For once, the light at the end of the tunnel did not turn out to be an oncoming train: The commonwealth’s beleaguered reverse mortgage industry has managed to delay the implementation of a potentially costly in-person counseling requirement. 

Still, the sector may yet get broadsided.

Thanks to a bill signed by Gov. Deval Patrick earlier this month, seniors will still be able to meet the requirements of the federal counseling mandate through over-the-phone sessions at least through 2014. That’s a considerable relief for the industry, given that funding for counseling has been scarce and only a handful of agencies in the commonwealth were in position to provide in-person sessions. 

But even though the industry dodged one bullet, its agility will be tested as it struggles to hang on through one of its most difficult years in a decade. In the wake of the exits of some of the biggest brand name lenders from the space – the latest being MetLife, which pulled out of the sector this spring – smaller lenders have so far proven unable to take up the slack. 

“I think there is a natural vacuum that’s created when you take something that large out of it, there was a hole left and that’s not going to be filled instantly,” said George Downey, founder of Harbor Mortgage Solutions in Braintree. “That process will settle itself out, the waters will close behind them. But it’s certainly not instantaneous.” 

Bad Timing

The struggles come during a time that many predicted would be the beginning of the industry’s greatest era for potential growth, as the retirement of the Baby Boomers picks up pace. Launched in 1990 with a push from the federal government, only a comparative handful of reverse mortgages were issued in the first decade of their existence. The number of federally insured Home Equity Conversion Mortgages (HECM, the official term for a reverse mortgage) issued in the United States did not break the 10,000 mark until 2002, according to the U.S. Department of Housing and Urban Development (HUD).

But by the latter half of the decade, the product was gaining popularity in leaps and bounds, with rising home values attracting seniors in droves. From 2007 through 2009, more than 100,000 HECMs were issued per year, and private issuers were beginning to dip a toe in the market. 

Since the crisis, however, all that has changed. So far this year, fewer than 50,000 HECMS have been issued – on track for the worst performance since 2005. 

The exit of the large lenders is only one cause of the drop in originations. Sinking home values are another:  The continued appreciation of the home is needed to balance out the interest compounding on the amount loaned during the life of the reverse mortgage. The faster prices are rising, the greater the amount which can be tapped through a reverse mortgage product.

But price depreciation – not to mention a spate of tax and insurance defaults on existing reverse mortgages – has made lenders cautious, and severely reduced the number of homes eligible for a reverse. Additionally, unlike previous generations, many boomers have already tapped into their home equity to fund college expenses or other costs, and may still be paying off their house as they enter their retirement years.

“The property values are a big problem,” Downey said. “The reverse has to pay off the existing debt. So that has been a larger reason than I think a lot of people realize.”

 

Missing Marketing

Still, other analysts see some signs of hope in the figures. 

“We’ve actually been pleased to see some of the volume pick up at other places. Both May and June have been higher,” than anticipated in terms of new reverses initiated, said John Lunde, founder of Reverse Market Insight, a California-based analytics firm that specializes in the sector. “That seems like a pretty decent indicator that the industry is still maintaining momentum and doing well.”

Lunde said it may take some time for the full impact of MetLife’s exit to be assessed, as many loan officers who transitioned to new lenders are still in the process of getting licensed. Since MetLife was a chartered bank, loan officers were not required to participate in the Nationwide Mortgage Licensing System. As these officers move on to separate mortgage companies, they must meet stricter licensing standards.

Also, reverse mortgages simply take longer than forward mortgages. 

Lunde admitted that MetLife’s exit will be “significant,” but he said he believes perhaps less so than those of Bank of America and Wells Fargo last year.  With BofA and Wells, “it was quite a bit less than 50 percent of that business which eventually transitioned to other lenders,” Lunde noted. “In the case of Met Life…it seems like we’re going to see something over 50 percent, [although] the last half of the year will be weaker than the first half because MetLife won’t be in those numbers.” 

Longer-term, the exit of the biggest players could have far reaching effect. 

“There are commercials on TV still. [But] it’s always been a long-term proposition to educate consumers about a new financial product,” Lunde said. “It would certainly help to have those big names, like Wells Fargo or Bank of America, with those additional marketing dollars supporting that education process.” 

And the state of the housing market constraining eligibility, coupled with the big banks’ withdrawal cutting off crucial marketing dollars, “There is a danger,” that the industry could miss out on its window of opportunity to tap into the Boomer market, Downey said.