Lenders Seek Niche in Reverse Mortgage for Empty Nesters
Lenders are gearing up to sell a type of reverse mortgage typically used by seniors looking to downsize their homes, as Texas, a key market, opens to the niche-within-a-niche product.
This version of the government-insured Home Equity Conversion Mortgage, known as the HECM for purchase, gives seniors flexibility in buying a home. The "loan" allows a borrower to tap the equity in an existing home to buy a new one, frequently because the borrower has an empty nest and needs less space. This setup means a senior can pay for the purchase before selling the old home and without taking on more debt payments.
Texas recently became the last state in the union to approve HECM for purchase loans, says Joe Morris, senior vice president in the reverse mortgage division at Open Mortgage in Austin.
HECMs have never grown very fast. Still, adding a Realtor-friendly loan in one of the largest HECM markets should help lenders seeking additional sources of purchase volume to make up for dwindling refinancing business.
"Texas is the third largest reverse mortgage state, and that's without HECM for purchase," says Mike Suits, manager of the new reverse mortgage division at 360 Mortgage Group, also based in Austin. Adding the HECM-for-purchase product will increase reverse mortgage volume in the state by up to 5%, he says.
"That is where reverse mortgage is going to see a lot of growth over the next two years," Suits says. "A lot of lenders are going out and setting up HECM for purchase teams."
California has dominated HECM for purchase lending recently, according to fiscal year 2013 geographic portfolio distribution data from the Department of Housing and Urban Development and the National Reverse Mortgage Lenders Association.
However, Texas could also be a promising market has it has numbered among the top three states overall for HECMs in the last 12 months, according to Suits. Also it has been the second largest state market for traditional HECMs, according to HUD/NRMLA.
Reverse mortgages in general have a lot of room to grow. They have never grown very fast, but their reputation is benefiting from broader government reform aimed at weeding out concerns that led to inordinate HECM losses.
As heavy reverse mortgage losses and evidence of some HECM abuses show, underwriting for the products across the board needed to be improved. It has been—in a way that has raised qualification hurdles for borrowers.
Relatively few borrowers get traditional "forward" mortgages after age 62 due the loan payment qualifications, which those living on a fixed income in this demographic might find difficult to meet.
Reverse mortgages that allow homeowners to tap home equity without making payments lower that hurdle, although they have had some qualifying criteria that traditional "forward" mortgages lack.
"On new builds, the new build will have to be completed and the certificate of occupancy issued prior to application," Suits says, citing one example.
And while HECM for purchase loans lack the monthly payment qualifications forward loans have, borrowers still have to meet income qualifications to make sure they can pay for living expenses and property maintenance costs.
Generally, borrowers do sell the old home, as the new loan requires owner-occupancy. However, if borrowers can show the financial wherewithal to support the costs of both properties, they theoretically could retain ownership of both.
HECMs need to be made very slowly and cautiously given the need to ensure that the senior borrowers truly understand them, even though it's tempting to look at the product as a vehicle for growth given the target population's demographics. Seniors' property values have been climbing and there is a lot of equity to tap in the market, says Roger Beane, CEO of the Orange, Calif., appraisal and asset management firm LRES Corp., which works with reverse mortgages in both lines of business.
"But I think that the origination divisions of these organizations need to make sure that their heart's in the right place," he says.
Some lenders believe they can push borrowers into HECMs quickly, using traditional sales techniques. But such an approach just doesn’t work well, Suits agrees.
"It's not an aggressive sell. It's an education process, and a lot of people just don't get it," says Suits. Both his company and Morris' make most of their money through other lending.
While HECM for purchase may not directly boost lenders’ volumes much, it can help build lenders' relationships with real estate agents who have increasingly been important referral sources as refinancing volumes have dwindled.
"I wouldn't say it's the most promising product as far as numbers are concerned, but I think each year the HECM for purchase gathers momentum as more people understand it and as more Realtors understand it," Morris says.