Reverse Lending Overview and Survey

Transcription

1 February 7, 2018 Reverse Lending Overview and Survey Jim Cameron, Senior Partner

2 Our Story OUR VISION STRATMOR is the most trusted consulting firm in the mortgage industry based on a reputation for providing candid, data-driven advice. We accomplish this by being the market information and intelligence hub of the industry, helping our mortgage customers to chart a sustainable strategic course. 2

3 Our Story OUR PURPOSE Provide mortgage lenders with vital mortgage industry data and information that cannot be obtained elsewhere. Transform industry data and information into important insights and understanding. Apply our insights and knowledge to guide our mortgage clients to make sound strategic decisions and take actions that improve their success. Bring to our work an unwavering commitment to objectivity, competence and integrity. Our recommendations are impartial and candid. Our ability to earn trust and build long-term relationships with our clients is core to our culture. 3

4 Agenda Forward Mortgage Lending Environment Overview of Forward vs. Reverse Market The Opportunity Borrowers over 62 Years Old Reverse Lending Survey Results Respondent Profile Lenders Offering Reverse Lenders Not Offering Reverse Looking Ahead 4

5 Dear John Letter My Home Equity Line Official notice the clock is ticking on my equity line In my mid-50 s not a problem; sufficient income and assets to qualify for another line of credit What if I had been 75 years old and on a limited, fixed income? Having my HELOC term out would negatively impact my financial flexibility A Reverse Mortgage with a revolving line of credit feature may protect me from this outcome 5

6 Forward Mortgage Lending Environment 6

7 Originations 1990 to % 9.3% % 8.4% 7.9% 7.8% 7.6% 7.3% 1, % 1, % 7.4% 1,379 1, % 2,243 1, % 2,854 1,757 3, % 6.0% 6.0% 6.5% 6.5% 6.2% 3,027 2,773 2,726 2,424 1,515 1,508 1,327 2,532 1,464 1, % 5.4% 4.5% 1,995 1,698 1,436 1,331 1, Refinance Volume ($B) Purchase Volume ($B) Average 30-yr Rate 5.3% 5.6% 4.8% 3.8% 4.0% 4.2% 3.9% 4.0% 3.6% 2,044 2,051 1,845 1,710 1,712 1,630 1,609 1,645 1, , , ,097 1,280 1,309 1,512 1,399 1, ,052 1,110 1,183 1,250 1, E 2018E 2019E 2020E As rates steadily declined from 1990 to 2016, the mortgage industry has generally had the wind at its back : Refinance Party - Fed decreased rates, refinance market exploded : Stretching the Envelope - while market volumes were still very high, the focus was on Alt A and Subprime : The Great Recession - precipitous drop in both purchase and refinance volumes; industry shakeout : A Nice Run - rates declined from 5.6% to a low of 3.6% 2017: An Inflection Point? : Back to the Future - with expected rate increases, we may have a Purchase-focused market like the early to midnineties Source: Mortgage Bankers Association - January

8 National Home Prices It s been a long ride back. After inflation, we re not there yet on a national basis Source: Harvard Joint Center for Housing Studies 8

9 Metro Area Home Prices West Coast, Northeast and Florida have done well Midwest, Southeast and parts of the heartland, not so much Source: Harvard Joint Center for Housing Studies 9

10 We re Not Getting Older, We re Getting Better! Reflects general aging of the population plus propensity to age in place Source: Harvard Joint Center for Housing Studies 10

11 Net Production Income (bps) Average quarterly pretax production income for the last 4 quarters has declined relative to the 10 year trailing quarterly average Source: MBA Quarterly Performance Report 11

12 Fulfillment Expenses ($/loan) 3,000 2,500 2,000 1,500 1,000 Retail Consumer Direct Broker Correspondent Fulfillment costs have increased steadily, especially since 2016 as the market shifted H-2017 Fulfillment Expense ($/loan) H-2017 Retail 1,733 1,793 1,832 1,987 2,591 Consumer Direct 1,304 1,269 1,795 1,780 2,321 Broker 1,298 1,615 1,403 1,430 1,963 Correspondent

13 Marketing Expenses ($/loan) 1, , , New Customer Acquisition Servicing Retention / Cross-Sell Retail - All Lenders Marketing Costs per Loan - $/loan Yr Avg New Customer Acquisition 1, ,062 1,260 1,113 Servicing Retention / Cross-Sell Retail - All Lenders New Customer Acquisition Lenders no previous relationship with customer (e.g. Bank Rate Tables, purchasing leads from aggregators, etc.) Servicing Retention / Cross Sell marketing to existing servicing or bank customers Retail limited marketing; mostly self generated leads from street LO s Marketing costs per closed loan have generally increased for Consumer Direct lenders since 2014 Note the almost $900/ln difference in average Marketing Costs between New Customer Acquisition and Retention/Referral It is much cheaper to market to customers you already have! 13

14 Forward Lending Key Takeaways Volumes flat, purchase focus Lender margin compression and increased costs Aging population well documented Home values increasing Marketing costs much cheaper to market to customers you already have Forward lenders are looking for opportunities to enhance profitability and build/maintain market share New channels Consumer Direct? New products e.g. Reverse, non QM, Construction, Reno 14

15 Overview of Forward vs. Reverse Market 15

16 Average Production - Reverse vs. Forward 5 Year HECM Avg Units, 54,802 5 Year HMDA Avg Units, 6,973,312 While Reverse lending volume is a fraction of the forward market, this could be an opportunity How many more reverse units could be originated if more forward lenders would recognize that their customers might benefit from a reverse? Source HMDA 2016 & The Department of Housing and Urban Development 16

17 Market Volumes Reverse and Forward ORIGINATION DECILE COMPARISON Forward (HMDA) Reverse (Top 100) Top 10% 11% - 20% 21% - 30% 31% - 40% 40% - 50% 51% - 60% 61% - 70% 71% - 80% 81% - 90% Bottom 10% 8.2% 11.2% 83.2% 69.3% Forward (HMDA) Reverse (Top 100) Top 10% 83.2% 69.3% 11% - 20% 8.2% 11.2% 21% - 30% 3.6% 5.8% 31% - 40% 2.0% 3.7% 40% - 50% 1.2% 2.6% 51% - 60% 0.8% 2.0% 61% - 70% 0.5% 1.7% 71% - 80% 0.3% 1.4% 81% - 90% 0.2% 1.2% Bottom 10% 0.1% 1.1% 100.0% 100.0% Both the forward and reverse market are heavily concentrated at the top Top 20% of forward lenders originated 91% of total volume, while the Top 20% of reverse lenders originated 81% Source: RMI Top 100 Nov 2017 & HMDA

18 Market Share Bank vs Independent MARKET SHARE COMPARISON Independents Banks REVERSE (TOP 100) 94% 6% FORWARD (HMDA) 51.0% 49.0% The reverse lending market is dominated by Independents why aren t banks originating more reverse loans? The forward market represents a more even mix between Bank and Independent lenders Source: RMI Top 100 Nov 2017 & HMDA

19 The Opportunity Borrowers over 62 Years Old 19

20 About MortgageSAT What is MortgageSAT? Industry leading borrower satisfaction survey Partnership between STRATMOR and CFI, launched in 2013 Data driven survey to measure every step of the borrower experience o o o o Origination Processing Underwriting Closing MortgageSAT Program to date: o o o Over 750,000 borrowers invited to complete the MortgageSAT survey Over 250,000 Completed surveys Over 120,000 Completed in 2017 alone MortgageSAT results were used to identify borrowers over the age of 62 that may have been HECM opportunities o Results from (250,000 respondents) yielded approximately 45,000 MortgageSAT borrowers over 62 which represented approximately 18% of survey respondents to date (45,000 / 250,000) 20

21 The Opportunity If we apply the 18% factor to an average of 7 million forward units originated annually, this would result in an estimated 1,260,000 units originated industrywide for borrowers over 62 A 10% capture rate would result in 126,000 additional reverse mortgage transactions, well over double the current industry volume This does not consider the opportunity from homeowners over 62 who have significant equity in their home and no mortgage debt Growing untapped mortgage equity 21

22 Property Use and Purpose Second Home 7% Construction 9% Primary Residence 87% Investment 6% Streamlined Refinance 1% 87% primary residence you can check that box 51% Purchase how many of these should have considered a HECM for purchase? 39% Refinance Cash Out Refinances typically represent 15 percentage points of this total; how many cash out refi customers should have considered a HECM? Refinance 39% Purchase 51% Loan Purpose Avg Loan amt Avg LTV Purchase 213,236 76% Refinance 267,653 60% Construction 231,718 67% Streamlined Refinance 203,771 86% 22

23 Product Type and Channel VA 21% FHA 9% USDA/Other 2% Likely to have lower LTV & greater potential for a HECM Conventional 68% Consumer Direct 16% Wholesale 4% Correspondent 0.1% Educate Retail and CD LO s & Mortgage Brokers to look for reverse mortgage opportunities Retail 80% 23

24 Referral Source Realtor 36% Friends, Family, Coworker 14% How can HECM for Purchase be Top of Mind? All Other 4% Found Myself 12% Investment/Tax Advisor 3% Lender Contacted Me 4% Other 7% Builder 9% Previous Originator 11% 24

25 Reverse Lending Survey RESPONDENT PROFILE 25

26 Reverse Lending Survey In preparation for this conference, STRATMOR decided to conduct a survey on the reverse lending business We wanted to learn from lenders in three categories: Category 1: Lenders that don t originate reverse mortgages explore the primary reasons for not offering reverse Category 2: Lenders that don t originate reverse but plan to understand the general timeframe for getting up and running Category 3: Lenders that currently originate reverse questions about reverse volumes, channel mix, product mix, functional matrix overlap, originator information and capital markets model (e.g. sell, issue HMBS, hold in portfolio). 26

27 Survey Respondents Bank vs. Independent Bank Independent % of Total 35% 65% # of Respondents We received responses from 120 lenders, roughly 1/3 Banks and 2/3 Independents 27

28 Survey Respondents Key Characteristics C-Level - The respondents were primarily C-level executives plus Reverse and Capital markets executives Retail Focus - About 2/3 of the FORWARD volume was Retail, with the rest of the volume spread across Consumer Direct, Broker/Wholesale and Correspondent Production Volume Distribution - The survey respondents were spread fairly evenly across production volume segments Just as many over $10b as under $500mm 28

29 Volume Distribution of Respondents Under $1 Billion Between $2 - $5 Billion Over $5 Billion Average Volume # of Respondents Yes $ 2,953,747,943 No $ 4,721,812,361 In Process $ 829,919,400 % of Respondents Yes 48% 33% 19% No 33% 39% 28% In Process 50% 33% 17% The 42 survey respondents offering reverse tend to be smaller than the 72 lenders who do not Smaller independent lenders may be more inclined to offer reverse due to the following factors: Nimble able to adapt quickly to changing market conditions Entrepreneurial culture, especially vs. banks Competitive advantage smaller lenders have more of a need to focus on niche products and programs to maintain a competitive advantage in the marketplace 29

30 Q: Do you Offer Reverse? Reverse Mortgage Offering Yes No In Process Bank Independent Total Of the 42 lenders offering reverse, only 3 were banks The lenders not offering reverse were evenly split between Banks and Independents Of the 6 lenders in the process of developing a reverse offering, only 1 was a bank 30

31 Reverse Lending Survey LENDERS OFFERING REVERSE 31

32 Reverse Volume by Channel Retail/CD Wholesale Correspondent HECM Units Proprietary Units

33 Reverse Fixed vs. Adjustable Fixed Rate, 28% Adjustable Rate, 72% Industry data from RMI and ReverseVision suggests that the Fixed Rate % is more like 10-12% Our survey sample is skewed towards Fixed Rate based upon the mix of company respondents 33

34 Reverse Volume Mix by Type HECM for Purchase, 15% General Purpose with term, tenure or line of credit, 55% HECM-to- HECM Refinance, 29% Represents volume mix for 2017, likely impacted by October rule changes See next slide for commentary on drivers of future volume 34

35 Drivers of Volume by Type STRATMOR Thoughts Category Overall Trend Impact Drivers H4P Growth in US purchase market despite supply challenges Market penetration more awareness from referral sources Cost reductions Initial MIP decline from 2.5% to 2.0%; Annual MIP reduced from 1.25% to.50% Builder business Certificate of Occupancy not needed for FHA case # Lower PLFs Financial Assessment requirements more cash to close H2H Lower PLFs Home Price Appreciation Bona fide advantage needed some apps won t pass the tests; yet a positive for consumer and industry in the long run General Market penetration more awareness from referral sources Upfront costs have increased for many borrowers; IMIP increase for low draw borrowers; Proprietary Lower HECM PLFs creates an opportunity for the private market to expand; while proprietary PLFs are still lower, they are typically applied to larger loan balances 35

36 Functional Overlap Forward vs. Reverse Dedicated for Reverse Processing 79.5% Sales / Application 71.1% Training / Onboarding 64.9% Underwriting 60.9% Servicing 50.0% Marketing / Lead Generation 44.1% Insuring 40.0% Secondary Marketing 40.0% Closing 39.3% Post Closing 34.5% Not surprisingly, front end processes are more likely to be dedicated for the reverse channel As we moved toward the back end of the mortgage process, reverse functions are more likely to be shared with the forward lending side of the business What can reverse lenders do to migrate to a less dedicated environment? 36

37 Average LO s by Type 285 Avg LOs (Rev + Fwd) 68 Avg Authorized for Reverse # LOs originated Reverse # LOs exclusive Reverse # LOs originated 1 Reverse + Forward Average Reverse lender respondents averaged 285 LO s, but only 68 LO s were authorized to do reverse Of the 68 LO s authorized to do reverse, only 28 (41%) actually originated a reverse loan Of the 28 LO s who originated at least 1 reverse loan, 18 (64%) were dedicated to reverse Of the 28 LO s who originated reverse, 11 (36%) originated at least 1 reverse loan and 1 forward loan during the year Takeaway only a small percentage of originators actually originate reverse, both as a % of total LO s and as a % of those authorized to originate reverse. Why is that? To what extent is this due to structural issues vs. originator hard wiring? 37

38 LO Process & Training Is there a formal process to authorize LOs to originate Reverse products? Are forward originators trained to identify reverse mortgage opportunities? Yes No % of Total 70% 30% # of Respondents Yes No % of Total 75% 25% # of Respondents % have a formal process to authorize LO s to originate reverse 75% train forward originators to look for reverse mortgage opportunities 38

39 Forward LO s Refer to Reverse Specialist? Do Forward originators refer loans to a Reverse specialist? Do Forward originators receive financial incentive for the referral? Yes No N/A % of Total 77% 23% 17% # of Respondents Yes No N/A % of Total 74% 26% 0% # of Respondents Most Forward LO s refer loans and receive an incentive Is this an effective approach to maximizing Reverse production when it makes sense for the borrower? 39

40 Comparison of LO Productivity 2016 Monthly Production (Units) per FTE Forward Reverse Top 20% % to 40% % to 60% % to 80% Bottom 20% Forward Production results from STRATMOR s annual Originator Census Survey Reverse data derived from Loan Officer closings in the ReverseVision system Production is heavily weighted to the top 2 quintiles for both Forward and Reverse As expected, productivity per Forward LO far exceeds productivity for Reverse LO s why is that? Common hypotheses: Sales cycle Counseling needed Lower Pull thru % Lack of a forcing function 40

41 Average Age of Originator # Respondents % Respondents Between 40 & 45 Years % Between 45 & 50 Years % Between 50 & 55 Years % Between 55 & 60 Years % Between 60 & 65 Years % 41

42 Channel vs Product Point of View Channel vs Product Separate P&L Channel/LOB Separate Product Neither % of Total 68% 32% 11% # of Respondents Yes No % of Total 54% 46% # of Respondents % of respondents view Reverse as a Channel/LOB vs a Separate Product A little over half of the lenders keep a separate P&L for reverse 42

43 Reverse Secondary Market Outlets 44.8% 8.5% 0.2% 46.5% Brokered out to Wholesale Lender Sold to Correspondent Lenders / Investors Issued Ginnie Mae HMBS Held loan on Balance Sheet - Portfolio Average Avg Reverse Units Brokered out to Wholesale Lender 46.6% 185 Sold to Correspondent Lenders / Investors 44.9% 1,083 Issued Ginnie Mae HMBS 8.5% 7,112 Total 100.0% The 42 survey respondents offering reverse either Brokered out the loans, sold to Correspondents, Issued HMBS or held loans in portfolio Brokered Out 47% of the volume of respondents; tend to be small originators (only 185 units) Sold to Corr 45%, larger lenders with average volume of 1,083 units Issued HMBS 8.5%, the domain of larger lenders averaging over 7k in unit volume 43

44 Reverse Lending Survey LENDERS NOT OFFERING REVERSE 44

45 If Not in Reverse, Why Not? Reasons to not offer Reverse Overall Avg Bank Indep Don t have expertise in house Don t believe it will be profitable Concerned about reputation risk Believe it will distract from fwd business Responses to Common Concerns About Reverse Reputation Risk Are forward lenders playing old tapes? Many changes in last several years such as caps on Origination fees; bona fide advantage rules; financial assessment / LESA s; removal of interest rate floor; common sense regulation is good for borrowers and the industry in the long run Profitability while current market is challenging for both Forward and Reverse, there is lots of room for improvement in efficiency and cost reduction; we have been through cycles before; combining functions with forward where it makes sense will be a big help Too Complex while the front end of the sales cycle is different and requires different skills (vs. Forward), at some point, a loan is a loan; reverse is not so much complex as it is unfamiliar to forward lenders and consumers Distraction from Forward shrinking forward margins will cause more lenders to move into reverse; expansion into new products is a common reaction to declining margins; what may seem to be a distraction for some may be an opportunity for others 45

46 Looking Ahead 46

47 Final Thoughts Some Challenges Margins are compressed in both forward and reverse Sales efficiency crack the code on leveraging both the forward and reverse sales force Operational efficiency - combine functions with forward where it makes sense Market awareness industry needs to continue to develop an awareness of the advantages of the reverse product with consumers and referral sources The Good News Demographics continue to be in our favor aging population with trillions of dollars of untapped equity Estimated 1.3 million loan transactions to borrowers over 62 in 2016; for many of these customers, the reverse mortgage may have been the best solution HECM for Purchase well positioned for go forward purchase market While the industry must continue to address reputation risk head on, there is much we can say and do to mitigate the perception 47

48 Contact Information Jim Cameron Senior Partner STRATMOR Group