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Evolution of Reverse Mortgage

Market Bringing New Opportunities

By Atare E. Agbamu, CRMS and Darryl Hicks

Reprinted with permission from NRMLA

In just the past five months (January thru May 2007), the reverse mortgage business has witnessed a rapid evolution not seen in over 17 years of existence. The reverse mortgage industry is finally beginning to mirror the traditional “forward” mortgage market, as more lenders have launched a wider variety of products and pricing options designed to fit the needs of our Senior customers. The years of slow growth (1990-2002) led to a period of rapid growth (2003-2006), which created the ‘critical mass’ necessary to reach the point

We’re at now. Whereas the entire industry funded a total of only 14,000 loans in 2002, just under 90,000 loans were funded in calendar year 2006. No one was particularly interested in our industry or product at low volume levels, but the recent attainment of ‘critical mass’ has created a whole new level of interest and activity. Much of the growth can be attributed to Financial Freedom’s decision in 2003 to expand its wholesale operation from roughly 55 percent to 80 percent of its total business, thus paving a way for many lenders and brokers to enter the business. Other market drivers included

Wells Fargo, which built volume and distribution through its own retail branch

system, and Seattle Mortgage Company, which expanded its wholesale business.

(Note: Seattle Mortgage’s reverse mortgage operation was acquired by Bank of

America.)

The pricing wars that we’ve seen of late started last year when Financial

Freedom (and Lehman Brothers) reduced the margin on its “jumbo” Cash Account

Products to compete more effectively against the FHA HECM in the mid-size

Home market ($450,000-$550,000).A second major development occurred when

Financial Freedom and Seattle Mortgage Company, with the ‘critical mass’ described above, created an auction on Wall Street that recognized (for the first Time) the true asset value of the traditional HECM 150 margin product.Once these companies started securitizing HECM loans, Ginnie Mae woke a few more people up on Wall Street when it announced plans in the fall to develop a platform to expand the secondary market

For reverse mortgages.All these factors contributed toward what we’re seeing now. But that was just the beginning. It was right around the time of NRMLA’s 2006 Annual Meeting last September that Seattle Mortgage introduced the first, new private sector reverse mortgage In over six years, The Independence Plan. Since Then, Countrywide Home Loans, Generation Mortgage Company, Sun West Mortgage Corporation and

Virtualbank have all launched competing products. BNY Mortgage Company jarred the market earlier this year by cutting the investor margin on the HECM monthly adjustable product by 50 basis points, announcing the move would increase customer proceeds and lower overall costs of a reverse mortgage. Within weeks, Financial Freedom, Wells Fargo, and Seattle Mortgage followed suit by creating their own versions of the so-called HECM 100, as well as other multiple-margin HECM products designed to address a

Variety of customer needs. On March 5, BNY launched a fixed rate version of the HECM. Banco Popular, the dominant provider of Reverse mortgages in Puerto Rico, has

Offered a fixed-rate HECM for years, but BNY is now the first continental U.S.-based lender to do so. In response, the Department of Housing and Urban Development is working on a mortgagee letter that will help clarify how certain features, such as the note rate, principal Limit lock, and payment plan options should work for a fixed-rate HECM.

However, that has not deterred BNY and its correspondents from originating fixed-rate loans in the interim. To gain some additional perspectives on these major developments, NRMLA put together a panel of Industry leaders at our Western Regional Conference

In Newport Beach, CA this past February moderated by NRMLA’s General Counsel, Jim

Brodsky, the panel featured Sarah Hulbert of BNY Mortgage (Renton, Wash.), Pamala Henderson of Countrywide Home Loans (West Hills, Calif.), Jeff Lewis of Generation Mortgage Company (Atlanta,GA), Bart Johnson of Financial Freedom (Irvine, Calif.), and Erik Anderson of Seattle Mortgage Company (Seattle, Wash.)

DIFFERENT HECMS FOR DIFFERENT FOLKS

Brodsky expressed curiosity over the driving Forces behind these industry developments.

Our business, said Hulbert, is witnessing a Transition from a “one-size-fits-all HECM product to One that has an infinite number of variables” and That customers will have “real choices based on an Evaluation of their needs.” 

LONG-TERM PERSPECTIVE

Brodsky questioned whether the HECM will continue its dominance or whether it will be overtaken by the proprietary Programs coming to market. Johnson replied that the reinvention Of HECM, with multiple pricing and closing- Cost options, has secured its

Longevity, noting, “What we are seeing Now is a variety of HECM products; Therefore, I think it will be around for a Long time.” Hulbert agreed that the HECM has a “long-standing” future, but she advised that the industry has to make education of counselors and loan officers a key priority so that consumers are able to make decisions regarding which products meet their needs. Hecms and proprietary products can co-exist, Henderson added, but “we are going to have a lot more proprietary products, because one or two products Do not meet the needs of every senior out there.”

JUMBO PRODUCT ENGINEERING: IT’S ALL ABOUT PROCEEDS

Brodsky shifted the discussion to proprietary products. Brodsky wanted to know the criteria and the factors influencing product designers’ thinking. Just as forward product design is all about getting the borrower the right monthly payment, Lewis said the key factor in reverse product engineering is the amount of proceeds the borrower is eligible for. “The number one component in this marketplace is proceeds,” added Lewis. “We’re trying to come up with a responsible way to generate as much proceeds as possible.”

MARKET SEGMENTATION BY NEEDS

Still on proprietary product design, Brodsky asked the panel about “market segmentation.” Are lenders putting senior customers in neat little marketing baskets— younger seniors, older seniors, married, unmarried, high-net-worth, low-net-worth? He also asked if there are programs designed to “split the marketplace into subsets in ways that are not there now.” Hulbert said market segmentation is coming. “We are not necessarily going to be looking at age segments, but we are going to look at our clients’ needs. If you have a borrower who wants cash for a shorter term, wouldn’t it make sense to go with an option that lowers upfront costs versus one that lowers overall costs over a

longer life?” Whereas if you’ve got a customer who plans to stay in his home for a longer period of time, it might make sense to go for a product that has a lower rate, hence lower life of loan costs, she said.

THE ROAD AHEAD: A DIFFERENT CREDITMENTALITY

Brodsky steered the discussion to the future. He asked the group what a similar panel discussion would be like in three to 10 years. Anderson predicted that with more industry data available to inform decision-making by all industry participants, Wall Street would become more comfortable with reverse mortgages, and we could see more money flowing into the business. Henderson foresaw more Boomers with a “different credit mentality” that may be “more leveraged” than today’s customers. She added that their presence would inspire new products and force changes in existing product features. As a result, better pricing would be available for future products. Brodsky forecasted changes in the “legal environment” Commenting that the “set of laws” which has given the industry special cover would have to be updated. Lastly, Lewis envisions reverse mortgages as core life-cycle financial tools that people are more comfortable with, similar to traditional first and second mortgages. “They’ll be common,” added Lewis, “and they won’t require much education and the process of originating them will be a lot faster than it is today.”