REQUIRED READING: The reverse mortgage industry continues to have a promising future, despite some stronger-than-expected headwinds. Quite frankly, time is on its side.
The inexorable demographic march by Baby Boomers toward their senior years continues – nothing can stop that evolutionary process. There are now about 34 million Americans aged 65 or older. By 2030, that number is expected to nearly double and account for more than 20% of the U.S. population. It doesn't take advanced calculations to see the potential demand in these numbers for a broad list of products and services.
The leading edge of these 70 million aging boomers has entered their sixties – and the vast majority of them are still working, playing and generally delaying many of the reduced-activity behaviors their parents experienced at the same stage of their lives. The majority of baby boomers are eschewing retirement, in part, because of a fresh faith in the belief that ’60 is the new 45,’ and because the continuing economic downdraft that has them doubting whether existing and promised financial support will see them through another two or three decades.
Sensitive to and aware of such shifts, many practitioners in the reverse mortgage business – particularly the nimbler, newer companies – are diversifying, redirecting their resources and packaging products to meet changing interests.
At the same time, however, the sector has experienced its share of tumult. High-profile institutions in the reverse mortgage sector – such as Bank of America, Wells Fargo and Financial Freedom – recently announced that they will no longer originate reverse mortgages. They may recognize the reputational risk that can come from the back-end servicing of the loans, or they may realize that overall market changes point toward a sharper product focus, perhaps best exemplified by Federal Housing Administration's (FHA) Home Equity Conversion Mortgage Saver program, which effectively eliminates the up-front mortgage insurance premium. Lower fees (and smaller loan sizes) will appeal to a different pool of prospective customers.
On the other hand, brokers and originators who want to diversify their lending business are giving reverse mortgages serious consideration, capitalizing on consumers' ever-expanding curiosity about and familiarity with reverse mortgages. Advertising on television and across other media has created a great deal of product awareness that did not exist a few years ago.
As new players enter the market, they would do well to heed a word of advice – or, perhaps, caution. Many mortgage companies, especially traditional forward mortgage companies, are not inherently equipped to originate or service reverse mortgages without first developing, altering or modifying their internal processes and systems. Even if they enter the market by utilizing a third-party loan origination system and a subservicer, there is still a substantial amount of work to be completed before closing the first reverse mortgage. Â
Particularly in servicing a reverse mortgage, one must first look at the servicing platform, as it drives all the transactions, accounting and tracking of the loan. A servicer has just a few options in today's reverse mortgage market: build a system, try to retrofit a home equity line of credit system or outsource the servicing to a subservicer.
Growth in the reverse mortgage sector also may be pursued through a new correspondent and retail presence, along with new asset management capabilities for performing and nonperforming forward mortgages and real estate owned properties.
The long-term argument for reverse mortgages remains as strong as ever, especially as more Boomers own their homes free and clear. Coinciding with this development, many will choose/need to augment their finances as they continue to age.
A study released in June by the Joint Center for Housing Studies at Harvard University supports this prognostication. The fact that seniors tend to relocate during retirement is good news for the reverse mortgage industry, as it suggests more opportunity to utilize equity over time to support seniors' financial needs.
In terms of the housing market, the Harvard study found that in the previous 10 years, nearly one-third of older households did move, most often to smaller homes. Assuming this percentage continues as the population explodes, a growing number of seniors will be changing homes in the next decade, many with the help of a reverse mortgage, to retire any debt on the former residence.
As reverse mortgages build market share, money managers, banks, hedge funds and others will look to capitalize on the trend. Until about a year ago, Fannie Mae was the biggest buyer of reverse mortgages. Now, most are packaged into bonds guaranteed and issued by Ginnie Mae, giving them a double guarantee, because the loans themselves are backed by the FHA. This is particularly attractive to institutional investors looking for fairly predictable cashflow, as they are the primary purchasers of the bonds.
Earlier this year, Jeffrey Traister, managing director and head of agency and non-agency reverse mortgage trading at Cantor Fitzgerald in New York, said he has ‘no doubt thatâ�¦10 years from now, this will be a massive market that will trade like every other market. Six months ago, there were many [firms] that never heard of it; now, there are seven or eight large broker-dealers that participate in the market.’
Traister added that other entities, including hedge funds and regional money managers, were also getting involved in the reverse mortgage market. ‘That creates momentum,’ he observed.
The mortgage banking industry should be confident that the reverse mortgage product is here to stay and back that belief with serious investments in the sector.
H. Marc Helm is president and chief operating officer of Reverse Mortgage Solutions Inc., based in Spring, Texas. He can be reached at (281) 791-7674.
