Reverse Mortgage Application Trends – April 2010

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.