October gave us reason to doubt that expectation, with the first half of Wells volume decline coinciding with a larger drop in wholesale/TPO volume than retail/direct. November brought us full circle as the second half of Wells volume decline saw wholesale/TPO rise to the challenge of replacing the former market leader.

Total endorsements were virtually unchanged in November, but wholesale/TPO grew 22.7% while Retail/direct dropped -11.8%. This stunning disparity brought wholesale/TPO share of the total market to the highest level in over a year at 42.5%.

From a lender perspective, there was plenty to cheer about on the leaderboard, as all but 2 of the 8 largest active lenders (ex Wells & BofA) showed gains in the month, with One Reverse and Security One being the only decliners. Metlife and Genworth both saw volume rise by triple digits.

November also saw big volume increases for some lenders outside the top 10, as Money House, iReverse and Cherry Creek all saw increases over 100% from October. Be sure to check page 4 to see where your company placed among the top 100 originators in November!

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Now that we have details available to report, it’s perhaps even more interesting that the broker/wholesale channel still declined faster than retail/direct, even though Wells Fargo’s decline was almost entirely felt on the retail side (Wells was 93% retail). Wholesale declined -18.3% vs. -16.1% for Retail, marking the fifth consecutive month of under-performance.

It’s logical then, to assume that other retail lenders did better in October than brokers in aggregate, and page 4 of our report makes it clear how each of the top 100 fared (although the list doesn’t distinguish retail lenders vs. brokers). A few notables:

• American Advisors Group (#4) was up 49.3% in the month (and 132.5% year to date) – Retail
• New Day Financial (#11) was up 34% – Retail
• Great Oak Lending (#17) was up 34.8% – Retail
• Open Mortgage (#23) was up 25% – Broker

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July summary

July endorsements showed a continued trend of better results for retail/direct lenders compared to wholesale/brokered volumes, with Retail declining -5.2% while Wholesale shrank -7.0%. We also saw the gap between the two channels remain fairly small, as the past four months (April to present) have shown Wholesale consistently within 3% of overall industry growth rate each month.  In the 8 months prior to April, we only saw that gap under 3% once and one month was as high as 13.6%.

Bottom line, the industry has basically finished the transition to the TPO world and further changes in volume will be related to other factors like lender exits and other events more than the past regulatory changes.

Report Updates – Rankings Description

For long time readers of our reports, you’ll notice the biggest change in our reports is the addition of page 4. We previously provided rankings of top HECM origination companies through our Retail Leaders report, but as FHA is no longer approving brokers, two things happened on that report: companies that are not FHA approved can no longer see their volume ranked against their peers there, and wholesalers can no longer see which of their clients and potential clients are originating HECM in volume.

That change has made the rankings on page 3 of this report which display lender volume by business channel (retail vs. broker) the single best source for ranking origination companies. But it also means the longest running report in our industry (FHA’s HECM MIC report that appears faithfully on the 1st of each month) no longer serves the purpose of broker companies.

We invite you to review the new page 4 on our HECM Originators report which replaces the basic functionality of the old FHA report by showing the single month volume rankings of the top 100 origination companies, but we also added to it by showing calendar year to date totals and rankings for each company along with monthly and YTD growth rates.

Housekeeping Notes:

• The Retail Leaders report has been re-named “HECM Lenders” to identify it as a ranking of FHA approved lenders closing HECM loans and includes both retail and TPO business for these lenders. The report will continue to be published during the first week of each month.
• Industry Trends has been re-named “HECM Trends” in keeping with the above changes. First report will be issued week of 9/19 and during the third week of each month thereafter.

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While the rest of the world is deciding just how much the rating agencies matter 3 years after the 2008 debacle, volatility in the reverse mortgage world is looking relatively calm by comparison.

Retail endorsements were up 13.8% on the month, while Wholesale/brokers endorsed 11.7% more loans. This marks three consecutive months where the performance gap between channels has been relatively low, with both channels moving up/down together after a much bigger performance gap in the wake of  regulatory changes at FHA and the federal/state levels. The trend may not continue given how much change we’ve seen lately, but it looks reasonable to assume for now that we’ve seen the FHA approval and loan officer compensation changes fully baked into the endorsement numbers by channel.

At this point it looks as though we’ve settled into a new normal of 60% Retail (defined as the same company taking application and closing loan) and 40% Wholesale. That compares to an average of 47% in 2009, with most months in a range from 41-50% (two months over 50%). The range in 2010 was considerably wider around a higher average of 54%, encompassing everything from 42% in January to 66% in December. That last month looks like an outlier right now, as the 2011 average thus far is 61% with a relatively tight range of 59-63%.

Housekeeping Notes:

• This report will be known as “HECM Originators” starting next month to identify it as the best source of rankings of all companies originating HECM loans, regardless of FHA approval status
• As of next month the Retail Leaders report will be re-named “HECM Lenders” to better identify it as the ranking of HECM Lenders closing loans under their own FHA approval. Lender volume presented on this report includes third party originations (TPO) of any company not FHA approved under their approved sponsor lender.
• Industry Trends will be re-named “HECM Trends” in keeping with the above changes

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HECM endorsements totaled 5,511 in July, down 5.9% from June and -6.6% from July 2010. And while the YTD total is still showing growth, many signs are pointing to a weak second half of the year.

First and foremost, the recent exits of Bank of America,Financial Freedom and Wells Fargo will all be impacting the last six months of this year (at minimum), although Wells Fargo endorsements are likely to continue until at least September or October given closing and insuring timelines.

But July also marked the first time in 4 months that we declined on a year over year basis, as shown in the chart below.

Given the long road to recovery from Oct 2009 principal limit reductions, it’s distressing to see how short and fragile the recovery back to growth mode was. The application declines (compared to last year) point to a continued downtrend for the immediate future, and we fully expect the absence of Wells Fargo in July applications and beyond to extend the trend.

The second graph compares the same year over year growth trends, but with endorsements lagged 4 months as per our usual application-funding-endorsement timeline assumption. If we assume a significantly negative reading in July applications, the industry’s near term future is uncomfortably clear.

All this adds up to a third consecutive calendar year decline as we’ve stated two weeks ago, as the four months of growth simply weren’t strong enough to offset what is likely to be eight months of decline for 2011 (Jan-Feb, Jul-Dec).

Housekeeping Notes:

• As of next month this report will be re-named “HECM Lenders” to better identify it as the ranking of HECM Lenders closing loans under their own FHA approval. Lender volume presented on this report includes third party originations (TPO) of any company not FHA approved under their approved sponsor lender.
• The Wholesale Leaders report will appear for the last time next week, and be known thereafter as “HECM Originators” to identify it as the best source of rankings of all companies originating HECM loans, regardless of FHA approval status
• Industry Trends will be re-named “HECM Trends” in keeping with the above changes

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

The chart above shows applications through May which appear to have held mostly steady since BofA stopped taking applications in February. Since then, applications were up 8.5% in March, and down -9.5% and -8.3% in April-May.

This second chart shows applications per business day, which make a clearer statement of decline once we recognize that March and May had 3 and 2 more business days than February, respectively. Of course, there are always many other variables changing in our industry at the same time that make it tough for precise comparisons, but the broad trend seems pretty clear. With BofA comprising 10-11% of retail market share in endorsements before their exit, a case could be made that the industry has lost more than half of that volume since their exit. Keep in mind that remaining lenders have still gained share of the industry since

Our last chart puts the BofA exit in context with Wells and Financial Freedom. We expect that June application numbers will show a boost given that Wells Fargo allowed loan officers to close out their pipelines and take applications through month end. Once that’s behind us, these three will collectively represent 30-35% of recent retail market share and whatever figure you use for the ultimate net loss to the industry after other lenders step in, that’s a hefty headwind for applications in the last six months of the year. Endorsements won’t really show the impact of Wells Fargo’s exit until Q4, but anyway you slice it 2011 looks to be an unlucky third year in a row of declines in HECM endorsements.

Housekeeping: Since the recent change in licensing requirements for HECM lenders, this report is now the most accurate way to understand retail/broker endorsement activity by originating company. Our Retail Leaders report includes TPO business for wholesale lenders as part of their retail volume, whereas it is correctly attributed to wholesale channel on this report. As part of this change, we will be renaming these two reports and making other slight modifications in the near future. Please let us know if you have a suggestion for new names for these reports.

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Last month we showed a chart that illustrated the impressive growth of TPO loans and the clear lead of a few sponsors in this channel. The updated chart shows continued growth as TPO loans made up 30% of all wholesale loans in April, and also the more competitive nature of the business as many sponsors raced to catch up.

Metlife ran out to a big lead in March but grew slower in April, while Urban, Genworth, Generation, BofA and Security One all grew significantly to more than double TPO business from 360 to 735 loans. We’re hoping in the future to analyze just how much TPO business is coming from originators new to the industry, but for now it’s clear that the sponsor side is becoming a much more competitive market.

This month’s report also raises a point in the discussion about industry consolidation, as the table on top of page 2 illustrates that some of the largest lenders declined much faster than the industry in April. We don’t put too much weight in any one month’s results, but it’s startling to see that 88% of the industry’s decline this month came from just 2 lenders: Wells Fargo and Metlife.

The 2 lenders were 44% of the industry in March, so their decline is far larger than their market share. The smallest originators didn’t catch a break though: top 10 lenders Urban and One Reverse both saw 12 month highs and Security One came in just one loan shy of their recent peak.

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The potential offset to that trend is just starting to show up, as TPO originations by non-FHA approved originators (working through an approved sponsor) grew dramatically in March. The chart below shows this activity by sponsor for the first three months of 2011:

While this activity wasn’t enough to keep broker/wholesale endorsements from falling -0.7% in March to 2,785, much less keep up with direct/retail endorsements that grew 10.8%, the sheer growth from February is astounding. At the most pessimistic it should ease the declines in the broker/wholesale channel, and an optimist might hope for a rebound given the potential of credit unions and community banks.

From a lender perspective, we saw 4 of the top 10 lenders hit 12 month highs in the month as the industry set its own high water mark for the same period.

• Wells Fargo captured 31.9% of all loans through both retail and wholesale channels, well above their 12 month share average of 26.4%
• Generation was whisper close to breaking double digits in market share at 9.7%
• One Reverse continues to grow their direct lending business, up 22.2% in the past 12 months and showing a 5% market share
• Sun West is on the comeback trail and back in the top 10 this month for the first time since November

One housekeeping note this month: As we noted in our Retail Leaders newsletter last week, we are not yet able to track non-FHA approved TPO originators individually, so you’ll notice a row in our lender listing of “Unknown”. That’s a summary line for all loans in this category for now, until we can track these individually (we’re expecting a few months).

And if you’re in DC for NRMLA’s Policy Conference, we’ll see you at the cocktail reception!

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• 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.

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• Wells Fargo is still the top overall lender and top retail lender, with a combined market share of 24% including both retail and wholesale channels
• Metlife is the top wholesale lender, with 20.9% of all wholesale volume
• 1st AAA Reverse Mortgage is the top broker, averaging almost 100 loans per month

Congratulations to all three companies that led the way in a tough year for the industry.

The report this month reminds me of a funny question someone once asked me. If you have one foot in the freezer and one foot in the oven, would your head feel average?

As lame as the joke might be, it highlights the fact that averages can mask a lot of variation under the surface.  That is certainly the case in December, as we see that a flat volume month for the industry hid continued growth for Retail (+8.5%) and a big decline for brokers/wholesale (-13.3%).

The most commonly cited reason in our conversations with clients is that new regulations are making it harder to compete as a broker without closing your own loans. If that’s what is behind the recent shift toward retail volume from broker/wholesale, it suggests that many brokers are either aligning with larger firms or joining forces with others in the same position to close their own loans.

Either way, we’d expect to see the number of active lenders continue to decline (or at least grow very slowly) even as volume increases, leading to a higher average loans per lender metric. And while we’ll be the first to agree that this average doesn’t tell an individual company’s story, it does tell us a lot about the general state of the industry.

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