Feb. 9: A dive into news about lending to both ends of the age curve

I’m getting old. Most of us are. (Although some attendees at mortgage conferences don’t seem to be aging much at all, for whatever reason.) I was recently listening to a speech on demographics from the back row and the speaker kept talking about Asian Place. I thought to myself, “Asian Place? I believed I was at the wrong event until it dawned on me that the speaker was discussing “age in place.” Growing older is something we should all appreciate, and never take for granted, and it seems that the majority of older adults prefer to age in place. (I’ll save my story about “clown storage” vs. “cloud storage” for another time.)

In general there continues to be, and should be, attention given by lenders to diversity. (See joke.) Companies in the residential business want their lending practices, and employees, to be reflective of the general population. This isn’t confined to race, religion, or sex, of course, but also includes age. Are your 77-year-old LOs in a neighborhood filled with 20-somethings? Are your recent high school graduates in the call center calling retirement communities looking for leads?

Is it a surprise to anyone that of the Top 20 affordable retirement communities, 9 are in Florida, aka “God’s Waiting Room”?

The volume in the “forward” mortgage market continues to shrink, and lenders are looking at other options. Looking at the role of reverse mortgages under the Home Equity Conversion Mortgage (HECM) program (sponsored by the federal government), it would appear that reverse mortgages are underutilized by seniors today and can help provide added retirement funding security to Americans when used appropriately. According to research presented at the symposium by Dr. Wade Pfau and Dr. Barry Sacks, reverse mortgages can be used in a number of ways to support a more secure retirement by allowing the homeowner to age in place. “A reverse mortgage can extend the longevity of a retirement portfolio when utilized to pay off a traditional mortgage. By doing this, the homeowner gets the flexibility to make mortgage payments when their cash flow and portfolio supports the payment throughout retirement, as opposed to a traditional mortgage which requires monthly payments or else the homeowner risks default.”

“The added cash flow helped reduce the percentage that an individual needed to take from their investments during down market years, allowing the portfolio to last longer in retirement. These both appear to be valuable options with many retirees voicing concern that longevity might cause them to outlive their money in retirement.

Other researchers at the event called for more regulations and private market product developments, like in the form of consumer protections to help borrowers throughout the life of the reverse mortgage loan. One takeaway from the event was “how little coordination is occurring between home equity and retirement security from current retirees. Laurie Goodman, PhD, Founder and Co-Director of the Housing Finance Policy Center at The Urban Institute presented a study showing that less than one percent of eligible homeowners utilize a reverse mortgage today. This weak uptake is despite research demonstrating that the number of people that would benefit from the product could be ten times higher.” Recent changes to the HECM program added additional consumer protections aimed at keeping homeowners in the home for their life. And notably, changes in the HECM fee structure have been made to improve the sustainability of the program.

Reverse mortgages are a form of borrowing, with a cost – but there is a benefit, which is an insurance component that helps the government provide a non-recourse guarantee, meaning that the homeowner is not on the hook for a HECM debt that exceeds their home value at the end of the loan. Even though this is a government regulated and backed product, homeowners still need to shop around and get advice when considering using the product. While reverse mortgages have been subject to misuse and misconceptions, far too many people today turn a blind eye towards the product. The program that exists today is less expensive and offers more consumer protections than it did in the past. Reverse mortgages deserve a second look because, when used appropriately, a reverse mortgage can help support a more financially secure retirement.

Peter Mazonas is a CPA who created, managed and was associated with Transamerica HomeFirst from 1989 through 2006, and with his team was involved in the early design of HECM products. He is currently the founder and CEO of NatEquity, an alternative senior home equity access product company. This week I received a note observing, “Recent articles suggest that for the government Home Equity Conversion Reverse Mortgages (HECM) to remain viable there must be substitute government sponsored entities (GSEs) or private mortgage guarantors. This speculation is particularly relevant due to continuing predictions in the press that the Federal Housing Finance Authority (FHFA) will soon push for privatizing Fannie Mae and Freddie Mac.

“Should that happen, HECM will be a casualty of the free markets. Pro-HECM articles ignore HECM’s 25-year history of failure and don’t acknowledge that private programs will not step in to directly compete. HECM is currently costing the FHA Mutual Mortgage Insurance (MMI) fund $4 billion annually and has a $14 billion current accrued future loss. Social pressure has for too long allowed the HECM program to continue at taxpayer expense without promoting private competition. Since HECM ceased to be a pilot program and became commercial in 1993, the program has never been solvent and relies upon the MMI fund at the expense of conventional GSE mortgage products and thus U.S. taxpayers.

“Private reverse mortgage-type products cannot and should not try to compete with HECM for an abundance of reasons. First, private real estate lenders and investment companies do not intentionally introduce products to lose money. Private market cost of funds exceeds those backed by the Government’s balance sheet. Costly components in the HECM origination process, like title insurance and escrow fees, need to reflect generally accepted commercial standards. HECM’s e-title insurance is a low-cost substitute that relies upon the government guaranty as a fallback.

“HECM’s Reverse Mortgage Backed Securities (RMBS) will be impossible to replicate because private products will not have the favorable spread between the higher interest rate charged borrowers and the much lower rate acceptable to investors in the government guaranteed RMBSs. Private products will have to be more creative. As reflected in reduced contract volumes because of recent HECM program changes, questionable applicants for private reverse mortgages will also not meet credit quality standards.

“Annual hands-on servicing costs for private reverse mortgages properties are far in excess of historic HECM servicing costs. Lax HECM underwriting and servicing must now comply with new FHA rules prohibiting HECM servicers the freedom to put HECM contracts back to Treasury until contract irregularities are corrected.

“And the government guaranty provides HECM contracts an exemption to be valued at cost under both commercial GAAP and government GAAP mark-to-fair value rules. Without that guaranty, contracts and portfolios must apply mark-to-fair-value GAAP rules. Senior home equity access products will be Level-3 longevity dependent assets. This requires a repeatable and statistically acceptable methodology to predict the NPV of future portfolio cash flows or alternatively suffer steep value discounts.

“For-profit senior equity access products need to look beyond the bounds of traditional compound interest mortgages, whether to replace HECM or for the jumbo home value markets. Whatever the pricing strategy, these products will not be able to support every market nationwide; nor will private senior home equity access products have the same pricing. These products will cost more and provide smaller monthly payments or lump sum advances, but presumedly be commercially viable.” Thank you, Peter!

At this point many “forward” lenders have reverse mortgage personnel or divisions. For example, this week I spent some time with the crew at Gershman Mortgage, which has a reverse mortgage offering by one of the few husband/wife teams in the biz, Lisa and Bill Nass. (Both are Certified Reverse Mortgage Professionals.)

Plaza Mortgage, for example suggests users, “Visit the dedicated Reverse Lending section of the Plaza website to view the Reverse Lending User Guide, market news, mortgage turn times, marketing materials and more. (Username: plaza, password: reverse.)

If you don’t mind wading through ads, here’s a reverse mortgage calculator that was recently put in front of consumers.

At the other end of the age spectrum…

Will potential borrowers in their 20s and 30s abandon the beloved cities to run away to the suburbs and have kids? Who knows — it’s one of the most divisive questions for urban economists. What we do know, thanks to a new study, is that the odds of someone in that age group buying their first home near a city center is 21 percent higher than those of the previous generation. One particularly striking finding was the impact that car ownership had on where a first home was purchased. Owning one car meant the odds of buying a first home in a city center fell by 21 percent. Owning two made it drop 41 percent. On one hand that makes sense: why own a device that aids in commuting if you live where you need to commute to? On the other hand, two cars? In this economy?

Where are buyers in their 20s and 30s (aka millennials, although not a favored term) buying homes? SmartAsset is out with its 2019 look.

The New Urban Institute Report on Barriers to Homeownership is a good resource. It includes updated data on 31 of the largest US markets that show about 21 million buyers under 40 are mortgage-ready today. In addition, most of the mortgage-ready millennials in the US earn enough to afford a typical house in their city, although this varies slightly by race and ethnicity. The report also analyzes 2017 purchase loan data and how many were eligible for down payment help.

Millennial homeownership rates are still poor, due primarily to student loan debt and tepid wages. If millennial homeownership matched previous generations, there would be 3.4 million more homeowners today, per the Urban Institute. The longer millennials delay homeownership, the more baby boomers looking to downsize will be pressured into lowering their home prices when they enter retirement, potentially causing a mass exodus on the market in the future.

Every three years, the Federal Reserve conducts their Survey of Consumer Finances (SCF) which collects information about family incomes, net worth, balance sheet components and other financial outcomes such as homeownership. The latest report showed a decline in homeownership to 63.7 percent of all U.S. family from 65.2 percent in the previous survey from a peak of 69.1 percent in the 2004 survey. Not surprisingly, there are large differences in the homeownership rate across income group with the top 10 having a 91.4 percent homeownership rate compared to 46.9 percent for the bottom 50 percent. When observed by age groups, each group with the exception of those 75 years and older saw a decline in the homeownership rate from 2013 to 2016 signaling that it is not just Millennials who are leading to the declines. It is important to note that since bottoming out in 2016, the homeownership rate has been increasing with the most recent data putting it at 64.2 percent.

People born between 1982 and 2000, aka millennials, closed more purchase loans in December 2018 compared to the last two years, according to the latest Ellie Mae Millennial Tracker. Share of purchases accounted for 88 percent of all loans closed by this generation in December, rising 4 percent from the same month in 2017, despite interest rates for all 30-year loans reaching 5.12 percent on average – the highest percentage since Ellie Mae began tracking this data in 2016. The average FICO score for Millennial borrowers on all closed loans dropped to 721, down slightly from 722 in December 2017. For all closed loans in December 2018, 52 percent of Millennial borrowers were married while 48 percent were single. These figures were flat from December 2017.

An Englishman, a Scotsman, an Irishman, a Welshman, a Latvian, a Turk, a German, an Indian, several Americans (including a Hawaiian and an Alaskan), an Argentinean, a Dane, an Australian, a Slovak, an Egyptian, a Japanese, a Moroccan, a Frenchman, a New Zealander, a Spaniard, a Russian, a Guatemalan, a Colombian, a Pakistani, a Malaysian, a Croatian, a Uzbek, a Cypriot, a Pole, a Lithuanian, a Chinese, a Sri Lankan, a Lebanese, a Cayman Islander, a Ugandan, a Vietnamese, a Korean, a Uruguayan, a Czech, an Icelander, a Mexican, a Finn, a Honduran, a Panamanian, an Andorran, an Israeli, a Venezuelan, an Iranian, a Fijian, a Peruvian, an Estonian, a Syrian, a Brazilian, a Portuguese, a Liechtensteiner, a Mongolian, a Hungarian, a Canadian, a Moldovan, a Haitian, a Norfolk Islander, a Macedonian, a Bolivian, a Cook Islander, a Tajikistani, a Samoan, an Armenian, an Aruban, an Albanian, a Greenlander, a Micronesian, a Virgin Islander, a Georgian, a Bahaman, a Belarusian, a Cuban, a Tongan, a Cambodian, a Canadian, a Qatari, an Azerbaijani, a Romanian, a Chilean, a Jamaican, a Filipino, a Ukrainian, a Dutchman, a Ecuadorian, a Costa Rican, a Swede, a Bulgarian, a Serb, a Swiss, a Greek, a Belgian, a Singaporean, an Italian, a Norwegian and 2 Africans walk into a fine restaurant.

“I’m sorry” says the maître d’, after scrutinizing the group. “But you can’t come in here without a Thai”.

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Rob Chrisman