Overall endorsements were down -1.8% from November, with the entire decline coming from the TPO/Wholesale side of the industry turning in a -4.4% performance. This isn’t a big surprise considering that TPO volume consistently under-performed retail/direct since May.

What’s perhaps even more important as we continue in 2012 is the trend in applications. In the past we’ve focused on the monthly effects of changes to lending limits, principal limits and lender exits, but for this year end chart we’ve focused on the theme of Wells/BofA/FF exits in 2011.

Case numbers issued (we use this interchangeably with applications) dipped in December to the lowest level since January 2010, but if we exclude the impact of Wells/BofA/FF it tells a different story. December’s total is right between May and June figures for surviving lenders, raising the question whether higher volumes from Aug-Nov were just the result of applications shifting from the exiting lenders in a one time surge. It would be much more positive for the industry if survivors fill the distribution gaps left by exiting lenders over the next few months and generate higher application volumes, but December merits concern for less rosy scenarios playing out.

As with any good year end ranking list, this one is filled with many successful companies bucking the trend of a down market so be sure to check pages 3 and 4 for final 2011 results for your company.

Click the image below to access the full report:

Whenever we hear this question, it reminds us of the boxing term for a fighter that does better than their weight-class suggests they should. So we went looking for places where our clients might do better than they might otherwise expect with their marketing budget.

Big City, Big Volume?

Looking at our top 10 list of cities by loan volume, you might think that these cities are here simply because they have the most senior homeowner households. It’s a good theory, so we tested it. The table below shows these same 10 cities with their senior homeowner household totals and the rank updated to reflect households rather than loan volume:

Most of the top 10 cities are in here, but they’re not in order and there are some true outliers here as well. If we think about loan volume similar to a response rate on a marketing campaign, we can calculate an adoption rate by looking at what percentage of eligible households completed a reverse mortgage. In this table we’ve shown it in basis points (percentage multiplied times 100) and annualized it. The “New Adoption” simply removes refinances from the equation to see just new reverse mortgage borrowers.

On this basis the differences are stark, as Baltimore is generating over four times as many loans per household as Chicago. So it would seem that huge numbers of seniors are important (mostly top 10 cities here) but not the end of our story.

Past Performance = Future Results?

One of the other metrics we like a lot is penetration rate, which shows what percentage of eligible households have a reverse mortgage at any point in time. We noticed while looking at this table that all of these top 10 cities had penetration rates (as of December 2010) higher than the national average of 2.24%. Our industry had done a good job focusing on the cities with the most eligible households, and seen success doing so, but what does that tell us about the future?

Washington DC and Baltimore both have high penetration rates and saw very high adoption rates (good for our hypothesis), but Miami had relatively little volume in Q1 (as measured by adoption rate) despite having a high penetration. Given how many cities there are, we thought it best to do a correlation analysis rather than continue our eyeball test, and discovered that higher penetration in Q4-2010 was strongly correlated (above 0.5 for you statistical types) with adoption rates in Q1-2011.

In other words, all other things being equal your marketing dollars are more likely to result in loans where the product has already done well.

Conclusion

We’d be the last ones to tell you that correlation equals causation, but it makes sense given high customer satisfaction ratings that our product does better in areas where potential borrowers already know friends or family in their local area with good experiences. If you’re looking for a way to test out this idea, feel free to use the tables in page 2 of this month’s report (click the image below) to tune your marketing to areas with higher penetration rates.

And if you’d like to see what penetration rates are for every county in your state (or states), it’s in our Market Opportunity Report for clients. Many clients use it do their marketing analysis every quarter, and if you’re shy about numbers we’d be happy to lend a hand with the statistical heavy lifting.

Click on the image below to view the full Industry Trends report for this month.

TRR Interview: John Lunde, Part I from The Reverse Review on Vimeo.

Given the changes rolling out today with the new fiscal year for HUD/HECM, we thought we’d share our volume forecast for the next 12 months (fiscal year 2011) in place of our usual drill-down into lenders and metros. If you want to skip directly to the report, feel free to click on the image at the bottom for the full report.

• Overall reverse mortgage market volume forecast for 2011 is 95,000-100,000 units
• HUD changes effective 10/4/2010 slight net positive for customer principal limits and industry volumes
• HECM Saver a major volume contributor in 2011, estimated at 20% of all HECMs within one year
• HECM Purchase grows slowly, dependent on home price appreciation and expectations

The changes to HECM effective 10/4/10 in our opinion broaden the potential opportunity for reverse mortgage lenders in the US. While a principal limit reduction was well-telegraphed by HUD several months in advance of the recent mortgagee letter announcing it, their surprise reduction in the interest rate floor applicable to loan expected interest rate calculations results in a net increase in available cash for most borrowers at current interest rates, particularly the younger borrowers that have become more prevalent in the past 18-24 months.

Given that, the current volume run rate of approximately 74K units per year (Q3-2010) would be reasonable as a base foundation for 2011 volume expectations, with a further 3,000 units likely from population growth (assuming no additional adoption rate increases). In the longer term, we are bullish on both HECM Purchase (available since October 2009) and HECM Saver as a newly announced program effective October 2010, although we believe the near term for Purchase continues to be under-performance against an attractive niche while overall home sale transactions remain depressed. We have seen relatively limited adoption for HECM Purchase (approximately 1,000 loans in 2009 calendar year with flat to slightly down volume thus far in 2010), and can expect similar challenges for the industry in growing HECM Saver volume given comparable distribution channel challenges.

HECM Purchase requires substantial investment and contact with real estate agent and builder business channels that have not historically participated in the reverse mortgage market, and thus lenders had not previously focused on these segments. HECM Saver will likely require a comparable investment in education and business relationships with financial advisory professionals that are much more likely to be involved with the target customer for Saver, namely, a client with somewhat higher net worth and motivated less by an immediate cash emergency than a lifestyle financial planning discussion of flexibility and cash liquidity tools.

Further volume growth for HECM Purchase may be linked more strongly to home price appreciation and expectations than other niches of the reverse mortgage business, even beyond the distribution channel challenges for lenders. HECM Saver, on the other hand, is likely to be almost entirely dependent on lenders’ distribution channel penetration success and customer product acceptance. Given that customers have consistently cited upfront product costs as the biggest deterrent to a reverse mortgage transaction (2006 AARP study) and many lenders have in place multi-year efforts to reach financial advisory professionals, we see the challenges as less severe relative to HECM Purchase.

We conclude that HECM Saver is likely to have a much faster start than HECM Purchase, contributing as much as 20% of the overall reverse mortgage market in 2011 and showing potential to produce greater unit volume than HECM Standard/Traditional in five years. Our overall reverse mortgage market volume forecast for 2011 is 95,000-100,000 units.

You can access the full report by clicking the image below. Enjoy!

One of the first questions that arises when looking at the age distribution chart from last week’s report is whether there was any difference between genders from an age perspective. As you can see from the chart below, single males are much more highly represented in younger ages than single females, with couples even further skewed to the young side.

In many ways this makes perfect sense given the shorter life expectancy for males, which naturally leads to fewer couples (assuming these are mostly married couples) and males at older ages.  There are simply more single females that survive to higher ages as potential borrowers.

What’s perhaps less intuitive is that fixed rate borrowers are skewed younger as well, clearly evidenced in the chart below.

Perhaps younger borrowers are less daunted by the full draw requirement of a fixed rate loan because they’re more likely to be using proceeds to payoff an existing forward mortgage? As we start considering how potential usage of funds impacts borrower age, it makes sense to consider payment plan types, as in the chart below.

Since Line of Credit (LoC) is the payment plan option selected by a vast majority of borrowers and is currently mandatory on Fixed HECMs due to full draw requirements, we’ve narrowed our focus to just the HECM ARM population and chopped off the top 60% of the chart to see the change more clearly.

Under 8% of HECM ARM borrowers in their 60s select one of the four monthly payment options (excluding LoC), whereas 32% of those over 100 select a monthly payment option. Given the greater tenure payments available to older borrowers this would seem more attractive to older borrowers, but the level of change surprised us.

So what does all this mean? We suspect that many will see product development opportunities and others likely see sales and marketing implications. We’re as interested as everyone else to see what this means for our market, but the resounding bottom line remains that the reverse mortgage market is in great need of market segmentation and diversity in our approaches to growing the business.

We’d love to hear your thoughts in the comments below, or use our contact form to email us privately.

Many of us who have been in the industry for a while have watched average age drop from 77 a decade ago, to 74 five years ago and roughly 72 last year. What has been masked by that “average” (or mean for the mathematically precise amongst us) is that the number of  borrowers at each age has changed dramatically. John mentioned that in the past few months, 62 year olds were the most common among his borrowers, which frankly shocked many folks in the audience.

We did an analysis of our own once we got back to our office and what we found suggests that Nixon’s comment is indicative of the industry as a whole rather than just at BofA, even if the industry’s peak age was 63 in 2009 rather than Nixon’s 62.  (To be fair, John may be looking at loans we won’t see for a few months due to the timelines associated with loan endorsement.) The chart below show the percentage of borrowers (youngest borrower) in each year at each age.

As you can see, there has indeed been a dramatic shift toward younger borrowers in the past few years, and particularly in the most recent year. Whereas in 2000 there were more borrowers age 76 than any other age, that figure has shifted downward much more dramatically than the average age: 74 in 2003 and 71 in 2006 to 63 in 2009.

So what does this mean for the industry?  Well, it suggests that a common refrain of baby boomers being much more likely to use reverse mortgages than the WWII generation and those before is coming true. At the very least, baby boomers seem to be less put off by recent changes to the product and industry that have dropped overall industry volume by -39% in the first six months of 2010.

This could be from higher expectations of living standards in the baby boomer generation, lower retirement savings preparation (and lower pension availability) or a greater receptivity to debt. We simply don’t know from the data we’re analyzing today.

But it did bring up some other interesting thoughts about fixed vs. ARM HECMs, payment plan types, and borrower gender that we’ll explore further in next week’s edition. In the meantime, let us know what you think this shift in borrower age might mean for the industry in comments below, or email us here.

For part 2 of this analysis, please click here: Reverse Mortgage Borrower Analysis, Part 2.

The good news: apps grew for the fourth straight month since reaching a low of 5,805 in January, now up 37% since then to 8,363 in May.

The bad news: lower upfront costs are likely fully baked in to these numbers by now, and we’re still nowhere close to the typical volumes we saw before the 10/1/09 principal limit reductions.

Applications overall continued to rise above the levels seen immediately after the principal limit reductions (red line) but well below the levels before (green line). Apps increased 2.4% on a gross basis vs. April.

Adjusted for the number of working days in each month the chart is slightly more favorable, showing a 7.2% increase vs. April after we account for one less working day in May.

We were recently asked by another industry veteran whom we respect a lot whether we thought endorsements have seen a bottom yet. It’s a good question, and we thought it would make an interesting quick little visual for you as it highlights another question of interest.

When comparing applications to endorsements, it helps to consider the timeline from one to the other. We generally use 4 months (basically allowing 2 months each for closing and insuring), which becomes clear on the charts. First, without a timelag:

There’s clearly a pattern, but introducing the timelag makes it much clearer:

As you might suspect from the chart, we do think that endorsements have probably bottomed given that May endorsements came in low 4 months after January’s application trough. One hint we could be in for a further decline is that the implied pullthrough rate of 78% for January apps to May endorsements is high compared to recent readings in the high 60′s, but we’re probably not going to see too much decline given the respectable bounce in February applications.

The other point that’s interesting here though is that the October spike in applications doesn’t appear to have produced any real corresponding spike in endorsements since.  Granted, February and March endorsements were too high to be entirely attributed to October and November applications, respectively, but we haven’t seen a single monthly increase in endorsements since December.

We’d be very interested to hear your feedback on this point, but from this view it seems disturbingly obvious that applications taken in a rush ahead of program changes collectively showed some of the lowest quality pullthrough the industry has seen in years.

All the more reason to lend your support to the efforts at NRMLA and CFIS to find alternatives to another principal limit reduction.

Volume is up 41% from the low in January, but remains well below the months before principal limits were reduced 10/1/09. Since I firmly believe that any chart can be improved with random doodles, I’ve drawn two lines here that will be interesting levels to watch in coming months.  The red line corresponds to the industry’s volume ceiling after principal limit reductions but before product changes got underway in mid-late March, and is roughly 7,000 apps per month.  The green line represents the volume floor of our old “normal” monthly applications, or roughly 10,000 apps per month.  Simply put, if we go above green then we’re headed back to growth status and below red means last year’s principal limit reduction is overwhelming the effects of product changes.

Last time I showed this chart one of our readers commented that March’s increase was simply due to an increase in business days from February. As you can see from the chart below, he was absolutely correct and you’ll notice that March was a down month for apps on a workday basis.  I’ve drawn the same figures for ease of reference here.

Frankly, we expected more from April apps and were a bit disappointed that we didn’t get closer to 9,000 given some of the anecdotes we heard during the month about volume increases. That really drives home the bigger question about the effect of product changes on industry volumes – how long will it take to reap the full benefits of positive product changes?

If you believe that our industry has learned from 20+ years of experience to serve the neediest borrowers that require as much cash upfront as possible with little regard for costs, then it stands to reason that less cash available (after principal limit reductions) would be a bigger factor for volumes in the short term than lower costs until we learn to market and sell the product to a cost sensitive borrower who is looking primarily for availability of funds and monthly payments rather than upfront cash.

In light of that significant shift required, we expect volumes to steadily increase but not see the full impact of product changes until perhaps late summer and beyond. Another point that could reasonably be made, is that the product changes need to continue to truly bring the “cash later” customer into the market – a low cost product without a full draw requirement.

Profitability holds that product back as the lack of UPB to sell makes it a loss leader at the moment.  But perhaps a product with ongoing mortgage insurance premiums (but no upfront) and limited origination fees that offers a lower principal limit geared toward monthly tenure payments with a small line of credit?  Kind of like an annuity with a house pledged as upfront funding asset instead of cash…

Executing on any idea is always harder than dreaming it up, and making it profitable is harder still, but if there’s one thing we keep learning every day it’s that our industry isn’t through changing.

March applications came in at 7,398, up 11.4% from February. Although this is still less than half of March 2009 volume, it’s important to remember that we’re just now hitting the one year anniversary of the 625K lending limit increase that drove a mini spike in applications as we’ve highlighted on the chart above. It’s hard to believe just a year ago we were seeing dramatically positive volume boosts coming from HUD program changes, especially as we’re staring down another principal limit reduction later this year.

It’s also important to note that there are 35% fewer originators in March 2010 vs. 2009, so the impact of a 54% decline in application volumes on average applications per lender is muted down to a still scary but more manageable 29% average decline for the survivors.

We’re very interested to see what April applications bring given the pricing changes and anecdotal stories of a resulting 30-50% increases in volume over March. A 50% increase would put the industry just about back to our typical monthly volume prior to the principal limit reductions, although we would expect fewer originators and therefore a healthier posture for surviving lenders.

Without further ado, here’s an update to the chart that our readers have come to expect:

As is obvious from the chart, we’re still in scary territory when it comes to application volumes.  The industry is effectively bumping along the bottom still after the October reduction in HECM principal limits, although it’s certainly better to be on the uptrend again instead of making new lows as we did in January.

That said, the most important question remains:  Where do we go from here?  With the recent announcements of $0 servicing fees by lenders (Genworth and Security One) and Pentagon Federal/Sunwest and Metlife going even farther by eliminating both servicing and origination fees, perhaps product driven competitive innovation can apply the needed boost.  We’ll have to wait until mid-May to see solid numbers about April apps that will tell us how far these innovations will get us.

In the meantime, we mean it in the best possible way when we say: go find your Baltimore.