While the reverse mortgage industry has seen strong business numbers for most of the past year with endorsements largely staying above 4,000 loans a month, the amount of Home Equity Conversion Mortgage (HECM)-to-HECM refinance transactions being done alongside other market factors frankly outside of the reverse mortgage industry’s control are doing very little to commensurately expand the penetration rate of the HECM category into the broader mortgage business.
This is according to John Lunde, president of Reverse Market Insight (RMI) during a presentation at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Summer Meeting this month. Other components working against the industry include the amount of loans being assigned to the Federal Housing Administration (FHA), even as the number of age-eligible borrowers continues to increase in an oft-mentioned demographic shift.
Reverse mortgage penetration remains stubbornly low
Two key figures contribute to the trend of reverse mortgage product penetration decreasing over time even though the reverse mortgage business is in a generally productive place in terms of raw numbers, Lunde explains.
“Nobody wants to see their market share go down,” Lunde says. “But, when we really start to drill into it a little bit, we’re seeing both of the numbers involved here move against us. The number of HECMs in servicing portfolios has been trending downward, basically, ever since the 2017 principal limit factor (PLF) changes. At the same time, we do still continue to see the number of age-eligible homeowner households go up. So, for both of those reasons, we’re actually seeing penetration go down.”
In terms of why this is taking place, assignment of HECMs — where the lender may assign the HECM to the U.S. Department of Housing and Urban Development (HUD) when the loan balance reaches 98% of the maximum claim amount (MCA) — has increased, which doesn’t actually remove such loans from the broader penetration equation, he says.
“In general, one of the things that’s been happening a lot lately and over the past several years is loans getting assigned to FHA,” Lunde says. “That actually doesn’t remove them from the penetration equation. If we think about loans exiting the servicing portfolio, yes, they’re coming out of a lender’s servicing portfolio, but they’re actually just transferring over to FHA’s servicing portfolio. One of those big numbers there isn’t really reducing penetration, but at the same time, we think about ‘how are the other, different factors happening?’ We’re seeing very low interest rates right now, and sharply appreciating home prices.”
These two things will help serve any reverse mortgage, but it does particular service for lenders who are looking to bolster their refinance volume, Lunde says.
“That really supercharges and creates a refinance boom not dissimilar to the way the forward mortgage world works there,” he says.
What a refinance boom does to penetration
One of the key issues with a reliance on refinance volume is just that the reverse mortgage industry’s base of borrowers does not grow even if business itself increases in terms of the raw numbers, Lunde says.
“When we do refinances as an industry, we might shift loans from one servicer’s portfolio to another but we’re not adding new customers as an industry,” he says. “We’re not growing our market share at all [by doing that]. We may be better serving our existing borrowers, but again, we’re not helping to create that more mainstream product awareness, and an installed base that really gets us further in terms of becoming a mainstream financial product.”
Becoming a more mainstream financial solution for appropriate clients is, of course, a major interest of the reverse mortgage industry as it continues to seek out fruitful new educational partnerships to communicate how the product has evolved since the 2007-2008 financial crisis. There are demonstrable signs of progress being made on this front in terms of the evolving reverse mortgage discourse outside of industry circles, but penetration remains low.
“We’re in the low 2% penetration range,” Lunde says. “And again, that’s down a little bit from a couple years’ past. I don’t think anybody would argue that that’s the right place for us to be [in terms of our ability to] really get widespread understanding and appreciation of the power of the product in really serving […] a client niche and a use case that really does exist out there, especially as folks are living longer. Most of their wealth is generally tied up in their home equity.”
The average maximum claim amount (MCA) for all HECMs has sharply increased over the past couple of years according to RMI data, but what has also increased is the full share of reverse mortgage endorsements made up of HECM-to-HECM refinances, Lunde explains.
“We can see that has sharply increased, [there’s a] general upward trend throughout the whole graph, but a sharp increase over 2020,” he says. “And in the beginning of 2021, that has also coincided with a pretty sharp increase in the percentage of endorsements that are HECM-to-HECM refis. So we can see that part of what’s behind this is really [those] fundamental forces that are out of our industry’s control. We’re just, in many ways, reacting to that. And that is those sharply increasing home prices, coupled with those low interest rates really help supercharge this effect.”
Senior participation in forward, and the finite resource of refinance borrowers
Keeping the low penetration of reverse mortgages in mind, it’s also worth noting that many who would otherwise qualify for a HECM are still engaged with the traditional mortgage business, Lunde explains.
“In terms of the age-eligible homeowner households that might be eligible for HECM, somewhere in the neighborhood of two-thirds of them [have no] mortgage,” Lunde says. “So if we were talking about refinancing forward mortgages and not worried about some of the qualification requirements for monthly payment and income, there’d be a huge installed base for that to be refinanced. But, given that we’re at that 2% rate, it’s simply a different story. And so, one of the things to keep an eye on and think about here is the fact that we simply don’t have that many loans out there available to refinance.”
The amount of HECMs which can be refinanced will eventually be exhausted, as it is a finite resource of existing reverse mortgage customers who even have the ability to refinance in the first place, he says.
“We can’t see a similar increase in HECM-to-HECM refinances over the next coming years, without a substantially bigger non-refinance origination volume happening, if for no other reason than just simply to support future refinances,” Lunde explains. “It’s simply a word of caution and some numbers to better understand that, frankly, there’s not a strongly sustainable, high-growth number here in terms of a HECM-to-HECM refinance niche.”
