Second Shoe – HECM Lenders September 2012

HECM endorsements for September totaled 3,706 loans, down 10.1% from August. The drop was felt across the nation, with 9 of 10 regions tracked seeing declines.

From a lender perspective, the entire decline can be summed within the top 10 lenders ranked on page 2:

  • Genworth was the only active lender to grow volume from August, up 14.2%
  • The exited lenders collectively declined -175 loans, or 42% of the total industry decline
  • The remaining 6 lenders dropped -354 loans, or 85% of the industry decline

When we turn to case numbers issued (our proxy for applications), we get a little bit of good news although it comes with a caveat.

August case numbers issued showed a year over year increase for the first time since March 2011, well before the Wells Fargo and Metlife exits (although after BofA). From the perspective of this chart, it would seem logical to expect endorsements to show an increase year over year around December (August case numbers issued with a four month lag for endorsement timing).

…but what becomes obvious when we look at the trends in the basic endorsement chart is that there’s an increasing gap between case numbers issued and endorsements. This is the conversion rate issue that FHA has pointed out at past industry events, demonstrating that the exited lenders as a group were more efficient at converting case numbers issued into endorsements than the remaining lenders collectively.

The conversion statistics for the industry are incredibly volatile from month to month, but smoothed over 3 months there is a clear trend downward from a recent peak in December 2010 of 82%. For the most recent reading on March-May case numbers issued, the conversion rate was just 57%.

So while steady increases in case numbers issued are undoubtedly good news for the industry, unfortunately the decline in conversion rates means it’s an uphill battle to get back to growing year over year on an endorsement basis. The 2.1% increase over August 2011 will be entirely offset by the decline in conversions, so we’ll have to wait til 2013 for endorsement growth even if case numbers issued continues to grow.

Please click the image below for the full report.