Volume vs. Values In New Loan Limit Era

If you’re wondering exactly how the recently enacted legislation has affected the reverse industry, you’re not alone. More specifically, we’ve gotten a couple questions about how loan limits have affected average loan sizes and volumes in different markets around the country.

Last month, we talked a lot about loan unit volume and the large numbers of HECMs being refinanced.  So let’s focus this month on how the loan sizes are being affected, in relation to volume. To do this effectively, we’ve split up the universe of loans into refis vs. new loans, since they can be dramatically different. We’ll look at the top three volume states, which conveniently enough, also offer a nice range of home values as well.

California

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Aside from the volume being dramatically different for refinance vs. original HECM transactions, a couple of very interesting things stand out here:

  • Refinance transaction values have stayed consistently higher than new HECMs, with home price declines showing up not in transaction values, but in volumes only
  • Loan limit increases have brought refinance volumes back up considerably, but still below the peak volumes in 2006 and 2007
  • While non-refinance transactions have experienced significant declines in both volume and values mirroring home prices, loan limit increases have led to a recent resurgence in values but not yet in volumes

One reasonable conclusion about California might be that aside from the current refinance surge, the reverse mortgage business won’t come back strong in the state until home prices recover or at least stop their dramatic slide.

Florida

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Florida presents a different story despite its similar HECM volumes and housing crash poster state status:

  • Unlike California, Florida’s non-refinance HECM volumes increased while values declined as home prices crashed, although volume in January was at its lowest level since December 2006
  • Florida is seeing a much lower refi volume surge, perhaps because so many of the loans here are so much newer and haven’t seen dramatic price appreciation since the existing HECM loan
  • Florida’s loan originators are also benefitting from the higher loan limits much more than California, given that a much higher percentage of California loans are already beyond the origination fee limits (only 12% of FL HECMs at or above $400K MCA in January, vs. 59% in CA)

At least so far, it appears that Florida’s reverse mortgage business is dramatically healthier than California, although the first cracks in the state’s impressive run are starting to appear.

Texas

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As you might expect, Texas has a different story entirely from the first two states, but in a few surprising ways

  • New HECM transactions in Texas have seen a 25% increase in average transaction value under the new loan limits, significantly greater than the approximate 15% increase in CA and FL. Better yet, originators in the state are benefitting dramatically from the new origination fee, with a higher minimum fee and virtually all of the higher loan values still low enough to fall under the cap and earn additional origination revenues.
  • Texas is experiencing its first real HECM refinance wave and generated more refinance volume than Florida in January
  • Both volume and value trends have gone slowly but steadily higher for new HECMs in Texas and while it’s not bigger than other states (despite the state motto), it’s certainly positive

All things considered, the reverse mortgage business in Texas looks healthier than either California or Florida, but the lower transaction values are likely to challenge new entrants to the state from higher value areas.

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