Beyond pessimism and optimism, the data reveals what we may expect for HECM endorsement volume this summer
FHA Single Family Production Report
Will reverse mortgage lenders and originators feel the love of increasing HECM endorsements this summer? To answer that question we go to one place that supersedes pessimistic projections and unbridled optimism- FHA case number assignments.
Each month FHA releases its FHA Single Family Production Report to which we’ve included a link in the video description and just below this video on HECMWorld. The report provides a wealth of data on both traditional FHA-insured mortgages and most notably Home Equity Conversion Mortgages. In its characteristics data, we can see that FHA continues to fulfill its mission to assist first-time homebuyers and the type of properties associated with the traditional FHA-insured mortgages endorsed by the agency. However, the more germane data related to HECM loan application characteristics reveals the demographic breakdown of HECM endorsements by the loan purpose, product type, gender, borrower age brackets, principal limits, and maximum claim amounts.
However, to determine if the summer months will actually provide the sunshine of increasing HECM endorsement data we go to the last page of the report.
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The HECM Application Activity report reveals the monthly total of HECM applications received- what we pass FHA case-number assignments. The data speaks for itself revealing the ebb and flow of the HECM-to-HECM refinance boom of 2021 and early 2022 as well as overall application volume.
The data is in so let’s look at a comparison of HECM case number assignments by month assuming a 4-month lag before endorsement. First of all, we must address the wild swings in pull-through rates, that is applications that resulted in a funded and endorsed HECM loan. Some of this may be explained by rapidly rising interest rates and softening home values. Then there’s March…a number that defied explanation until we consider that AAG most likely had a number of loans to get endorsed prior to its acquisition by Finance of America. This resulted in a surge of endorsements or 114% of November’s FHA case numbers.
Knowing that the average time from a HECM application and case number assignment to endorsement is approximately four months, let’s look at what the first months of summer may bring. Assuming a stable 64% pull-through rate February and March case numbers could push HECM endorsements to nearly 2,300 units in June and 2,600 in July. That’s good news considering the sharp peak-to-trough seen since late last summer as refinance transactions saw significant curtailment. When comparing leading applications to eventual funded and insured loans the trend line becomes clear.
So will we have a summer of love for HECM lending? If we do it will be a modest embrace of moderately increasing endorsements. The real work lies ahead, as it always does, in application activity that hinges on attaching new first-time HECM borrowers.
What insights would you add to the data we just reviewed today? Join the conversation in the comment section below. Also, please share this video with other mortgage pros on your LinkedIn and Facebook profiles.
Resources:
FHA Single Family Production Report
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3 Comments
Good report Shannon,
Optimism we need. Keep going strong Bro!
John
John,
I am a numbers guy. To people like me, optimism is the same hallucinogen as pessimism.
So what does the four month rule of thumb that underlies Shannon’s computations tell us? Basically few applications with case numbers assigned after 5/31/2023 will turn into HECM endorsements before the start of the next fiscal year on 10/1/2023.
As to HECMs that were endorsed over the last twelve months and using the four month lag rule for the average endorsed HECM to go from case number assignment to endorsement, the conversion rate on the annualized method was 69% as of May 31, 2023 while as of October 31, 2022 that same annualized conversion rate was 77%. Since there are man made delays in the endorsement process such as the expected AAG delays referred to by Shannon, one would expect to see some volatility in the annualized conversion rate just as we do..
We need to be realistic. Even if this is the summer of love for HECMs, realistically total HECM endorsements for this fiscal year will either be the worst fiscal year for HECM endorsements since 2003 or the second worst fiscal year for HECM endorsements since fiscal 2003. I would not call either prediction optimistic or pessimistic. We are just in some really bad fiscal years (both 2019 and 2023) for HECM endorsements. On the positive side, fiscal 2022 was THE best fiscal year for HECM endorsements since fiscal 2011. So not everything in the five fiscal years since 2018 has been all good or all bad.
This is the way of most industries, particularly HECMs.
CNBC presented the results from the latest Millionaire Survey. First the fight to reduce inflation to 2% will take at least two more years. 78% believe that current or higher interest rates will still be here 12 months from now.
About a year ago one long time reverse mortgage originator
(and for decades before that forward mortgage originator) stated that the 6%+ expected rate would be the new norm for several years. So far he seems right.
Minimal ups and downs will do little to change the outcome for this fiscal year. Transparency not hype should be the standard of reporting used by those reporting on the RM industry.