ReverseIQ Newsletters

Body Shots – Retail Leaders May 2011

We had such a favorable response to the boxing title last newsletter that we’re sticking with it today. And judging by May’s endorsement total, we may exhaust our limited stock of punchy phrases before we pick ourselves up off the mat.

May HECM endorsements came in at 5,188, down -15.3% from April but up 13.9% from last year. This is the second lowest level since December 2005, with only the recent trough of May 2010 registering a lower total. At this point the only question that seems fair is the same one we’re all asking of home prices: will there be a double dip?

Endorsement volumes are pointing downward again for the past two months, showing an eerie resemblance to the trend-line last year at this same time. We could draw a line through the dots and end up with nothing before Thanksgiving, which is downright scary.

That said, we need to look at application volumes (HECM case numbers issued to be specific) to really see whether our market is going to zero like a bad dotcom bubble stock.

The trend here is much more encouraging, although not without its challenges. We’ve been averaging just over 7,000 since October, but April’s total of 7,371 was the lowest over that 7 month period. Two key questions arise here, which we can deal with in turn.

Question 1: What does the application trend look like if we remove seasonal factors? We look at the application per business day trend year over year for this analysis, as it removes differences in business days and usually holidays (Easter is an exception falling in March and April, but was in April both this year and last).

The chart makes it more clear that much of the April decline in applications was due to fewer business days compared to March (21 vs. 24), although it also illustrates that we saw our first year over year decline in applications in the last 7 months. So while it’s probably safe to say we’re not going to fall off the bottom of the graph (at least this year), it does signal business plateauing at a low level, probably due at least in part to the exit of Bank of America and Financial Freedom.

The two lenders together were probably doing roughly 1,000 applications per month before exiting, so if we assume half of that volume has been picked up by other lenders it would mean slight growth year over year on this chart instead of the decline.

Question 2: What can applications tell us about the next few months for endorsements? We’ll go back to a modified version of the application/endorsements chart above, with endorsements lagged by 4 months to better align the two datasets.

The endorsement decline looks just as shocking here, but the blue line for applications shows it’s in the context of a much smaller decline in applications. We can also see that the pullthrough rate for applications in Oct-Nov was unusually high at 84% and 89%, respectively. We had previously chalked that up to spillover from September applications (where pullthrough was expectedly low at 48%), but the decline this month has us rethinking that.

In any event, we usually expect pullthrough to come in at 75-80% over the course of a few months based on historical experience, and May endorsements equate to 70% of Jan apps. It seems more likely that we’ll come back a bit given that applications were up in Feb-Mar and pullthrough may bounce back also.

So while the headline endorsement number is staggering and certainly tempers enthusiasm for the second half of the year, we’ll be paying more attention to the applications per business day and pullthrough trends to make sure these are one-time events and not the start of a negative trend.

A bit of housekeeping: As HUD changes their data reporting in the wake of broker licensing changes, please note that brokers not closing loans in their own name are rolling off the active lender list over the next few months. As such, we will not be emphasizing active lender counts and changes until this stabilizes, likely toward year end. After that transition is complete, Retail Leaders will reflect the number of lenders closing HECMs in their own name.  For a report including brokered loan activity attributed to the broker, please see our Wholesale Leaders reports.

Click on the image below for this month’s report.

Wholesale Leads the Way – Wholesale Leaders January 2011

The first month of 2011 brought us back to a familiar theme from last year as broker/wholesale endorsements outpaced retail in a down month for the industry overall. We saw this pattern several times last year, particularly as the industry volume growth tapered off in September and October.

• Broker/Wholesale endorsements for January came in at 2,413 units, up 9.3% from December but down 45.8% from a year ago
• Retail endorsements totaled 4,049 units, down 6.8% from last month but up 27.7% from last year
• Brokers contributed 37.3% of all units, up from 33.7% last month but down from 58.4% a year ago

The divergence between channels is particularly striking this month because Retail was entirely responsible for the industry decline. It’s way too early to attribute the weakness to BofA’s exit (we won’t see that effect until at least March or more likely April endorsements, so we can probably expect some bounce-back from Retail in February results if our client conversations are any indication.

Indeed, BofA has had its two best endorsement months since February 2010 as the chart below illustrates.

What’s most interesting is that broker/wholesale business has grown very little from the lowest levels in last years for BofA, while retail has recovered with the rest of industry. We’ve heard from several people in the industry that this directly related to the decision not to pursue certain types of broker/wholesale business, and whatever the cause the effect has been clear on this chart.

There was a wide divergence among other top 10 lenders in January, as Genworth and Urban both saw strong recoveries from what now look like hiccups in December, while Financial Freedom had the most notable decline to a multi-year low.

Click the image below to access the full report:

Reverse Mortgage Wholesale Leaders – May 2010

May’s volume was notable for being the lowest on record for 5 years, but the difference between broker/wholesale volume and retail/direct was just as stark. For the fourth consecutive month now, brokers bore the brunt of declining volumes, down -25.8% vs. an -8.4% decline for retail. If nothing else it shows the continuing impact of smaller originators getting washed out by lower industry volumes and new licensing requirements.

As we suspected in last month’s report, we did indeed see retail units surpass wholesale units in May, with 54% of volume coming from retail/direct originations. Given that the downtrend the past 6 months has unambiguously hurt broker/wholesale volume more than retail, we’ll be looking closely to see if the increased volume in June (and hopefully the next few months as well) continues to favor retail or swings back in favor of brokers.

So where are lenders placing their bets? One way to look at it is with the fastest growing lenders in both retail and wholesale:

• Of the 5 fastest growing retail lenders, only one (Metlife) also has wholesale business, although they do happen to be the number 1 wholesaler
• Of the 5 fastest growing wholesale lenders, all five have retail originations as well, although none has more than 23% of business from retail
• Also of note, 2 of the largest wholesale lenders with the longest track record in the space, Bank of America and Financial Freedom, are flat and down -60% respectively in wholesale volume

In many ways today’s report illustrates what has long been considered a truism in the mortgage industry: wholesale is much faster to grow, but retail is where companies create lasting franchise value. We’re all in favor of a healthy industry with both retail and wholesale channels, but the trends right now are increasingly showing strain in the broker/wholesale side of the industry.

Be sure to click the link below to access the full report: