Twenty-five years ago this July, HUD launched the Home Equity Conversion Mortgage Demonstration, creating an invaluable tool designed to help senior homeowners fund their retirement years.
Since that time, the industry has seen volume rise and fall, and lenders come and go as it struggled to find its place in the mortgage market. Even today, the program continues to be modified under new regulations as HUD, convinced of the HECM’s value, seeks to ensure its long-term sustainability.
With so much change in the market as of late, professionals in the space spend a great deal of time discussing and debating the future of the reverse mortgage program. While it’s easy to get wrapped up in the drama of the moment, it might be worthwhile, on this notable anniversary, to take a step back to reflect on the past. Maybe, in order to assess what direction the program will take, it would be insightful to look at how far it has come.
Lotto Winners In July 1989, HUD launched a small pilot program to test the concept of a loan that would allow seniors to convert their home equity into cash. According to the agency, the goal was to assist elderly homeowners who were “house-rich but cash-poor,” a market it said comprised more than 3.5 million seniors with incomes below $15,000 and homes valued at more than $50,000.
To start, Congress authorized HUD to insure 2,500 HECM loans in two years, and the agency notified FHA-approved lenders across the country of a lottery that would select 50 initial participants. Each lender selected would be allowed to originate 50 reverse mortgages.
Jeff Taylor was president of Wendover Funding at the time, running a large forward mortgage bank and servicing operation based in North Carolina. He remembers the lending industry’s response to HUD’s initiative. “Lenders who put their name in were selected by lottery. Some were shocked that they got it, some were excited that they got it, some simply said, ‘I’m not sure I want to be in this.’”
Taylor says Wendover saw an opportunity to step in. “We went to the first meeting, which was in ’89 I think, and I stood up and said Wendover Funding would be in a position to offer subservicing for the initial 50 lenders,” he says. “So we signed up 95 percent of the lenders… We were up and running in about six weeks. Candidly, we started servicing them on an Excel spreadsheet.”
A Rocky Start Although the going was slow at first, the HECM’s potential was obvious from the beginning. Just one year after launching the demonstration, Congress agreed to extend it through 1995, increasing the number of authorized HECMs to 25,000 and opening up the program to any FHA-approved lender.
The first few years, though, were decidedly rocky. Because there was no foundation for the origination of these loans, everything—from staff training and counselor education to processing procedures—had to be created from scratch.
Taylor recalls how little support there was at the time. “There weren’t even any state-by-state loan documents,” he says. “So we partnered with a law firm in Washington, D.C., and they made the documents available for the states as they came online. We went to the 50 lenders to see what states they were going to be in, and they paid $1,200 for a set of legal loan documents for their state, or for every state they wanted to be in.”
From the start, Fannie Mae was the sole investor in the space. “Each loan was sold to Fannie Mae loan by loan,” Taylor says. “Today, they’re sold in pools, but there was such little volume that each loan was sold over the counter to Fannie Mae, one by one.”
Wendover also held the first reverse mortgage seminars at its Greensboro headquarters. “AARP came, Fannie Mae came. Freddie Mac would periodically stick its nose in. For probably the first four years, from 1990 to1994, Wendover was the only host, inviting the agencies to come out.” After that, Taylor says, AARP and Fannie Mae stepped in to host meetings of their own.
Because support and resources were so minimal in those early years, participating lenders struggled with how to make a profit selling the loan. In a report to Congress three years after the pilot’s launch, HUD wrote that the “unconventional and complex aspects of the loan” presented challenges to lenders. “With little reverse mortgage experience to draw upon, the business of making and servicing HECM loans has been costly and time-consuming for lenders,” the agency wrote.
The result was an absurdly long turnaround time, with some lenders reporting to HUD that it took as long as 18 months to close their first reverse mortgage. At this time, the majority of active lenders were also originating fewer than one loan per month, making any investment in training and infrastructure unfeasible.
This was problematic because staff education was a major hindrance. Without a team of loan officers who really understood the product, it was hard to sell it to consumers. “There was no ready supply of reverse mortgage professionals who knew how to make the loan, so everybody had to be trained, and it was by the seat of their pants, ” Taylor says.
NRMLA Forms Gradually, however, things began to improve. As familiarity with the program increased, the number of originations more than tripled from 1991 to 1992. By August of that year, a total of 2,155 loans had been closed in 38 states, marking an upward trend that continued for the next several years.
The number of HECM lenders also grew steadily, peaking in 1997 to 195 across the country. But the lender pool then declined, a trend attributed to low origination fees, limited profits and the fact that the forward mortgage scene held greater promise at the time.
Consumer outreach was also a problem. Most seniors had never heard of a reverse mortgage, and profits were too low to spend substantial dollars on marketing. As Taylor says, “The classic line I would tell everyone was: This is a great industry to be in. First of all, you have no competition, but unfortunately you have no customers.”
The fledgling industry had a dire need for a trade association to help advance its mission. In 1997, Peter Bell established the National Reverse Mortgage Lenders Association to do just that. Taylor says he approached Bell with the idea. “We had coffee one morning and I said, ‘Peter, I think it’s time that we pull our membership together and form a trade association so that we have a voice in Washington,’” Taylor says. “I got 20 lenders to put up $5,000 each to create the trade association… Peter already had his foot in the door as a lobbyist, and the rest is history.”
Taylor says NRMLA helped steer the product in the right direction and navigate the conflicting interests of all the parties involved. “AARP was trying to take the program in one direction, and it was kind of counter to the lenders’ desires,” he says, adding that originally AARP lobbied Fannie Mae for a single fixed-rate loan that would be serviced for just $10 a month.
The association’s establishment went a long way to advance the industry. “It added credibility,” Taylor says. “What I learned very quickly is that it’s difficult in Washington, even if you know what you’re doing.”
Major Players Emerge In 1998, nearly 10 years after the launch of the pilot, the industry was picking up steam. HUD declared the HECM program a permanent FHA offering, increasing the number of authorized loans to 150,000 and, not long after, raising the limit on origination fees from $1,800 to $2,000 or 2 percent of the maximum claim amount.
Craig Corn was working for Lehman Brothers’ MBS team at the time, when the firm was just beginning to venture into the reverse space. He says raising the cap on origination fees was a major leap forward for the industry. “It meant that you could actually make money in the business, because you could charge origination fees that were commensurate with the work that you were doing,” he says.
The move toward increased profitability sparked a dramatic shift in the market. In 1999, with financing from Lehman Brothers, Financial Freedom Senior Funding Corporation purchased Transamerica’s reverse mortgage loan portfolio and servicing operations for $200 million. As part of the deal, Lehman Brothers would repackage the loans as securities. The deal turned Financial Freedom into a major player in the space. “Financial Freedom took the origination and servicing platform, so they got the business infrastructure, and we at Lehman took on all of the loan assets,” Corn says. “So in one fell swoop, Financial Freedom went from being this tiny, regional lender to having licenses in 30-something states.”
That same year, as Lehman issued the first reverse mortgage securitization, others began to take an interest in the market. “When a well-known institution like Lehman Brothers gets into the space, that causes a lot of other people to at least take note,” Corn says. “That, combined with changes on FHA’s level to allow for more revenue opportunities, really changed the dynamic and the economics of the space.”
By October 1999, the program was well under way. Nearly 40,000 reverse mortgages had been insured thus far, with only 388 loans ending in claims on the insurance fund. The servicing sector had begun to expand, growing from just one firm—Wendover—to four, bringing a healthy competition into the market. Now Unity Mortgage, Seattle Mortgage and Financial Freedom were also offering servicing for correspondent lenders, although Wendover still handled two-thirds of the industry’s servicing needs.
In a report to Congress in 2000, HUD determined that the program “has generally been a success, with loan volumes growing, borrowers reporting high levels of satisfaction with the program, premium collections projected to exceed insurance claims by more than $500 per loan, and a trend toward lower average costs paid by borrowers to originate.”
It was around this time that Wells Fargo began building its reverse channel, bringing Taylor on board in 2000 to help develop and expand its HECM operations. According to Taylor, Wells Fargo entered the market when it merged with Norwest Mortgage, which had previously acquired Directors Mortgage, one of the original 50 lenders. “Norwest maybe had 35 or 40 reverse mortgage loan officers, but [when I came on board] that grew to 1,200.” Taylor says the lender focused its efforts on training staff about the loan, with Ken Kanady leading the charge. “We had a mandatory training program called STORM (Sales Training of Reverse Mortgages). You had to close at least three loans with a manager before you could be certified.” To this day, Wells Fargo is credited for helping advance the program by providing exceptional training to a huge number of reverse professionals, many of whom are still in the business today.
At this point, Financial Freedom’s operation was thriving. The Irvine-based lender acquired several reverse companies—including Unity mortgage, which was the largest national lender at the time. “By the time we got to 2001, we had effectively acquired or absorbed nine different companies to create a national platform for Financial Freedom,” says Jim Mahoney, who was CEO at the time. “By then, we had a 65 percent market share and were a national company with retail, wholesale and servicing.”
Seattle Mortgage was another burgeoning lender in the space at the time. John Nixon ran the company’s forward and reverse channels. “We were doing about 30 loans a month, and then it started really taking it off. It got so strong that in 2002, I relinquished my forward mortgage duties to focus solely on reverse mortgages, because they were becoming a much bigger percentage of our overall production,” he says, adding that at the time, Wells Fargo and Financial Freedom still had the majority of the market share. “We really came from nowhere and became the second-largest wholesale lender and the third-largest overall lender by the time we were sold to Bank of America in June 2007.”
Improvements Abound While the industry saw major players take root as mergers and acquisitions altered the landscape, other aspects of the program evolved as well. One important development was the establishment of nationwide counselor education, which had been an issue for the industry from the start.
HUD’s program guidelines required borrowers to participate in a session with a certified housing counselor, but the number of counselors out there who fully understood the product was nominal at best. “It was a real struggle getting counseling back then. You couldn’t find anybody who new how to do it,” says Taylor, adding that at the time, no counseling software had been created and some agencies didn’t even have computers.
Mahoney agreed. “The counseling was scattered, inconsistent,” he says. “They were all good people doing their best, without a doubt, but there just wasn’t an infrastructure for counseling that was that supportive.”
In 2001, HUD took steps to change this, partnering with AARP to establish training programs that would certify counselors to educate consumers about HECM loans. Through the program, the two instituted mandatory exams and established consistent policies and procedures.
Consumer awareness was another lingering issue that began to right itself. In the ’90s, lenders struggled to sell the product without any sort of substantial public outreach. Consumers were simply unaware of the product’s existence, and the loans were not quite profitable enough to allow for any sort of sizable PR campaign.
Corn says marketing in the early days was minimal and vastly different than it is now. “It was before TV spokesmen and it was certainly before the Internet, so a lot of it was direct mail. There was some radio being done,” he says. “It was much more of a grassroots, doing-business-in-your-backyard kind of business model.”
Taylor agreed. “Marketing was very fragmented. A lot of people worked out of the trunk of their car. They would make up their own flyers and do what they wanted.”
In the absence of national print or TV campaigns, most borrowers were hearing about the loan through word of mouth or from the local media. According to HUD’s 2000 study, in which a number of HECM borrowers were surveyed about their experience with the loan, “The majority of the participants first learned about the HECM product from family or friends, local newspaper articles, or, in a few cases, printed materials from [AARP].”
The marketing landscape shifted dramatically around 2005 with the success of two national television campaigns featuring well-known actors: Jerry Orbach for The Senior Lending Network and James Garner for Financial Freedom.
According to Corn, the campaigns had a lasting impact on reverse mortgage marketing. “Those two institutions really pioneered the national cable TV lead generation model, and it was that model that completely changed the nature of lead generation. For the first time, you could really make some decisions about how much money to spend and have a pretty good understanding as to how many calls you’d get, how many qualified leads you’d get, how many applications you’d get, and how many closed loans you’d get,” Corn says. “In other words, you actually had a business model that wasn’t hit or miss. That changed everything.”
As national TV commercials helped spread the word, HECM endorsement numbers reached unprecedented levels. In 2005, the market grew from slightly more than 40,000 loans to nearly 110,000 loans in just two years. According to Mahoney, this massive jump was the result of several factors, including rising home prices and low interest rates. The industry had also been working together under NRMLA’s guidance to dispel product misinformation, and their efforts were paying off.
“The major lenders—which were Financial Freedom, Wells Fargo, Bank of New York and Seattle Mortgage—funded a PR campaign for NRMLA because too many negative articles were being written in the press … Writers did not understand the product,” Mahoney says, adding that the effort made a difference. “The public started seeing very positive articles on reverse mortgages. We got good borrower stories out, so the general perception changed in the newspapers and magazines.”
In 2006, the reverse space saw a wave of positive change that propelled the market to new heights. Recognizing the product’s potential, private investors entered the secondary market, giving rise to a competitive interest rate environment. HUD raised the volume cap yet again, increasing the number of authorized insurable HECMs to 275,000, and the department finally established a single national loan limit. Prior to this, borrowers were limited by the FHA lending limit in their county, which, according to Taylor, was around $90,000 for most counties in 1990. The new limit of $417,000 went a long way to make the loan more desirable.
The following year, Ginnie Mae entered the securities market with the establishment of its HMBS program, vastly altering the landscape. According to Mahoney, Ginnie Mae’s entrance propelled the market forward. “That perfected the executions on the secondary market. You now had a federally insured loan backed by Ginne Mae’s guarantees,” he says. “It became a very desirable investment.”
With Ginnie Mae in the game and consumer awareness rising, 2008 saw volume exceed 100,000 loans, prompting HUD to call that year a “turning point” in HECM history.
Fast-Forward to Today Needless to say, the program’s evolution continued well beyond 2008. The industry endured fallout from the housing crisis, saw loan limits increase again, witnessed big banks enter and exit the space, and navigated its way through increasing regulatory oversight and program adjustments. With HUD on the brink of instituting Financial Assessment, the changes are unlikely to grind to a halt any time soon.
Many believe that despite, or perhaps because of, its tumultuous path, the reverse mortgage program has become a better, stronger offering for America’s seniors. Corn says FHA’s revisions have improved the program. “Do I think that the changes FHA has made and continues to make are good for the financial stability and sustainability of the program? The answer is yes.”
Over time, Corn says, the program has evolved to become a much more important part of FHA’s business. “The market has changed dramatically,” he says. “Now you have a very deep, very liquid market for these securities and full-priced transparency—that’s good for the industry. We understand much better what these assets are worth now.”
Mahoney says that when reflecting on the industry’s progression, a cyclical pattern becomes is evident. “We’ve had a lot of struggles in this industry over the course of time. If you look back, we had periods of falling real estate prices, we’ve had periods of unemployment problems, we’ve had similar problems [reappear] because most of the economy is cyclical,” he says. “What we’re dealing with in the industry today is in some ways different but also the same than what we’ve dealt with in the past.”
Those who have stuck it out remain committed to the product and are confident that once the regulatory dust settles, the market will rebound from recent lows and grow to new heights. Nixon says the demographics, coupled with home price appreciation, are bound to have a positive impact on the market. “The retirement gap is just so overwhelming, and it’s going to keep getting wider and wider as more and more people face it,” he says. “I think once we truly get this product imbedded as a retirement and financial planning tool, the pie will grow, and it will grow rapidly.”
