In hindsight, the easiest piece of forecasting all year might have been to predict that we wouldn’t get a chance to publish our follow up piece on forecasting until December given the recent NRMLA conference at the end of November.  Better late than never as the saying goes, and it couldn’t be more true.

A New ‘Normal’?

Let’s talk about applications for a minute.  October HECM applications were at 5,892 (not a typo), which is by far the lowest in almost three years we’ve been tracking them and probably much further back than that.  Most of this is a technical issue that you’ve probably already thought about – October applications got sucked forward into September by the quick implementation of the principal limit changes.  If we average the two months together we come to 12,474 – just 11% above the average in the prior three months and likely to end up somewhere around flat if we assume some additional bleed off in November and/or December.

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The key question here is whether the November application numbers will return to the typical average we saw before September or if we’ll see a new, lower ‘normal’ established if the principal limit reductions meaningfully impact the HECM’s effectiveness for senior customers.

For those of you that noticed the October 2007 jump in apps, we’d love to hear your thoughts on what that was.  Maybe we’re just getting old but we can’t remember if that was related to LIBOR product roll-outs, the exit of proprietary products, or some other factor that’s escaping us at the moment.

So how does this affect 2010 expectations?

Other Factors In Play

From an endorsement perspective it’s likely that we’ll have a strong start to 2010 simple because of the application spike at the end of September ahead of principal limit reductions by HUD.  But beyond that we need to see a pickup in purchase and perhaps coops to replace the inevitable drop in refinance activity this year:

• HECM Purchase: We’ve been saying for some time now that the purchase market has significant potential, with our conservative numbers supporting at least 10,000 loans per year once the industry gets up to speed in the realtor/builder distribution channels.  Last year’s total (FY09 total of 560 HECM Purchase endorsements) suggests we have a ways to go as an industry in reaching that potential, and even recent application figures of 130-140 are not showing significant growth yet.
• Refis: Refi volume in 2009 is likely to top 9,000 loans and it seems very unlikely that we’ll see anything like that level of volume in 2010 barring some dramatic reversals in product margins.
• Coops: This one is somewhat of a mystery given the lack of guidance by HUD on the topic since legislation was passed last year.  Although it’s hard to put solid numbers around this, looking at the higher volumes this year in typical coop locations like New York City and Orange County, CA seems to suggest that this could perhaps add as much as a few thousand units annually, disproportionately benefiting lenders in just a few locations.

Bottom Line

Rather than ending this exercise with an answer, we’d suggest you look at your November applications compared to your August applications.  If you saw a decline it probably points toward a negative growth year in 2010, and if you saw no change or an increase we would suggest that means you’re going to see growth in 2010 given the other factors identified above seem likely to be a net positive.  Meanwhile, we’ll do the same for the industry overall once we have application numbers for November, probably closer to the end of this month.

We have a fighting chance, albeit a slim one, at preserving our winning streak this year for endorsement totals given the volume push generated by the September application rush.  Where we go from here depends a lot on how seniors perceive the reduced principal limit HECM and how successful our industry is in capturing business from new distribution channels like realtors and builders.