To Protect Market Share and Better Serve Borrowers, Offer a Wider Range of Loan Products
By Wendy Peel
July 10, 2018
Wendy Peel is vice president of sales and marketing for ReverseVision, San Diego, a reverse-mortgage software provider. She joined ReverseVision in 2015. Earlier this year, MBA Insights recognized Peel as one of its 2018 Tech All-Stars; she has also been honored by HousingWire and Mortgage Professional America.
The mortgage market outlook for the rest of 2018 is a sobering one, with residential volume significantly impacted by rising interest rates and a corresponding decline in refinance activity. The purchase market has remained essentially flat in recent weeks following the Fed's approval of its sixth interest-rate hike since the financial crisis. According to a statement issued by the Mortgage Bankers Association late last year, the average mortgage lender can expect to be working with 20-25% less volume in 2018 than it did in 2016.
With multiple factors contributing to the purchase market pinch, there's no quick fix in sight. Housing inventory, already at near-historic lows, is expected to continue shrinking through the first few months of 2018 at least. Millennials are waiting longer to buy their first homes. And the overall economic climate, while rallying in many respects, won't turn housing volume around any time soon.
A recent STRATMOR Group Insights report predicts the watchwords for success in 2018 will be "stealing share" and improving the "borrower experience." Although the report poses several worthwhile suggestions for growing market share--from establishing new sales channels to expanding into servicing to adding ancillary lines of business--offering new products is by far the easiest to execute. What's more, adding products can be a powerful way to better serve borrowers.
The Generational Lending Approach
With margins compressing, lenders who want to protect their market share must seek new ways to add value for borrowers--or face the possibility of losing clients to rivals who are equally focused on "land grab."
In an effort to differentiate themselves from competitors and tap into a larger customer base, many mortgage lenders have already relaxed their credit standards or begun offering down payment assistance. These programs typically cater to the needs of first-time Millennial homebuyers.
But what about the needs of borrowers at the other end of the customer life cycle?
Generational Lending is a strategy for offering loan products to borrowers at all stages of life. By adapting to borrower needs as they change over time, originators can keep a full pipeline in any market and build customers for life.
Most lenders are familiar with the products that serve borrowers at the beginning and middle of the customer lifespan. Many, however, are failing to adequately serve their senior customers with the Home Equity Conversion Mortgage. The FHA-insured HECM is a home-equity program specifically designed to serve homeowners 62 and older, much as the agency's popular first-time homebuyer programs serve younger borrowers. Lenders that do know about HECM often know it by reputation only, and if their impression is based on old HECM lending standards instead of current ones, lenders can fail to understand this loan product's true value. HECM is no longer the loan of last resort lenders may think.
What is a HECM?
Home Equity Conversion Mortgages enable homeowners age 62 or older to receive a percentage of their home equity as fixed cash payments over time or as an available line of credit. It's also a loan that can help a senior purchase a new home, whether upsizing or downsizing.
Because this home-equity product hasn't always been understood or offered by lenders, only a small percentage of the over 10,000 people who turn 62 every day in the United States take advantage of its benefits.
Yet the tide is turning. In 2017, three new mortgage bankers added HECM loans to their product offerings each day--so if you're not making this FHA-insured home-equity product available to your qualified customers, it's only a matter of time before someone else will.
Here are a few reasons HECMs belongs in your product mix:
--Boomers have a LOT of untapped equity. According to Freddie Mac Chief Economist Sean Becketti, people over age 54 control nearly two-thirds of all equity in single-family homes. That's nearly $6.4 trillion in equity held by homeowners 62 and older, according to the NRMLA/RiskSpan Reverse Mortgage Market Index.
--Regulatory changes have made HECM loans safer than ever, reducing default risk by 50%. First, HUD set limits on how much borrowers can draw at closing or during the first 12 months following closing (usually 60% of the principal limit). Next, it added protections that enable qualified non-borrowing spouses to continue occupying the home and defer loan repayment after the borrower has passed away. Finally, HUD added a required Financial Assessment to ensure HECMs are only offered to financially qualified borrowers and available set-aside (equivalent to a traditional mortgage's escrow account) to ensure HECM borrowers have enough money to pay taxes and insurance.
--In a blind comparison, consumers prefer HECMs over HELOCs. HECM funds are non-taxable and do not impact negatively Social Security or Medicare. Once a HECM is established, the borrower has exclusive control over future draws on the loan, and there are no restrictions on how the borrower may use the funds. Draws on available HECM funds cannot be denied by the lender. In contrast, additional draws on a HELOC can be denied by the lender should conditions change. HECMs are also non-recourse loans, which means that if the value of the property decreases, the borrower (or his or her estate) will never owe more than the loan balance or the value of the estate, whichever is less. Compare that to HELOCs, which are often recourse loans for which the borrower is personally liable. In a blind test, when HELOC and HECM options were given to borrowers, a majority chose the HECM as the more valuable loan option.
--HECMs are a gateway to additional business. Because a HECM borrower's children or grandchildren are frequently involved in the decision-making process, mortgage lenders can create a promising lead pipeline at the same time they are serving senior borrowers. Earning the trust of this older demographic can have a definitive impact on their children's and grandchildren's lending decisions.
Lenders who embrace a Generational Lending approach and add HECM loans to their product mix find that they are able to meet the needs of underserved borrowers while growing production volume even in a flat purchase market. If you're not yet offering HECMs, you could be at risk for losing a long-time client to a competitor for what could be their last loan. Now is the time to decide if you want to lose that business to your competitors or grow your business in 2018 using the Generational Lending strategy.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)