Reverse mortgages constitute just a small slice of the mortgage market, but in 2017 a number of traditional mortgage originators began to take a closer look at the HECM’s offering. Refi volume on the forward side has been lagging, and the demographics make a compelling case for the HECM’s market potential.
Recent data revealed an increase in the number of active HECM originators in 2017, perhaps a sign of the product’s growing appeal. But could HUD’s latest decision to reduce limits and raise initial premiums have a dampening effect on this trend? Volume is likely to slump as lenders once again grapple with program changes, reworking their marketing strategies and increasing efficiencies to stay afloat.
The going might be tough in the near term, but those dedicated to this product remain certain that the HECM market will adjust and emerge stronger than before. With better safeguards and features that more closely resemble traditional bank offerings, some predict that more forward players will start offering HECMs, not less.
It’s clear that before reverse mortgages can hit the mainstream, the lending community will have to embrace the product. With more originators presenting the HECM as a possible solution to senior clients, more consumers will learn about the benefits of the loan. To break down the barriers, the industry will need more originators on its side.
Forward in Reverse
Last spring saw the number of active originators jump nearly a quarter, according to data from Reverse Market Insight. The trend can be attributed in part to a lag in forward refi volume, which left originators looking elsewhere. Some also say the uptick could be a sign that Financial Assessment did its job.
Mark O’Neil, who heads TPO sales for Reverse Mortgage Funding LLC (RMF), says they started getting the first tentative calls from forward lenders in 2015, not long after FA was rolled out.
“For the first time in a while, we had forward lenders calling us and telling us they heard we were making changes to the program, that we’re now underwriting our borrowers for credit and income, and that they felt ready to embrace the reverse market. But still, the growth was slow,” O’Neil says. “Then, late in 2016 we started to notice an increase in interest coming from forward originators. Between Labor Day and the end of Q4, our inbound volume of inquiries from lenders who were new to reverse quadrupled.”
O’Neil says interest from forward originators can certainly be attributed to the post-election interest rate spike that had a chilling effect on forward refis. But he also says he thinks the product’s reputation has improved thanks to FA, and this might have been a contributing factor. “I personally believe that the positive press cycle we have been in has led to greater awareness among originators and their borrowers, which is leading more of them to seek us out.”
Wendy Peel, VP of sales and marketing at ReverseVision, says her company has also seen a spike in interest from forward players this year. The company recently hosted a webinar on reverses for forward originators, and the turnout was impressive with several hundred logging on to learn how they could get started in HECM origination.
Peel also says she thinks FA has contributed to this growing interest. “Regulatory change is always one of the things people fear, but FA was probably one of the best things that could have happened to this industry. It had to operate in a more mainstream fashion.”
Both RMF and ReverseVision offer training and software designed to help forward mortgage professionals originate HECM loans.
RMF’s program includes training courses, marketing strategies and LQ, its proprietary loan qualification software. The goal is to make the move into reverse a simple business expansion for traditional lenders looking to increase their reach.
LQ helps users determine whether a borrower is eligible by providing them with conditions as certain data is entered. O’Neil says it was designed to mirror software commonly used on the forward side so that users can easily navigate its features.
“The real genius of the program in the reverse space is it makes the HECM program much more accessible to originators who are new to reverse. With a little training, new originators can quickly and efficiently figure out if they have a borrower who may be eligible to qualify for a HECM loan. As long as the user enters correct income, assets and liabilities, the system does the work for you in initially assessing a prospect’s eligibility,” O’Neil says. “It can save an originator an hour or more per file on time spent just figuring out if a borrower meets residual income.”
ReverseVision is promoting HECMs to the forward community with its Generational Lending strategy. The concept revolves around the idea that reverse mortgages are the logical next step in the cycle of one’s lending life, and that traditional lenders should be engaging their older customers in discussions about how a HECM can play a part in their retirement.
“At the end of the day, they have an entire database of people for whom they have written mortgages for the last 40 years,” Peel says. “If they’re not going to take advantage of the very last couple of loans that a borrower could potentially get, they’re missing the market. Somebody else will.”
ReverseVision offers forward originators training and use of its RV Exchange (RVX) loan origination software to get started. So far, the company says the Generational Lending strategy is resonating. Just under 500 brokers or broker companies have started using their software this year, Peel says, and that includes 12 of the top 50 traditional lenders.
Interest from the forward side has picked up in recent months, but some say HUD’s latest round of program changes may crush this momentum. Reverse Market Insight’s John Lunde says the uncertainty created by changes is likely to deter new players from jumping into the market, for now at least.
“I think the turbulence caused by the October 2 changes likely discourages companies from entering the market, at least in the immediate future, unless they have a high degree of confidence in how the changes will shake out and want to get in while things are unsettled,” Lunde says. “For most, I’d expect it’s more daunting to enter a market where volume and revenue are likely to be down in the near term and competitive dynamics are in significant flux.”
Peel says the changes don’t detract from the HECM’s appeal. “Traditional lenders are coming into the market for very specific strategic reasons. They want to keep a borrower for life. The threat of a declining refi market and potentially rising interest rates, coupled with the tsunami wave of baby boomers becoming HECM-eligible, solidifies the HECM’s appeal,” she says. “If anything, this regulatory change will normalize reverse even more for traditional LOs.”
O’Neil says he thinks the changes will ultimately encourage new entrants. “All of the recent changes, including ML 2017-12, are aimed at further strengthening the program. That’s a message that is going to make traditional lenders feel better about entering this market,” he says. “It’s easy to get caught up in all of these changes we’ve been going through as an industry. I try to keep the big picture in mind. The demographics are the same as they were before the changes were announced, and the HECM is still one of the best financial planning tools available anywhere.”
Lunde says he could see more banks entering the space down the road. “The October 2 changes make the HECM look more like a bank product, specifically HELOCs. Banks have traditionally been the biggest HELOC lenders, so I’d expect the changes would make HECM more attractive to bank-owned mortgage companies.”
O’Neil says he believes the changes make the H4P a much more appealing product for traditional lenders looking for new opportunity.
“Reducing the initial and ongoing MIP is going to greatly reduce the lifetime cost of the loan to the borrower. For those comparing the H4P to traditional financing, the H4P will look a lot more attractive. Typically, a lot of our H4P buyers were going to pay all cash before they found out about the HECM. So the fact that they have to bring some more money to the table post-October 2 is not really going to be a big factor. What they know is they get the same house and they are keeping a lot of money in the bank.”
Peel also says she thinks the latest changes will encourage traditional lenders to embrace the H4P.
“While it is true that a borrower who is upgrading may need to bring more cash to closing, borrowers who are downsizing may actually pay lower closing costs,” Peel says. “The H4P is a lending product that can help a senior purchase a home, keep money in their pocket and offer flexible payments—and it’s now a better price. The H4P should be a big winner under the new ML.”
For some on the forward side who were upping their HECM game before the changes were announced, the new rules don’t dampen their plans for growth.
Janet Kaul and David Brindley of Mortgage Solutions Financial in Colorado Springs have been working on the launch of the company’s new reverse mortgage division. They both say it remains to be seen on how the new rules will impact the market in the short term.
“There will definitely be some changes to the economics for the lender community because of secondary market execution, and most lenders will need to review possible expense reduction options in the space as we go forward,” Brindley says. “The jury is still out.”
But Kaul and Brindley say the rules won’t affect their plans to launch their reverse division.
“What puts us in a better position than most is that we are developing an entire strategy under the new model, so it hasn’t really changed our implementation. We can introduce the division with a plan that makes sense under the new rules, so we don’t have to undo anything,” Kaul says, adding that the rules don’t change the growing need for the product. “The business is still out there, the need is still there, the demographics are still there.”
Christina Harmes, assistant manager of C2 Financial’s growing reverse division, agrees that there is still a need for this product in the marketplace.
C2 Financial, the largest mortgage broker in California and the second-largest in the nation, recently launched an extensive training program that includes a mentorship and certification process for its originators.
Harmes says she is uncertain how the latest changes will impact C2’s plans for expansion in the space.
“I think right now the dust has to settle and we have to figure out what the changes from October 2 really mean before we figure out our direction. But we’re in the best position we possibly could be in, because whatever does happen, most of our loan officers have a forward base and that will get them through whatever bumps in the road lie ahead for reverse.”
Jeff Gray, senior reverse mortgage specialist at Wholesale Capital Corporation in Southern California, has been leading the company’s growing reverse division. Gray says WCC’s reverse team includes 12 recently trained originators, and that while HECMs currently comprise about 10 percent of WCC’s business he “would not be surprised to see that number double or triple over the next two years.”
Gray thinks the new rules will soon be old news. “While few in the industry saw this coming, the industry will adjust as it always has. This has always been an ever-evolving program. If anything, strengthening the viability of the HECM in the long term makes perfect sense,” he says. “We’ve been here before.”
Gray says WCC believes in the product and is committed to making its mark in the space. “We’re training, we’re making the financial commitment. Why wouldn’t we do this? The HECM product will soon be a mainstream loan. We’re positioning to be a part of this growth.”