a leg up on your 2010 planning, you’re also way ahead in contingency planning for the inevitable ‘fire drills’ that will happen next year – in addition to principal limit reductions, higher loan limit extensions, FHA broker approval process changes and YSP legislation that already look probable.
We would never advise anyone to drive exclusively by looking in the rear view mirror, but if you talk to enough investigators you’ll notice that they all look at the skid marks and debris trail to learn why cars crash and advise drivers on steering around future accidents. Let’s learn from our own and others’ successes and failures in a tumultuous year, and make this the year our industry and our companies navigate safely in an uncharted ocean of opportunity serving seniors.
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