Because the FHA reverse mortgages (HECM) have loan limits, are expensive, and got harder to obtain, the private reverse-mortgage market is growing. These can be used to buy a home too, and have no payments! Maybe the realtor disrupters will get into the reverse-mortgage business instead?
Borrowers of proprietary reverse mortgages are increasingly becoming more closely aligned with the typical profile of a Home Equity Conversion Mortgage (HECM) borrower, through two very identifiable attributes: loan amounts that are in-line with those of a more traditional HECM, and the use of a loan’s proceeds to consolidate and pay off existing debt of other types. This is according to data about borrowers of proprietary products from Reverse Mortgage Funding (RMF) in a webinar hosted last week by RMD.
“We’re getting a lot of borrowers who are not necessarily the ‘jumbo’ market over that max claim limit of a HECM,” said Craig Barnes, head of training and education at RMF in discussing the company’s Equity Elite proprietary reverse mortgage. “We’re doing a lot of loans for much less than that.”
While most proprietary reverse mortgages have maximum loan amounts of up to $4 million – including RMF’s Equity Elite – Barnes shared that some of the greater flexibility granted by proprietary products are attracting more borrowers that would previously have only been served by a traditional HECM.
“[Our typical borrower is] age 77, they have a home valued at $1.5 million. So, as I said, it’s not a super jumbo product,” Barnes describes. “With the change in max claims last year, really you have to get well above $1 million or so depending on a borrower’s age in order to maximize the HECM anyway. We just had one yesterday that was for $400,000.”
Another way that proprietary products may be more attractive to borrowers who could previously be served by only a HECM is in lower upfront costs.
“We wanted to increase [the scope of] the industry for everyone,” says Mark O’Neil, national wholesale and correspondent sales leader at RMF. “[This includes] borrowers who, in a lot of cases could take out a HECM, but just won’t pay the closing costs. We’ve been serving a lot of cost-sensitive borrowers who — even if a HECM is a great solution for them — just cannot stomach paying two points upfront in MIP. We’ve been tapping a good number of those borrowers here over the last year.”
Client profiles also reveal that the borrower base even at lower loan amounts does not necessarily constitute someone who is needs-based, or someone who turns to the reverse mortgage as a “last resort.” The lowest-recorded loan amount for RMF’s proprietary product sits at just over $63,000, the average credit score of all its proprietary borrowers is 738. This could represent an industry-wide shift based on trends RMF is observing, O’Neil says.
Data gleaned from proprietary borrowers also indicates that many of them are using the proceeds from the proprietary loan to pay off other kinds of debt not typically associated with the wider perception of a proprietary borrower, Barnes says.
“Our average mortgage debt payoff is $173,285, so these are not borrowers who have very, very large outstanding debt,” he says. “The average property price is $1.5 million, but average mortgage debt is only just over $173,000. So, we can treat these as consolidation loans.”
Another attribute that’s not commonly associated with proprietary reverse mortgage borrowers, according to Barnes, is credit card debt. The data, however indicates that borrowers on average are using their proceeds to pay that off, as well.
“The average credit card debt that we’re paying off is just under $22,000. So, again, our population of clients that we serve certainly do have credit card debt,” Barnes says. “I think it’s inaccurate [to think they] don’t have credit card debt. On average they have less credit card debt than the younger folks, but again we’re paying off an average of just under $22,000 in credit card debt.”
Many clients are taking a more holistic approach to paying off other outstanding obligations too, however.
“Obviously, we’re paying off the liens on [a borrower’s property], but we’re also paying off car loans, personal loans and credit cards,” Barnes says. “Sometimes the borrower just simply wants to get a clean slate on that, or sometimes the underwriter may require that the borrower does pay off so that it can increase their cash flow.”
It may also be the borrower’s ability to qualify or not by paying off another obligation. Either way, shifts being observed in the industry indicates to RMF that there is potential for private reverse mortgage products to eclipse their government-based counterparts.
“We’re certainly seeing things going in the direction of HECMs being eclipsed by proprietary products,” O’Neil shares.