One of the questions we hear a lot is whether having more lenders is good or bad for the industry. Of course, most people dodge by saying that more of the right type of lenders is a good thing, which is much easier to agree with.

We can’t prove that more or fewer lenders is the better way to go, but one thing is becoming evident over time. Whichever comes first, lower active lender totals march in lock-step with lower loan volumes.

It’s no secret that endorsements have been lower the past few years, nor that there are fewer lenders actively originating HECMs. What’s striking about the chart is just how correlated the two trends have been. The endorsements figures are easy enough to find (any of our 3 monthly reports). You can find the active lenders count including TPO (red line in chart) in the top left box on page 2 of HECM Trends each month, and the FHA approved HECM lenders (blue line) in our HECM Lenders reports.

It’s also worth pointing out that as FHA switched from approved brokers to TPOs approved by lenders (gap between red and blue lines on chart), HECM volumes stayed in line with the red line that includes TPOs. This would suggest that the active originators metric including TPOs is more representative of the health of the industry.

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

We’ve previously written about Baltimore, New Orleans, Philadelphia, and North Carolina, but as the housing bust has progressed there have been fewer growth stories to find. Saint George caught our eye as it rose to the top of our listing of cities by MCA growth on page 2 (bottom), finally taking the crown from Philadelphia.

Our first guess was that this might be another refinance driven surge as we saw in Baltimore and Philadelphia, but there hasn’t been a single HECM to HECM refinance yet in 2011 for the city. That of course got us even more curious, so we started looking at lenders – and hit the jackpot.

Cherry Creek Mortgage has created substantial business in Saint George as a new industry participant, in a place where the rest of the industry put together is essentially following the national volume trend. There are lots of ways to interpret the company’s success, and we won’t pretend to know their secret sauce. But we’ll hazard a couple of thoughts:

• Small, under-penetrated industries like ours still have niche opportunities that have not been fully understood nor harnessed by existing competitors
• Single companies with an innovative approach to the customer, product and/or market can change the shape of the industry in a city, state or even nationally
• Our industry is well served by new competitors that thoughtfully pursue new strategies

Congrats to Dan and the rest of the team on an amazing success story.

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

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.

A potential government shutdown has come and gone, and HUD still managed to post application volumes for March in a timely fashion! The application headline number is good news considering the 8.5% increase in applications, a second consecutive monthly increase.

Unfortunately, we don’t have to look far for negative impressions either. The increase was entirely due to more business days in March than February (24 vs. 21), so apps per business day actually declined 5.1%.

The outlook report also provides our monthly reading on HECM Saver endorsements, which were up 38.2% from February to 409, and represented more endorsements than refinance transactions (5.6% vs. 5.1%). Saver is continuing to grow at a steep rate after a slow start, and at this pace could be in double digits for market share later this year.

In looking to the Industry Trends pdf report linked at bottom, we can see that Pennsylvania stands out as the fastest growing among the top 10 states, up 27.2% vs. Jan-Feb 2010. There’s been a strong assist from Philadelphia, which has continued to grow since we profiled it last October.

In contrast with Baltimore, which is now declining fast as refinance activity dries up, Pennsylvania has always had a broad base to support industry growth: 5th largest number of senior homeowner households in the nation, and the lowest of the top 5 in penetration rate (% of these households with a reverse mortgage) as of December 2010.

Demographics isn’t always destiny, but it’s very useful to understand how our industry is tracking to its demographic potential. We put this type of demographic information alongside volume and loan size information together for easy reference in positioning your reverse mortgage business for success in our Market Opportunity Report. See a free sample on our website and subscribe today for quarterly updates.

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

After several months of the broker/wholesale channel losing the volume battle, the down market showed less decline there (-4%) compared to retail/direct (-14%). One month isn’t going to change the tide of regulation and resulting transformation of some brokers consolidating into direct lenders while others become loan officers at larger institutions. That said, brokers are nothing if not scrappy and we’ll see more than a few stay in the broker/wholesale side as it transitions to TPO.

We’ve also been following closely the breadth of our industry’s recovery from the May volume lows, as measured by lenders above/below their May volume figures. We’ll be the first to caution that normally you shouldn’t look at individual months as especially important when using endorsement data, but in this case the decline and recovery have each been severe enough and long enough to make for interesting comparisons. Among the top 10 lenders specifically, several companies seemed to lag behind in increasing loan volumes while others leaped forward. The chart below shows that as of September almost all are well on the recovery path:

As you can see, 9 of the top 10 lenders have increased volume since May, with several showing dramatic increases. As of just two months ago, only 5 lenders had increased volumes at an almost identical industry volume (1.4% higher in September). Whatever your thoughts about each of these lending leaders, we can all agree that it doesn’t progress our industry forward to see volume declines wash out major lenders from our business.

Click the image below to access the full report:

As we dive deeper into August’s year to date results, an interesting city stands out this month, similar to how Baltimore bucked the trend earlier this year. Many areas of the country are still fighting their way back from low volumes in the past year, but Philadelphia has recovered faster than many others. It’s the only city in our top 10 this year that is growing year to date (+4.3%). Check out the chart below:

Not only is Philly up year over year, but it’s also trending higher. The difference is more notable year over year when comparing each month:

So what changed? Another familiar story from Baltimore: Refinances.

Non-refinance endorsements were down 11.4% from 2009 through August. There are at least two easy thoughts from this. First, we’ve seen a few times now that the best performing markets in 2010 are those where refinance is driving a significant portion of volume. That might be a good or bad thing, depending on your perspective.

Given that we’ve only addressed a small portion of our potential target market so far (see our sample report on this page for a reference check), we tend to see refinance similar to getting addicted to cough syrup. It probably feels great for a while, but sooner or later someone is going to take it away. Given continued home value issues and concern in the secondary market over refinances taking away the incentive for paying well for these loans, you should enjoy refis when you run into them but don’t count on them to make your 2011 numbers.

Now, let’s keep in mind that this is all happening before any of the HECM Saver and changed principal limits took effect. So this doesn’t say much about what will happen to the refinance volume with those changes. It probably says more about Philadelphia’s housing market than anything else, as Zillow shows a relatively healthy market.

Second, and as you might expect given the overall industry volume is down 38% year to date, refinances are much more of a localized phenomenon than an industry trend. Check out our refinance table in the left column (gray) of page 2. Refinances are down 45% year to date nationally.

The bigger story here is that non-refinance originations are down only 11% compared to 38% nationally. Proof yet again that it matters where you market. If you want to get these numbers for your markets to target your marketing where the return is highest, check out our services for reverse mortgage marketing and sales professionals.

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

HECM Endorsement Trends by Year

Volumes for each month this year have been below 2009 thanks to startlingly low application counts, but now the task before us all is to improve on the 39% decline YTD. No one is expecting a 100,000 loan year anymore, but it’s shocking to realize that 80,000 would represent significant progress given what we’ve seen so far.

So where is the volume coming from next month and for the rest of the year? Last month we looked at HECM Purchase, which has been growing steadily (up almost70% last month vs. 2009), but started from nothing in late 2008 so we need more than just impressive growth figures (last eight months = 910 total loans). We continue to believe that the potential exists for 10,000 or more loans annually from this program, so we thought it would make sense to share that high level analysis with you here.

There are a few key steps in this quick analysis, and we’ll be the first to admit this is back of the envelope rather than something we can prove in our normal style from hard data. That being said, the numbers get interesting very quickly.

• There are 23.2 million senior homeowner households in the US as of 2008
• According to a 1991 study by the Real Estate Center at Texas A&M University, only 7.4 percent of seniors moved in a given year, which we’ve adjusted down to 6% due to their lower survey age
• Statistics range from 60-80% of seniors owning their homes outright, so we took the more conservative assumption that only 20% of seniors would use mortgage financing to purchase a home

That leaves some 280,000 seniors purchasing homes annually with mortgage financing, so HECM’s opportunity is to capture some portion of that. Whether you believe that HECM can capture 5% or 50%, we still have a large market to address. Of course, that also doesn’t consider seniors who otherwise would not be able to move or buy a house with traditional mortgage financing, but could through a HECM Purchase.

It’s not the only answer to today’s tough market conditions, but it certainly pencils as part of a larger solution.

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

It certainly doesn’t help the comparison that we had a nice rise in March 2009 resulting from the $625K lending limit increase. We’ve been talking recently about the encouraging uptick in application volumes, but that will take at least another month or two to show up here due to endorsement lag times.

So now that we have the bad news out of the way, let’s talk about some bright spots. In keeping with the increased lending limits mentioned above and our recent analysis of refinance volumes, you might be surprised to find out just how effective the lending limit increases still are at affecting the dollar volumes of different markets and lenders around the country – even one year after our last lending limit increase.

Baltimore is a great example of refinance success in a market by enterprising lenders, and this month’s report shows another good opportunity in growing markets. To highlight, let’s look at the MCA Growth Table at bottom of page 2:

Every city on this list has seen significant increases in dollar volumes that drive revenue and profit for lenders (and put dollars in senior borrowers’ pockets), with many doubling compared to last year. Since we’re showing you the result of lenders’ collective efforts in these areas it goes without saying that you won’t be the first to discover these growth opportunities, but the scale of these markets suggest that there could easily be more potential here than is currently being tapped.

We’ve consistently noticed that despite the large numbers of active lenders in big markets, many metro areas still look relatively under-served compared to rural communities when we look at senior households per active lender on our Market Opportunity Report, but it also is evident on this report in a more bottom line measure: average loans per lender. Check out the table below for a quick look:

It’s worth pointing out that Brooklyn shows up at the top of the MCA chart and here as well, but notice that Chicago has both the most active lenders and second highest loans per lender average. Sure, it’s hard to make a living just originating three loans a month in Chicago if that’s all you’re doing, but remember that’s the average – there are a lot of lenders doing much more than that in just that one market. Same goes for the other cities listed here, which have more active lenders than every other city but still show decent volumes per lender.

For those inclined to be pessimistic we freely admit that there are also a lot of lenders that do less than average in each of these cities, just as there isn’t a silver lining without a dark cloud. In the meantime, our optimistic clients can keep thinking about how lower upfront costs can reach a whole new customer base that doesn’t want every last dollar in their hands today.

If there’s any truth to the long touted statistic that 4 out of 5 senior homeowners don’t have a mortgage (and we think there is), then it stands to reason that lenders offering an efficient means of making that equity available for future emergencies at little cost today breaks new ground for where this industry can go from here.

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

Thankfully (if you’re among the survivors), there was an even greater decline in active lenders (down 7%) that translates to an almost imperceptible uptick in average loans per lender. It’s nothing to write home about, but at least it’s helping keep some heads above the water.

• Several regions saw modest volume increases in April, including the Mid Atlantic region that includes Baltimore. If you missed our prior newsletters about what’s occurring in the Orioles’ city and what might be driving the numbers, check out our prior pieces here and here)
• Midwest and Great Plains also showed strength, but their relatively low volumes couldn’t make up for significant declines in Pacific/Hawaii and NY/NJ
• Pacific/Hawaii in particular is struggling, as volume has dropped 44% since December
• Of all 82 metros we track, just 2 show positive volume growth year to date vs. last year: Houston and New Orleans.  We’ve talked about the relative strength in Texas before, and perhaps New Orleans is simply doing its best to welcome all of us to town for NRMLA’s annual convention later this year…

The story is similarly stark (and no that’s not an Iron Man 2 reference, even though we are excited to see the movie next week) among lenders, as you might expect given the broad industry decline in recent months. On a year to date basis, only 2 of the top 10 lenders show positive volume growth:

• Urban Financial (recently purchased by Knight Capital) saw retail volume grow 48%, perhaps benefiting from relative strength in the Midwest where they’re based, despite their top volume state continuing to be Florida
• Genworth is seeing positive trends in their retail business, up 41% vs. 2009

The full report is available by clicking the image below.  Enjoy!

Here’s an update on our running application trend chart to illustrate what we’re looking at for 2010 omens.  The only thing that could be more disturbing than the slow recovery we saw in November and December is the double dip back down in January.  Apps were all the way back down to 5,805, below even October’s reading of 5,892.

If you’re looking for good news, we are finally hearing optimistic anecdotes from many of our clients about activity levels picking back up in February.  Of course, we’re also hearing a lot of examples of small reverse brokers who are opting out of the new licensing tests and either fleeing the industry entirely as the volume declines or joining up with larger firms where licensing (and corporate profitability) is someone else’s problem.  And of course, there are plenty of federal bank subsidiaries out there that are marketing their exclusion from individual loan officer licensing pretty heavily these days…

Connecting the dots, we can see from this month’s report that the number of lenders dropped 11% in December.  We suspect that many of those that are jumping out of the business are likely in areas like San Bernardino/Riverside/Fresno in California, Las Vegas, NV and Miami, FL where penetration is highest and home price declines have been most severe, as areas with these characteristics continue to see steep declines in loan volumes.

Take a look at the flip side of this trend though, and we can see that many of the higher value urban areas are seeing large increases in activity as the loan limit increases continue to work their way through.  Lenders that want to survive are learning to adapt to where the business is today, getting much more local than ever before.

Of course, if you’ve been reading this report for a while you already know all this.  For our new readers, you can find these facts on page 2 of the report below and plenty more food for thought as well.

Click the image below for this month’s Industry Trends report.