September ended with a bit of a whimper, just 5,966 HECM endorsements, down -10.2% from August. For the government fiscal year, we ended at 79,096 units, down -31.1% from FY2009.
Given the changes rolling out today with the new fiscal year for HUD/HECM, we thought we’d share our volume forecast for the next 12 months (fiscal year 2011) in place of our usual drill-down into lenders and metros. If you want to skip directly to the report, feel free to click on the image at the bottom for the full report.
- Overall reverse mortgage market volume forecast for 2011 is 95,000-100,000 units
- HUD changes effective 10/4/2010 slight net positive for customer principal limits and industry volumes
- HECM Saver a major volume contributor in 2011, estimated at 20% of all HECMs within one year
- HECM Purchase grows slowly, dependent on home price appreciation and expectations
The changes to HECM effective 10/4/10 in our opinion broaden the potential opportunity for reverse mortgage lenders in the US. While a principal limit reduction was well-telegraphed by HUD several months in advance of the recent mortgagee letter announcing it, their surprise reduction in the interest rate floor applicable to loan expected interest rate calculations results in a net increase in available cash for most borrowers at current interest rates, particularly the younger borrowers that have become more prevalent in the past 18-24 months.
Given that, the current volume run rate of approximately 74K units per year (Q3-2010) would be reasonable as a base foundation for 2011 volume expectations, with a further 3,000 units likely from population growth (assuming no additional adoption rate increases). In the longer term, we are bullish on both HECM Purchase (available since October 2009) and HECM Saver as a newly announced program effective October 2010, although we believe the near term for Purchase continues to be under-performance against an attractive niche while overall home sale transactions remain depressed. We have seen relatively limited adoption for HECM Purchase (approximately 1,000 loans in 2009 calendar year with flat to slightly down volume thus far in 2010), and can expect similar challenges for the industry in growing HECM Saver volume given comparable distribution channel challenges.
HECM Purchase requires substantial investment and contact with real estate agent and builder business channels that have not historically participated in the reverse mortgage market, and thus lenders had not previously focused on these segments. HECM Saver will likely require a comparable investment in education and business relationships with financial advisory professionals that are much more likely to be involved with the target customer for Saver, namely, a client with somewhat higher net worth and motivated less by an immediate cash emergency than a lifestyle financial planning discussion of flexibility and cash liquidity tools.
Further volume growth for HECM Purchase may be linked more strongly to home price appreciation and expectations than other niches of the reverse mortgage business, even beyond the distribution channel challenges for lenders. HECM Saver, on the other hand, is likely to be almost entirely dependent on lenders’ distribution channel penetration success and customer product acceptance. Given that customers have consistently cited upfront product costs as the biggest deterrent to a reverse mortgage transaction (2006 AARP study) and many lenders have in place multi-year efforts to reach financial advisory professionals, we see the challenges as less severe relative to HECM Purchase.
We conclude that HECM Saver is likely to have a much faster start than HECM Purchase, contributing as much as 20% of the overall reverse mortgage market in 2011 and showing potential to produce greater unit volume than HECM Standard/Traditional in five years. Our overall reverse mortgage market volume forecast for 2011 is 95,000-100,000 units.
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