Archive for the ‘ReverseIQ’ Category
May’s application numbers have good news and bad news for the reverse mortgage industry.
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.
One of the most interesting conversations going on today in the reverse mortgage arena is how much the recent product changes (reducing upfront cost to borrowers through origination fee, MIP, servicing fees, etc.) will change the size of the HECM borrower market. The easy answer is that these changes give borrowers what they’ve been requesting for years, so of course the market gets bigger. We heard anywhere from 20-40% increase in applications from February, and you can see from the chart below that we’ve already seen some lift from the lowest levels in October & January.
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.
We started getting word in mid February that application activity was picking up a bit after what we knew were several very depressed months following the October 1st principal limit reductions. February’s numbers did indeed show a slight bump in app volumes on the heels of a new low in January, and March has continued the trend as you can see in the updated chart below (click for larger chart).
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.
