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Why many choose against a reverse mortgage

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SPOILER ALERT: It’s not our product or the media

Despite the need many seniors are unwilling to spend down assets or tap into home wealth.
Despite the need, many seniors are unwilling to spend down assets or tap into home wealth.

If you worked for Evian water and were found reluctant, if not thirsty, customers in a desert would you be frustrated? Perplexed? Such may be the case for Home Equity Conversion Mortgage lenders who face an ever growing market thirsty for a way to fund their retirement.

Is it the product or message?

It’s difficult to know where we can pinpoint the reason why more older homeowners are not embracing the reverse mortgage. We could easily point to the harm that negative media stories and consumer bias have inflicted leaving us with a mere 2% market penetration of age-eligible homeowners. But does this belie the fact that there are other considerations that we should take into account? Are we asking the right questions to gain insight to the product bias and resistance we still struggle to overcome?

Having sat at hundreds of kitchen tables it came as no surprise that research reveals many seniors have no interest in spending down their housing wealth or their other financial assets for that matter. “We obviously know that the elderly don’t spend down their housing wealth, but what’s interesting is that this is almost as true for financial assets as it is for home equity,” said Chris Mayer, CEO of Mahwah, N.J.-based reverse mortgage lender Longbridge Financial.

Download a transcript of this episode here.

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6 Comments

  1. I agree that homeowners are reluctant to use home equity. I feel it is my job to educate and inform seniors about this unique product. It’s just another tool in the toolbox. I am glad to see all of the positive news these days and I believe the financial community is also becoming more and more interested.

  2. Excellent topic and great presentation.

    If it is a choice of bad news but higher endorsements as in our past or great news with fewer endorsements as our present, bad news sounds sweet to the ears. As Peter Bell has said in the past, good and bad news about reverse mortgages comes in cycles.

    If seniors are not decumulating the assets acquired for that purpose, will they decide to put up their home as collateral for a mortgage they do not understand?

    Unless we deal with the reasons for our loss in endorsements and reasonably decipher the cause(s) once in an upward swing we will not be able to avoid the next downturn or mitigate it. With our current concern and level of research into the causes, we are nothing more than the victims of fate.

    When will we take our future under our control? Interest expressed by the financial community is no substitute for control.

  3. Shannon,

    Very good segment and a great deal to consider. However, I believe FHA Case #’s are a more accurate figure on determining the publics “thirst” for our product. There is one stat that I rarely see anymore and I believe plays a very important part in helping to explain our continued overall production decline.

    The Pull Through % from ordering the HECM Case # to the eventual HUD Endorsement.
    When I got started in the industry over 15 years ago, the most challenging aspect was getting the borrower to proceed with an application. Once you could get the case # it was almost a certainty that the loan would close. Even if the loan took months to process. I believe it was well above a 95+% pull through ratio back then.

    Since the HECM began its long and steady evolutionary progression I have personally seen a greater and greater number of loans fall by the wayside. They all had one thing in common; The new rules, requirements and regulations were the main reason they failed to close.

    My summation is that the HECM Case # to HUD Endorsement ratio % has had a steady and ever rapid decline over the past 5+ years. If the data supports this viewpoint, then I would continue to place the root cause of our ever decreasing “production” on all the changes that have been made to the HECM. Not the public’s lack of desire for the product.

    • Forward in Reverse,

      There are different ways to compute the pull through rate. The best I have found and use regularly is one that takes a good deal of the volatility of endorsements out of the picture.

      The most accurate name for it is the modified annualized conversion rate. It takes the total of 12 trailing months of endorsements and divides it by 12 consecutive months of case number assignments. However, there is a four month lag incorporated into the 12 months used. For example, to find the modified annualized conversion rate for last fiscal year, I simply divided the total endorsements for the twelve month period ended 9/30/2016 and divided that by the total case number assignments for the twelve month period ended May 31, 2016 (and started June 1, 2015.

      The modified annualized conversion rate for last fiscal year was 63.78%. For the fiscal year 2015, the modified annualized conversion rate was 59.47%. For fiscal year 2011 (five years ago) it was 69 and for fiscal year 2007, it was 96.54%.

      I hope the foregoing answers your questions.

  4. We’ve been asking ourselves this question for years. I think part of the reason for the downturn since we were over 100,00 in endorsements in a year is a lack of confidence in the future by potential borrowers. When Seniors are uncomfortable about the future, unsure if they will see continued stagnation or something even worse, they tend to play things “close to the vest” and are unwilling to put their last great asset at risk. Once consumer confidence is restored, I believe our endorsement numbers will rise as well.

  5. Very interesting stats by James Veale. The fact that the modified annualized conversion rate actually went up slightly from 2015 to 2016 – when the creation of FA should have caused a much higher percent of fallout – is very counter-intuitive. 2007 is the year when case numbers resulted in endorsements with apparently minimal fallout. Why?
    Did houses have less issues with appraisals? Even though the down cycle was under way? Appraisal quality is generally accepted to have been much better prior to H.V.C.C. With less net pay and accountability, the appraisers who haven’t given up completely are less motivated to do a great job. And with nothing to go on but online databases, and no appraiser contact allowed by the lender, it is much harder to know up front if you are on a wild goose chase, or if the value is likely there. Those of us who originate HECM’s love to blame FA, poor appraisal work, underwriters who are not yet comfortable with the changes, and even bad publicity, not to mention more stringent credit and income requirements – and the resulting LESA’s that suck up proceeds. But a large factor has to be the dramatic reduction in the max percentages for principal limit that took place and decimated the reverse market – well before FA was in place.
    Will HUD increase the percentages to what they were a decade ago? Probably not, but it would be a huge boon to millions of seniors. As would a rollback or modification of some of the less pragmatic and wrongheaded changes that came along with ‘Dud-Frank’ Just saying.


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