[u]REQUIRED READING:[/u][/i] After many years of accelerating growth, the reverse mortgage sector appears to be running into problems.[/b] This development could prove to be problematic for both the retail channels and the relatively nascent secondary market for the product. A reverse mortgage, which is only available to Americans 62 years and older, allows homeowners to use the equity that has built up in a residence. The homeowner gets a loan in the form of a lump sum or multiple payments, and repayment with interest is deferred until after the owner dies or goes into aged care, and the home is finally sold. Although the product has been available for years, it has only started to gain traction in the last decade. By 2005, just under 50,000 reverse mortgages had been written. In fiscal year 2009, the number of applications for home equity conversion mortgages (HECMs) reached 162,000-plus units, and Federal Housing Administration (FHA) endorsements totaled 114,000, according to Michael Mooney, assistant vice president of MetLife Home Loans in Hartford, Conn. About 99% of reverse mortgages are FHA-insured. In scrutinizing the reverse mortgage loan outlook for fiscal year 2010 (which began Oct. 1, 2009), the FHA and Office of Management and Budget felt that in regard to where home prices were heading, the reverse mortgage market would begin running at a loss. So, the FHA decided to make the program more stringent. In October 2009, the FHA lowered the principal limit factors. ‘It reduced the amount of money seniors could get out of a reverse mortgage by 10% across the board,’ explains Matthew Copley, chief operating officer with San Diego-based Senior American Funding Inc. While these changes were being made, housing values continued to erode, which also affected the reverse mortgage industry, because seniors who might have considered a reverse mortgage realized they couldn't pull out enough money from their home as they might have achieved in the past – and what they could pull out, might not be enough. The net result of slumping housing prices and the more conservative rule changes flattened the reverse mortgage market. ‘Since the third quarter of 2009 and through the first quarter of 2010, we had a 54 percent reduction in the number of mortgages originated and closed,’ says Torrey Larsen, president of Security One Lending, a San Diego-based reverse mortgage lender. For fiscal year 2010, the FHA is projecting 125,000 applications and funding of 107,000 units, says Mooney. But the fall-out has begun: For example, Equitable Reverse Mortgage Co. of Chicago, which originated 400 loans last year, stopped making reverse mortgages on April 30. Other changes may be in the offering, as well. The FHA is looking to increase the net-worth requirement for brokers and lenders, says Joe DeMarkey, assistant vice president of MetLife's Strategic Business Development Group in Boston. ‘Today, the net-worth requirement is $250,000, and the FHA is looking to increase that to $1 million and then, over a three-year period, to $2.5 million,’ he says. [b][i]Retail jitters[/i][/b] That may not be a problem for a large company like MetLife, but it could be for smaller firms. Further consolidation could be expected, but in actuality, this is a very small niche of the larger mortgage industry, so there is not a whole lot of room to consolidate. ‘We have about 12 to 15 wholesalers that we do business with as we shop our loans to different lenders such as Bank of America and Urban Financial Group,’ says Copley. ‘The government's new rules, which will likely go into effect sometime in the next year or two, will require all mortgage wholesalers to have higher net worth. This is going to lead to some firms' exiting the business and further consolidation.’ The irony that the reverse mortgage sector is slowing down just as it finally began to speed up is not lost on Sherry Apanay, senior vice president with Generation Mortgage Co. in Atlanta. ‘In the beginning, it was actually a lottery, and only 50 lenders were awarded the ability to do these loans,’ she says. ‘Wholesale lenders were in short supply for many years, but we've seen more competition come and go over the past two to three years – the reason being, the reverse mortgage market requires a commitment for specialized personnel and systems.’ If a company already is an FHA-approved lender, that doesn't mean it can automatically underwrite FHA reverse mortgages; to underwrite HECM loans, a lender has to get additional specific HECM direct endorsement approval. Also, in order to service these loans, a lender would need a separate servicing system. ‘Everything for HECM has to be separate,’ Apanay asserts. As a result, Mooney adds, the market is not poised to grow. ‘There is a relatively small set of players,’ he says. 'And from a statistical point of view, the top 10 wholesalers in the reverse mortgage space represent about 95 percent of all the wholesale volume.’ Over the past year, MetLife has been the largest wholesale player in the business, Mooney reports. The big insurer's reach runs deep, as it encompasses three reverse mortgage business channels: retail, wholesale and correspondent. MetLife is looking to increase its market share, even as projections indicate a shrinking number of new loans in the near term. ‘It's a niche business,’ says Mooney, ‘but it's a niche that has the potential to expand with demographic trends. From our perspective, it is a product that can help seniors. Products will evolve over time, and through that evolution, the reverse mortgage will become more attractive to more consumers. The need is long-term.’ [b][i]Securitization woes[/i][/b] In the short term, MetLife has to do something with all of its reverse mortgages. The lender utilizes the secondary mortgage market through different structures, including Ginnie Mae's home mortgage-backed security (HMBS). The HMBS is structured as an accrual pass-through bond, where HMBS issuers pass through the payments to investors as homeowners pay off the loans. Ginnie Mae is the dominant entity in reverse mortgage securitization. In 2007, a $116 million HMBS issuance was, according to Ginnie Mae, the first-ever government-guaranteed, mortgage-backed security collateralized by FHA HECMs. Prior to this, a number of public and private institutions originated proprietary reverse mortgage products and then sold the mortgages under a private-label securitization structure. Today, of course, the federal government has filled the void left by the shrunken private-label market. Security One Lending sells some of its reverse mortgage production to MetLife, but recently has taken another route with HMBS trades, partnering with Spring, Texas-based Reverse Mortgage Solutions (RMS). RMS is better known as a major servicer of reverse mortgages, but it recently started to get into the business of buying and securitizing the product. ‘RMS ends up buying our loans and issues the security with Ginnie Mae,’ says Larsen. Lenders should keep in mind that all mortgage markets are still trying to find their footings relative to credit and liquidity spreads, so the only securitization mechanism utilized today for reverse mortgages is by Ginnie Mae. ‘This just wraps the FHA whole loans and issues the pass-through securities,’ says Cameron Beane, head of secondary marketing and capital markets for Genworth Financial in Richmond, Va. But Ginnie Mae is not the only government entity involved here. ‘Up until three years ago, these loans were sold exclusively to Fannie Mae, which was the only investor for the longest time,’ Apanay observes. ‘We would originate the loan or purchase loans from other brokers or correspondent lenders. We would fund the loan on our warehouse line, and in the end, our investor, Fannie Mae, would reimburse us. We had a few other investors in the market for a while, but it was still basically a Fannie Mae product.’ When the federal government took over Fannie Mae, the HECM portfolio was reduced. Ginnie Mae had just entered the market the year before, Apanay explains, thus ensuring the product would have a future in securitization. ‘It's been about two years since the jumbo market for reverse mortgages dried up,’ she continues. ‘It was in that market that we saw other investors like Goldman Sachs, Deutsche Bank, Lehman Brothers and Bank of America.’ When the financial markets – and mortgages, in particular – took such a hit, all the jumbo private-label reverse mortgages evaporated, along with most of the investors. ‘For the market to grow, we'll need other investors again, and we are starting to see some interest in the private-label market,’ Apanay notes. ‘As the housing and financial markets recover, we do expect to see them come back.’ The question, of course, is when that will happen. The private-label securitization sector will return, but not right now, as liquidity has not fully returned to the marketplace, Larsen opines. ‘Maybe it will be back as early as the fourth quarter,’ he says. ‘When I look back to 2007 and when the meltdown began, I thought it would last maybe six months, but here we are, quite a number of years later, and the problems are still with us. The fourth quarter would be my absolute best guess, but until then, the only activity is through Ginnie Mae.’ The return of private-label securitization is not going to happen in the next 30 to 90 days, Beane asserts, adding that non-government investment is needed and will come back. ‘This product is uniquely positioned to be of strategic advantage to seniors,’ he says. ‘The features that need to be created for this product should complement, but be a little different from, the FHA product. It is an attractive opportunity for the broader markets. As they heal from the forward mortgage debacle, there will be a significant desire for this asset class to succeed in the right way. That will bring in capital and investors to buy up this product.’ [i]Steve Bergsman is a freelance writer based in Mesa, Ar
