Rethinking Reverse Mortgage Lending

This piece originally appeared in the June 2023 edition of MortgagePoint magazine, online now.

As the real estate market continues to cool, lenders are working harder to find new borrowers. Competition is heating up, and every loan the lender wins is getting more expensive because they’re having to expend more time, effort, and marketing budget to win that business.

Some lenders, however, are looking at the mortgage business in a slightly different way, and it’s making a big difference in their ability to compete. A subtle shift in approach to their existing businesses is yielding unexpectedly good results.

Instead of looking at the reverse mortgage lending business as a completely new line of business, these lenders are just looking at reverse mortgages as another loan product to add to their existing menu.

Instead of building an entirely new business with its own infrastructure, staff, and siloes, these lenders are just making reverse mortgages available to their loan officers to sell. It’s a better strategy in a down market.

There are reasons this thinking is revolutionary, and why most lenders have not looked at the business this way, but it can bring big benefits to the lenders who can.

Thinking About Reverse as a Product, Not a Business?
In the early days of reverse mortgage lending, there was confusion as to the rules, both on the part of the lender community and consumers. This led to the rise of specialized lending firms that sold only these products. As a result, their technology was also specialized.

In the beginning, everyone thought of reverse mortgage lending as an entirely different business, rather like auto lending or small business financing. Because compliance was just coming into focus, this made some sense from a risk management perspective.

Today, reverse mortgage loans are a mature product set with easy-to-understand compliance rules that any lender can learn and apply to their institution. Borrowers are also more aware of these products, how they can be used during retirement, and the risks and rewards for doing so.

We have been advising lenders for some time now to diversify their product set and, in fact, we see more lenders originating broader menus lately. Going with a broad strategy with a larger menu of loan products that can serve more borrowers is better than focusing on a particular set of products when volumes are down, and the costs are high for attracting new customers.

In addition, settlement services providers that previously may have focused solely on either the forward or reverse lending market are now broadening their services to cover any mortgage-related product. This is making it easier for lenders who have not offered reverse mortgages in the past to do so without going to the trouble of seeking out a new set of partners.

Given all of this, why aren’t more lenders thinking about reverse mortgages as a product and not a separate business?

Traditional Hurdles That Kept Forward From Reverse
The first significant hurdle that kept forward lenders from moving into the reverse mortgage market was compliance. It took some time for the rules to come fully into focus, and for the specific actions taken by reverse mortgage lenders to make it past regulators. No one wanted to become the first reverse mortgage lender to suffer regulation by enforcement for a new mortgage product.

The second hurdle largely grew out of the first. Because reverse was treated as a separate business, technology for reverse lending was developed for that specific process.

Unless a forward lender wanted to invest in an entirely new tech stack, it became very difficult to get into the reverse business. That new LOS would have to include all the compliance infrastructure to keep the lender safe as it ventured into the new line of business. One mistake could put the lender’s other businesses at risk.

We’re talking about a massive investment on the tech side, and that’s before you wire up all the new partners, including a source of compliant documentation. It’s a heavy lift.

There are only a dozen or so lenders in the country large enough to ramp up a de novo reverse business quickly enough to generate a return on an investment like that.

Finally, new compliance requirements and a new loan origination system naturally gave rise to a new breed of mortgage professional.

The best of these professionals are expensive to recruit, which means the lender would have to start with less experienced personnel, which is always risky.

In the past, there were plenty of reasons why lenders backed away from reverse mortgage lending, but those days are now behind us.

Why Every Lender Should Consider Reverse Mortgages
Mortgage lending is a numbers game. The more volume a lender can capture on its existing infrastructure, the lower their overall cost per loan and the higher their profitability.

When volumes fall, lenders will begin to look for new ways to leverage their existing tech stack and staff to originate more business.

In the past, this was difficult as origination platforms were designed to meet the specific needs of the majority of lenders, which has traditionally been forward mortgage lenders.

Today’s next-generation digital lending platforms are not architected in the same way.

Today’s leading LOSs can originate reverse mortgages as easily as they can forward mortgage loans, all on a single stack with a common database to make regulatory reporting and data governance simple. It’s a game-changer.

Lenders that are already using a modern LOS for forward lending can now easily expand their operations into reverse lending without having to make a major investment in what amounts to an entirely new business just to offer a new product.

Providing a mortgage product to meet the needs of every consumer segment instead of just a subset maximizes the lender’s ability to compete effectively in the current market.

It’s a better strategy in the current market and many lenders can implement this strategy on their existing loan origination technology.

The economics of reverse mortgage lending may not be quite as favorable today as they were when rates were lower and older homeowners could pull more equity out of their homes, but they still make sense for a wide range of consumers.

And, thanks to demographics, there are more reverse mortgage borrowers than ever.

Data collected by the U.S. Census Bureau suggests that there will be more than 80 million Americans 65 or older by 2040.

In a market like the one we are living through now, lenders must take business where they can find it, especially if they already have technology that can originate the products. This makes even more sense when you consider that there are more experienced people looking for work now than there have been in years.

Continuing to think about reverse mortgage lending as a separate business doesn’t make sense in an environment where the hurdles to reverse lending have been removed and the need for additional volume has never been greater.

Thinking about these products as just another product that you can sell into the market opens you up to more volume, additional revenue and connections to older Americans who very likely have children they can refer to the lender for their next loan. It’s a simple mind shift that could pay very high dividends.