Reverse mortgages may be the next big lending product that takes off in both the credit union and overall mortgage industry. Not only can credit unions use the product to meet member needs by helping seniors who are house rich but cash poor, but they also position themselves as more of a “trusted advisor” for long-term financial planning and increase the odds of solidifying primary financial institution ( PFI) status with these members. To read more about what a reverse mortgage is, please click here.
While there are multiple options to explore for the reverse mortgage product, the most prevalent form is the Home Equity Conversion Mortgage (HECM) program offered through the Federal Housing Authority (FHA). The HECM program accounts for approximately 90% of volume.
The National Reverse Mortgage Lenders Association recently announced that the number of HECM loans endorsed by the FHA in the fiscal year ending September 30, 2006 grew 77% to 76,351. Since FY 2001, the number of endorsed HECM loans has grown an astronomical 881%.
Secondary market presence increasing
Ginnie Mae, a secondary market player, announced in October 2006 that it had created a HECM mortgage-backed security (MBS). The move signifies the growing popularity of the reverse mortgage product and increases liquidity options for lenders. In its current state, the HECM reverse mortgage product has several upfront fees which have arguably hampered its growth potential as many seniors and lenders have been wary of these fees. As a result of the secondary market beginning to securitize this product, more competitors should enter the market, which in turn should drive down borrower costs.
The HECM MBS will be an accrual class pass-through security that does not have a set payment schedule. According to the Ginnie Mae announcement, it will accrue interest on the securitized principal until the loans in the pool are paid down or paid in full. The HECM MBS can either be sold as a stand-alone security or be used as collateral for a Ginnie Mae REMIC.
While more needs to be learned about how this security will perform in different rate scenarios, one would expect the standalone product to provide lumpy payments to investors. There are multiple ways for seniors to extract equity from their house through this product (lump sum, line of credit, combination of both, etc.). Since the principal and interest are not due until the senior passes away, the title is transferred or the homeowner’s insurance is not kept up-to-date, investors will not receive regular payments that they would expect from a traditional pass-through security. Therefore, from an investment perspective, credit unions will likely not find this investments option attractive due to the irregular payment schedule.
Lenders predominately sell HECM loans to one of the three major correspondent players (Financial Freedom Holding Inc, Seattle Financial Group Inc., and Wells Fargo & Co.) to reduce their balance sheet risk and generate non-interest income. Based on their commitment level, credit unions can either earn a referral fee or the origination fee with the service released premium. Depending upon whether or not they fully underwrite the loan, they may have to pay a servicing fee to the correspondent player. However, from a lender’s perspective, the reverse mortgage is beginning to make an impact on the national front, and it would be prudent to consider whether this product makes financial sense for your credit union’s membership.
If you would like to learn more about the reverse mortgage product, check out Callahan & Associates’ recent webinar, “Addressing the Feasibility of Reverse Mortgages”. It featured executives from Fannie Mae, MEMBERS Trust, and Mountain America FCU discussing the various business models and strategies to enter the market.