Is the HECM-Only Business Model Challenged?

Shannon Hicks February 9, 2018 6

ePath 100K RM leads

With declining applicaitons should lenders diversify their offerings?

Right now, the unsettling year-end numbers for reverse mortgage applications revealed. Once the excitement of the HECM endorsement surge before October 2nd has subsided and the HECM endorsements work their way through the system, a sobering perspective of the state of our industry becomes clear.  Much like our stock market, we are experiencing the after effects of a rapid run up followed by market contraction.

There are two key yet distinct metrics that warrant our attention: FHA case numbers issued and endorsements. HECM loans are ‘endorsed’ when the loan is approved to be insured and the policy is attached to the file case binder. There is typically a 3-4 month delay from application to endorsement. However, FHA case numbers are an early indicator of market penetration and engagement. The final quarter of 2017 resulted in a meager 9,657 case numbers being issued for new applications.  A similar surge in volume followed by a crash can be found in late 2013 when over 16,000 case numbers were issued in September in the rush to beat reduction of lending ratios or principal limit factors. The ensuing months or the final quarter of 2013 tallied only 13,778 issued FHA case numbers. 2017’s final quarter finished 30% below 2013. Even more sobering is the fact that we have to go back 14 years to 2003 to find a similar fourth quarter.

Industry professionals are faced with the choice to strive to build a larger base of qualified referrals from outside professionals or expand their product offerings…

Download the video transcript here.

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6 Comments »

  1. The Positive Realist February 10, 2018 at 3:53 pm - Reply

    This comment corrects two ideas that Shannon shares and puts a different emphasis on his points as well.

    Shannon talked about cash flow and sources of income but in fact when dealing with retirement far more important than cash flow is seeking out new sources of cash flow, NOT just income. There are two primary sources of cash flow, income and debt. We deal in the debt realm, not the income realm.

    The E-path representative brought up another source of cash flow, the sale of a portion of the bundle of rights connected to real estate ownership. One of those is the exclusive right to the growth in value (as mentioned in the vlog) and another, mineral rights. One motion picture found the proceeds from the sale of air rights as the solution to a mortgage in business property which was in foreclosure; the solution was plausible and a viable one in portions of west Los Angeles even though the story was fiction.

    Let us reemphasize the case number assignment trend we are seeing right now. What we saw in the last two months of calendar 2013 in comparison to case numbers assigned during October 2013 was a rise each month in case number assignments. The pattern was not the same at the end of calendar 2017. While the number of case number assignments was significantly larger in November 2017 compared to October 2017, they were slightly down that December.

    Fiscal 2018 is starting out with a 50.2% lower case number assignment inventory from its first three months than fiscal 2017. Is the 25-30% drop in business that John Lunde and his RMI group are predicting in fact too low? Could it be over 50%, i.e., demand remain about 50% of what it was for the remainder of fiscal 2017? As to information to be released from HUD, there are five months of applications with case numbers assigned (January 2018 through May 2018, inclusively) which will have any substantial influence on the number of HECMs endorsed this fiscal year. That is because the historied rule of thumb for how long it takes the average HECM to go from case number assignment to endorsement is four months. That has once again been reemphasized by looking at the endorsements for January 2018 (6,313, the highest endorsement monthly total since 3/2011) and the case number assignments for September 2017 (20,405, the highest total ever) and October 2017 (2,750). This outcome reinforces the four month rule of thumb rule.

    For those who do not think in terms of the fiscal year of HUD, we are well into the fifth month of fiscal 2018 leaving just 8 months of endorsements to impact the endorsement total for fiscal 2018 but only four months of case number assignments, despite only having monthly case number assignment totals reported by HUD through December 2017 (seven months of reported case number assignments which will impact total endorsements in fiscal 2018).

  2. George Ownes February 11, 2018 at 1:21 pm - Reply

    Without trying to step on anyone’s toes, a very important question arises from the pattern we now see forming in demand. Is there sufficient demand in the market for endorsements to reach 48,000 endorsements during fiscal 2018?

    The first four months of fiscal 2018 have definitely shown good endorsement results as will most likely the total endorsements for February 2018. Yet with three straight months of weak demand as reflected in the HECM case numbers assigned in those months, it seems the endorsement total for this fiscal year could end up 10% (or more) worse than had been anticipated up until HUD posted the December 2017 FHA Single Family Production Report.

    This is not a matter of comparing our present to our past but rather asking if this is our new reality. It is pretty clear that the demand as reflected in endorsements during fiscal 2019 will rebound over the average total endorsements for the last 7 months of this fiscal year but how large and how strong will that rebound be?

    While lenders are trying this and that, marketing fails to obtain the demand that we keep hearing is within our reach. So while the industry still claims that the environment all points to ever higher endorsement numbers, lender diversification undermines those claims.

  3. John A. Smaldone February 12, 2018 at 7:24 am - Reply

    Shannon,

    You make very good points, you were transparent with the good and the bad!

    To adapt in today’s HECM world is a must, if one can’t adapt, they have to consider the possibility of moving on!

    We have many opportunities today to capitalize on. We actually have more equity in the hands of senior homeowners than ever before, that is the good news!

    Yes, October 2nd came upon us, to many, that was the Straw that broke the Camels Back. To others, they got beyond the shock wave and realized the new potential business out there.

    The professional sector and world of fiduciaries offer us a new founded opportunity if approached properly!

    Have any of you thought about calling on RV Dealerships? What about Funeral Homes? I can go on and on but I think everyone gets my point.

    We need to work harder and smarter but we can do it and pick up our volume at the same time. It is funny but volume makes up for the losses on each loan we may realize in today’s market but if you can offset it with increased volume, usually you come out better in the end!

    One last point, those of you you that are looking to do business with quality lead provides like Shannon Hicks and the Reverse Focus, need to set your demographics differently.

    Go after larger valued homes and much lower loan to value ratios, 35% and lower! Look more at the retirement planning value associated with the HECM rather than the last resort, need based purpose!

    That is my comment for the day.

    John A. Smaldone
    http://www.hanover-financial.com

  4. Mike Johnson February 12, 2018 at 8:54 am - Reply

    Sorry for your loss of a friend, but many of us do not know who Jeffrey Taylor was?

  5. Mike Johnson February 12, 2018 at 9:03 am - Reply

    I disagree! HECM specialization is more needed today than ever before. The low # of originations is indicative of our industry, but, specialization is the cure to the problem. Adding other products to our bag of tricks only waters down our strengths. I personally LOVE the ability to tell a prospective senior clients that I only do REVERSE or HECM and am not one of those who says YES, we offer that too, to every question. My competition does that and subsequently loses to me much more often than not. I deal face to face at kitchen tables and ONLY on REVERSE. I am not embarrassed by telling those that dislike REVERSE that I specialize in only offering REVERSE. M y job is to “educate them” as to what it now is TODAY, not what it once was. YES, we now offer 45-55% rather than 60-80% as in years past, but that’s whey we got the bad rap in the first place. YES MIP si 2% of their home value now, but it’s the best insurance ever. Sorry for preaching to the choir here, but “specialization”, the right marketing are the keys.

    My feeling is what I call “WWW” – Work With the Willing”. They either need this or they don’t and if they do, it’s our job to get them to also “WANT IT”. If we can’t fdo that, we should leave the business, not add more products and services to our bag. We are not a bank with multiple offers, we are HECM specialists and can really help those who need and want to be helped. As we all know, many whoi need it don’t want it, and many who want it, don’t need it. We need to marry our offering to those who really need and want it. Sorry for being verbose, but as you can see I am a bit passionate about what I do.

    Mike Johnson
    Senior Mortgage Advisors

    • The Cynic February 12, 2018 at 1:38 pm - Reply

      Mike,

      Before 10/1/2009, we offered PLFs to 62 year olds of 62.5% and 90% to 95 year olds when they were the youngest borrowers on the HECM and expected interest rates were no greater than 5.56%. We did a LOT of HECMs with those PLF levels. [It is assumed there is no qualified non-borrowing spouse impacting PLFs unless otherwise stated.]

      In case you are unaware today the industry is authorized to offer a PLF low of 0.5% (yes, less than one percent) when the expected interest rate is no greater than 18.93% when there is an 18 year old qualified non-borrowing spouse. The high is 75% for a 97 year old (or older) who is the youngest borrower and the expected interest rate is no greater than 4.56%.

      Your 60% to 80% era was when?

      Your PLFs of 45% to 55% range for today is odd. Today the only time that PLFs will get lower than 55% for youngest borrowers over 96 years old is when the expected rate is above 14.31%.

      If we are going to present a reasonable complaint, it is important that the facts be stated as they are, not just to make our case stronger.

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