Property preservation company MCS announced last month that it had entered the reverse mortgage business after acquiring Five Brothers Asset Management Solutions. In part one of RMD’s interview with MCS CEO Craig Torrance, he explained his company’s interest in the reverse space.
In the second part of the interview, Torrance goes deeper into the value proposition of engaging in the reverse mortgage business; the ways companies like his might be able to simplify certain necessary property obligations; and more about what the company is inheriting from Five Brothers in terms of knowledgeable people and reverse industry relationships.
Editor’s note: This interview has been edited and condensed for clarity and readability.
Chris Clow/RMD: What do you hope the industry can do to offer more or better information about how MCS will pursue continued business in the reverse mortgage space?
Craig Torrance: I think [we] will naturally, hopefully, bring in the lenders to think through what this relationship will look like going forward, and to identify what else we can do to help folks in the space. Generally, I think as we pull together resources and understand as an industry what we can do, there will be more of that type of thinking around what services can be created for reverse mortgage owners to utilize and say, ’Hey, I need work done. I need somebody to cut my grass.’
In many cases, some of those services are managed by family members. So, you’ve got the elderly folks in the reverse mortgage, and the kids are the ones trying to figure out how to maintain mom’s house. If we can professionalize that so people feel good knowing the person performing this work at mom’s house is from a solid, reputable company — and that the lender, the servicer and everybody’s kind of involved in that — it’s probably an upside for the whole community.
Clow: It’s my understanding that Five Brothers was a member of the National Reverse Mortgage Lenders Association (NRMLA). Is that a membership MCS will continue with?
Torrance: Yes. We grabbed everything out of the business, and we’re also going to continue with the team there. They bring a lot of industry expertise, and the business was huge: It was a 50-year-old business. They spent a lot of time in this space, with a lot of people there having 20 to 25 years of experience in reverse. Part of the deal was to bring all that expertise into MCS and continue.
So, we really want to be active in the reverse space, be a participant in the industry, be part of the conversations and share what we think we can do to help out. Hopefully, everyone can raise their hands.
Clow: What’s your assessment of the competitive landscape for this specific segment of the reverse business?
Torrance: We don’t see any direct competitor to our place. We see direct competitors in certain segments, like property preservation in forward (lending). There are competitors in single-family rental (SFR) service centers. In reverse, there are a few competitors. But to us, what is key is that when you put it all together, there isn’t any one company that can do all the things we can. That’s why we feel good about the business model.
Adding in reverse allows all those reverse companies to pull from a commercial business, from our single-family rental business and from our forward mortgage business. That ultimately means we have more vendors, better technology and tools — we believe — than our competitors. So, we have individual competitors in certain segments but no one overall competitor, which makes us somewhat unique.
Clow: HousingWire is read by people across the business — from loan originators up through executives at lenders and servicers, as well as government officials. Is there anything in particular you think they should know about MCS getting into reverse?
Torrance: I think the key message that I would double down on is the conversation around labor in the U.S. and how costs to perform this kind of maintenance work have only accelerated over the last few years. What we’ve found is that this is ultimately a fee-based business. When you perform some of these basic types of maintenance services, there’s a cap on how much you can charge for that.
What has happened is we have seen vendors leave the space, so we are at a point where they would rather work for Amazon than cut grass because they can make more money than cutting grass on a defaulted reverse mortgage property. So, what we’ve seen is people shy away from this segment and these FHA-backed properties. MCS is trying to solve that problem by bringing more work to the vendors today through reverse, forward, commercial and SFR.
Clow: Is there anything that we didn’t speak to about this entrance into the space that you think people should know?
Torrance: The only thing I would add in is that Five Brothers has built a technology platform to really enable the reverse process very well. When it comes to technology, people say you can build anything. It’s just ones and zeros at the end of the day. And to an extent, that’s true, but the reality is that it’s hard to build the platform to do reverse mortgage process servicing.
It’s hard to build a servicing platform, and the servicing platform that reverse people use is different from forward. So, thinking through that, what they’ve really done over the last 20 to 30 years is they’ve created a process flow and enabled that process for a really slick tech engine that you can now move through the reverse process very easily. It’s transparent, and we can unlock a lot of efficiencies, and ultimately get to compliance and deliver great service through there.
That was critical for me. Technology needs to unlock this. Five Brothers probably has the best property preservation platform for reverse in that segment. We now have that platform, will continue to invest in it and we can only just accelerate that over the next few years.
Finance of America Companies (FOA), parent company of industry-leading reverse mortgage lender Finance of America Reverse (FAR), released a new “investor update” this week to update shareholders and other stakeholders on different elements of its reverse mortgage business including its strategic initiatives, business model and an update on its integration of American Advisors Group (AAG).
The company also provides commentary for its fourth quarter 2023 financial performance, assesses its market advantages and offers an assessment of impacts stemming from changes in Ginnie Mae’s Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) program.
Business update and market share
The company announced the availability of the update in a filing with the Securities and Exchange Commission (SEC). FOA begins the update by listing statistics illustrating the market potential of reverse mortgages, including the amount of home equity held by seniors ($13 trillion based on the Reverse Mortgage Market Index), a majority of seniors’ aging in place preferences and sources of anxiety in retirement.
Citing data from New View Advisors, FOA describes itself as “the largest Ginnie Mae HECM issuer for the last 10 years” when including AAG, with 37% of total 2023 issuance compared to Longbridge Financial (21%), Liberty Reverse Mortgage (16%) and Mutual of Omaha Mortgage (15%).
The company also said it “continues to evaluate new products to reach additional segments of the population facing a retirement gap,” and describes recent reverse mortgage industry consolidation following influential industry changes in 2017 and the 2022 bankruptcy of Reverse Mortgage Funding (RMF).
“As a result, the industry has consolidated from approximately 20 HECM issuers controlling 50% of the market in 2017 to only four today, and FOA’s market share has increased to 37% over that same period with the acquisition of AAG,” the company said.
Last July, the company sold its title insurance business to Essent Group, followed by strategic changes in September including a transition of its offshore-based operations to a team in the Philippines and the sale of “certain operations” of its home improvement lending business to Aqua Finance.
“Following the wind down of its forward mortgage business and sales of non-reverse segments including Lender Services, Commercial Originations and Home Improvement, FOA is focused solely on the reverse mortgage market,” the company said. “The Company has substantially completed its exit from all non-core businesses at the end of Q1’24.”
Reverse mortgage leader and ‘right-sizing,’ future goals
Following its acquisition of AAG in March 2023, the company became the industry’s leading reverse mortgage lender. This resulted in the company taking “aggressive actions to rightsize its originations and back-office headcount to align with continuing operations,” saying it reduced its overall headcount by roughly 30% from its Q2 2023 peak following the acquisition of AAG.
This has resulted in FOA having “less than 1,000 employees” as of the end of 2023, the company said, leaving the organization “well-positioned to evaluate opportunities for further industry consolidation,” the update explained.
The company is also transitioning into what it calls a “de-levered, cash-generation business model,” which it plans to accomplish by “monetizing its existing balance sheet while new originations generate free cash flow and long-term equity value.”
That positive free cash flow it is aiming for will potentially go toward new financing on newly-originated HECM mortgage servicing rights (HMSRs), and wants to reach a point where “incremental financing” on HMSRs create additional liquidity.
FHA, HMBS program changes
The company went into additional detail regarding changes handed down to the HMBS program by Ginnie Mae brought about by the bankruptcy of RMF. Last September, Ginnie Mae announced it would begin allowing the securitization of multiple participations related to a particular HECM in any one issuance month. In January, the government-owned company announced its plans to develop a new reverse mortgage-backed security product in response to industry liquidity challenges.
The Federal Housing Administration (FHA) announced a series of several different HECM servicing changes in November 2023 including allowing mortgage servicers to contact borrowers by phone to verify occupancy for the program’s required annual occupancy certification, as well as allowing mortgage servicers to assign a HECM to the U.S. Department of Housing and Urban Development (HUD) after the servicer funded a cure on delinquent obligations.
FOA noted several impacts on its business stemming from these changes, including increasing the “velocity” of tail securitizations; a reduction in the need for third-party financing; and increased value for the company’s HMSRs.
Ginnie Mae’s potential new HMBS product, referred to by some in the industry as “HMBS 2.0,” has other notable potential for FOA’s reverse mortgage business, the company explained.
“HMBS 2.0 may allow FoA to collapse ~$630 million of securitized buyout [unpaid principal balance (UPB)] and reissue these as [Ginnie Mae] securitizations, improving liquidity and freeing operating capital,” the company said.
In its Q4 2023 earnings report last month, FOA said that it narrowed its quarterly loss to $20 million and posted an overall improvement in its earnings to $164.7 million in fourth-quarter 2023.
The fourth-quarter loss was down from the $25 million in losses posted in Q3 2023, touted its HMBS market share and addressed remaining challenges related to the integration of AAG and two notices it received from the New York Stock Exchange (NYSE) about its stock price being out of compliance with continued listing standards.
Last month, Northeast regional lender WSFS Mortgage released the results of a survey that measured reverse mortgage product sentiments. It found that more people seem to be aware of the potential value that a reverse mortgage could provide for older homeowners, including as a tool to age in place and to provide greater cash flow in retirement.
Despite the more regional focus of WSFS Mortgage’s reverse mortgage offerings — which offers the loans through its brokerage — the survey itself was conducted nationwide with a research company enlisting responses from 750 homeowners at or over the age of 60.
To get a better idea of what motivated the survey and its desire to learn more about reverse mortgages, RMD sat down with WSFS Mortgage President Jeffrey Ruben.
The education gap
The reverse mortgage industry has long made serious investments in educational programs, particularly when looking at the efforts of current and former major lenders in the space like Finance of America Reverse (FAR), American Advisors Group (AAG) and others. In terms of what motivated the company to conduct the survey, Ruben describes a perceived disconnect between the utility of the product category and its reputation.
“The ‘aha’ moment was really validating an assumption we had going into it, that there is this large education gap,” Ruben said. “Whenever there’s a chance to educate and let people know how this product works, [the industry] all about it, and that’s where we are as well. We feel that as a product, it suffers from a lack of information and a lot of misinformation. I think the survey bears that out.”
When asked if it is aiming to use the survey results to inform future plans with the reverse mortgage product, Ruben said that the company has a nearly 200-year old history and had been more involved in reverse mortgages in the past, but not since he joined the company roughly a decade ago.
Population trends
WSFS did in fact have a national reverse mortgage-focused subsidiary, 1st Reverse Financial Services, but elected to wind it down and shutter it in 2009. Since Ruben joined the organization, reverse mortgages have not been a major focus of the company, he said.
“Since I’ve been involved, I’ve stepped back and looked at our depositor base. We’re based in Wilmington, Delaware, we service the tri-state area of Pennsylvania, New Jersey, Delaware and some of Maryland,” he said. “And if you look at that population group, it’s an older group of Americans and our deposit base reflects that as well.”
However, Ruben describes being surprised at a generally low level of reverse mortgage activity he has seen since becoming involved, and thought about engaging in an exercise that would allow for a clearer understanding of whether or not reverse remained a viable business path for the company.
“We thought we weren’t successful in getting the word out about this product and how it can be used,” he said. “It’s not for everyone, but it definitely should be something that is in the offering, and that people can make an informed and educated decision about. Our motivation was to look at our population base, and to look at the values of homes. We have an aging population, and it just seems so ripe to make sure that our older Americans are aware of this option and this program.”
Maintaining a regional focus, program changes
Despite the results of the survey indicating more understanding of the utility of reverse mortgages, Ruben said the company has no immediate ambitions to progress beyond its regional focus brokering reverse mortgages to investors. But he didn’t completely shut the door on the prospect for the future.
“It sounds cliché, but we do like to walk before we run,” Ruben said. “We want to be able to learn how this product is going to be received. It is a much safer and financially less impactful decision to broker initially, but as we get more and more knowledge we do feel that it is a product that we could bring in-house at some point if the conditions are correct and we are comfortable with the program.”
The company will also keep an eye on the regulatory environment, and any potential changes that the U.S. Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA) may choose to make to the Home Equity Conversion Mortgage (HECM) program, he said.
But the involvement of the HECM program’s stewards likely helps what could be a delayed process of recognition for the HECM product due to its age restriction, he said.
“When the government came in and started setting a real good guideline foundation for this product, I believe it caught and continues to catch interest,” he said. “It’s not fully adopted, but more and more financial advisors who are working with individuals in retirement planning are starting to recognize the value and the potential opportunity for a reverse mortgage to help with that retirement cash flow, which is usually the main goal of a successful retirement plan.”
A lack of product awareness is giving way to people who are starting to think in longer terms about their financial futures, Ruben has observed.
“I see even in our own bank, younger people today are really focused on a 30-year and 40-year plan for when they retire someday,” he said. “So, I think it will become a tool and a financial instrument that people will learn about earlier in their life, today and in the future.”
Reverse mortgage professionals in Massachusetts will be reliant on their borrowers’ ability to complete their required counseling sessions under the state’s face-to-face mandate following the expiration of a provision temporarily relaxing the standard that expired on April 1.
This is according to prior legislative documents reviewed by RMD and an announcement this week by the National Reverse Mortgage Lenders Association(NRMLA).
In an email update to its members, NRMLA explained that a spending bill containing an amendment that would permanently allow for telephonic and video counseling was approved by both houses of the state’s legislature, but that the addition of new amendments to the Senate version had prolonged the process that would allow it to become law prior to the expiration of the last extension.
The issue has remained a specter over the state’s reverse mortgage business for years. Massachusetts is the only state in the country to require in-person reverse mortgage counseling, a requirement that caused issues and effectively halted its reverse mortgage business during the early days of the COVID-19 pandemic.
Industry professionals and trade organizations — including NRMLA and the regional Massachusetts Mortgage Bankers Association (MMBA) — have urged state leadership to adopt a more permanent solution. It looked as if one would pass last year, but a revision of the budget bill deliberated at that time included an amendment that removed the permanent allowance from a prior version approved by the State House.
Reverse mortgage industry veteran George Downey of The Federal Savings Bank in Braintree, Mass. has been a critical figure in the advocacy for a permanent solution that would allow for remote counseling. While he remains apprehensive about the latest budget bill and whether it will include the desired language in its final form, he also shared that this time feels a bit different when compared to prior recent efforts to address this issue.
In addition to support from NRMLA and other trade associations, Downey said the outreach he and others have done on the issue has felt fruitful.
“We’ve done as much as I think reasonably could be done to get the information to the surface so that the conference committee members, when they were evaluating these various amendments, would have some sense of what this is about and how important it is,” Downey said in an interview. “So, I feel a measure of confidence in that regard. I’ll be optimistic and give us 50% odds.”
Part of the challenge in getting such a provision passed, he said, stems from longtime reputational challenges the reverse mortgage product has had that are difficult to challenge among lawmakers, he explained.
“It’s those old misconceptions, those old biases that carry a lot,” he said. “That’s just speculation on my part, but I’m pretty sure that that was the problem.”
Downey previously explained to RMD that there are only five full-time U.S. Department of Housing and Urban Development (HUD)-approved counselors serving the state. But the disruption caused by COVID-19 has helped lead lawmakers, regulators and the public to become more aware of how useful remote communication is today.
At the NRMLA Annual Meeting and Expo held last October in Nashville, HUD’s Deputy Assistant Secretary for Housing Counseling David Berenbaum alluded to the challenges in Massachusetts. He elected not to directly comment on them but said that there is no reason for HUD to believe that alternative delivery methods of counseling could not provide quality services.
“Our expectation at HUD is that the quality of the services should be maintained regardless of modality,” he said at the event. “And I do know from my experience in the space that superb housing counseling can happen in many different ways. It’s really the professional offering those services that make all the difference.”
The Mortgage Bankers Association (MBA)’s policy advocacy group, the Mortgage Action Alliance (MAA), is urging its members in the state of Massachusetts to support the continued use of remote telephone and video counseling for reverse mortgages in the state following the lapse of an exemption allowing for remote counseling.
“The provision in state law which permitted these forms of consumer counseling on reverse mortgage loans expired on March 31st via sunset,” the call explained. “Importantly, language has been introduced to emergency funding legislation that would restore these forms of counseling and make this flexibility permanent. Importantly, that language was only included in the House passed version of the emergency funding bill.”
Specifically, MAA is calling on its members to contact their representatives in the State House and Senate to urge their support of Sections 11 and 12 of H.4466, the reconciled version of the emergency budget bill.
These two sections modify existing state law to allow for counseling sessions to be conducted “by synchronous real-time video conference or by telephone,” according to the text of the bill.
The differences between the House and Senate versions of the bill are expected to be reconciled this week, according to the MAA notice. According to its most recent update on the website for the Massachusetts legislature, the committee conference implementing the reconciled version was appointed on Mar. 28.
The issue of a face-to-face reverse mortgage counseling provision has remained a specter over the state’s reverse mortgage business for years. Massachusetts is the only state in the country to require in-person reverse mortgage counseling, a requirement that caused issues and effectively halted its reverse mortgage business during the early days of the COVID-19 pandemic.
Since then, there have been multiple efforts to implement and renew time-limited exceptions that allow for phone or video counseling, with certain reverse mortgage professionals within the state working in concert with trade associations to advocate for a permanent solution. While one came close to becoming law in 2023, the necessary language was ultimately not included in a budget bill and another temporary exception was put into place.
That exception expired at the end of the day on Mar. 31, but reverse mortgage industry veteran George Downey of The Federal Savings Bank in Braintree, Mass. — who has been a critical figure in the advocacy for a permanent solution — said it could happen this time.
“We’ve done as much as I think reasonably could be done to get the information to the surface so that the conference committee members, when they were evaluating these various amendments, would have some sense of what this is about and how important it is,” Downey told RMD late last week. “So, I feel a measure of confidence in that regard. I’ll be optimistic and give us 50% odds.”
Last year, MBA President and CEO Bob Broeksmit signaled that the association would be more involved in the reverse mortgage industry in 2024.
“I think that given the demographics of this country and given the record levels of home equity, it makes perfect sense for our members to focus on that product, [and to] make it as strong and sustainable, both for lenders and servicers and of course for the homeowners and their families, as it can be,” Broeksmit said in December.
In the March rate update, we discussed why Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgages (HECMs) utilize two interest rates. The “expected rate” is unique to reverse mortgages and is calculated by adding the lender’s margin to the weekly average 10-year constant maturity treasury (CMT). This rate is used, among other things, to help determine a borrower’s initial principal limit (borrowing capacity).
For such a critical number, little has been written about the expected rate and its impact on HECM loans. In this month’s update, we’ll discuss two features you may not know about expected rates.
HUD publishes tables using expected rates in 1/8% increments
Because U.S. Department of Housing and Urban Development (HUD) look-up tables are published using expected rates in 1/8% increments (6.625%, 6.75%, 6.875%, etc.), we must use the nearest 1/8th percent (0.125%).
For example, a 2.50% lender margin combined with last week’s 10-year CMT average (4.22%) would produce an expected rate of 6.72% today. When looking up the borrower’s principal limit factor, we would use 6.75%. Here are sample lender margins and expected rates for the period from Apr. 2 to Apr. 8, 2024.
Because we use the nearest 1/8%, HECM proposals often don’t change from week to week unless the 10-year CMT moves enough to push expected rates beyond a rounding threshold.
Higher or lower expected rates impact principal limits
Higher expected rates reduce borrowing capacity, while lower expected rates increase borrowing capacity. So, it is understandable that HECM prospects want to know how unlocked expected rates could impact their principal limit.
We cannot determine the precise percentage until we know both the relevant age and the expected rate. Depending on those two factors, the impact could be 0.4% to 0.9% of a prospect’s home value. Nevertheless, the average impact of a 1/8% change in the expected rate is a little over 0.6%.
For example, a prospect with a $500,000 home could see their principal limit drop by an average of $3,000 (0.6%) from a 1/8% increase in expected rate. Conversely, their principal limit could increase by an average of $3,000 from a 1/8% decrease in the expected rate until that rate is locked.
April 2024 update
The 10-year CMT average dipped to 4.13% for one week in March, offering higher principal limits for new applications and some loans in processing. While the index rate in effect for April 2-8 is 9 basis points higher (4.22%), the 10-year CMT has been relatively flat since early February.
Example
With a 2.5% margin and resulting HECM expected rate of 6.72% (Effective 4/2/24 – 4/8/24), a 73-year-old homeowner with a $500,000 home appraisal for would qualify for 39.2% of the appraised value of the home. This equates to a principal limit of $196,000 as shown here:
Expected rate: 6.72%
Youngest age: 73
Home value: $500,000
Principal limit: $196,000
For updated principal limit calculations like this, a loan originator can use RapidReverse® (available on any Apple or Android mobile device) or use any HECM loan origination system of their choice.
Note: 2.5% lender margins are used for education purposes only. HUD expected rate look-up tables use the nearest 1/8% for calculating HECM principal limits.
This column does not necessarily reflect the opinion of Reverse Mortgage Daily and its owners.
To contact the author of this story: Dan Hultquist at [email protected]
To contact the editor responsible for this story: Chris Clow at [email protected]
Although fourth quarter mortgage originations were flat year-over-year, nonbank lenders that could provide products through multiple means were able to grow their business during that tough period, a Morningstar DBRS recap found.
“In addition to affordability challenges, seasonality and competition also impacted volumes and pricing,” the report from Shaima Ahmadi, assistant vice president, North American financial institution ratings, said. “However, on an individual company basis, those with omnichannel organization models continued to grow originations in [the fourth quarter] as they were able to capture a higher share of the market versus those with less diverse channels and refi heavy models.”
The top mortgage lenders benefited by undertaking business restructuring and making strategic shifts in order to capture more purchase business, Ahmadi said.
A shift underway that might not be going well is taking place at Finance of America, which had been at one point a multi-channel forward lender. After several previous strategy shifts, the company elected to focus on reverse mortgages. As part of that strategy, it bought American Advisors Group, which helped to drive FOA to a 40% market share in that segment.
“Despite market share gains, when excluding forward organizations in 4Q22, FOA’s reverse mortgage origination volume was down a significant 56% YoY in 4Q23,” Ahmadi pointed out.
“Meanwhile, Rithm Capital Corp. has made a number of acquisitions of mortgage servicing and alternative asset management businesses over recent years as part of the company’s strategic shift to become a real estate asset manager. Companies also continue to diversify their basket of mortgage loan offerings with added complementary services.”
The Mortgage Bankers Association’s fourth quarter industry profitability survey found that independent mortgage bankers and bank mortgage subsidiaries, both public and privately held, lost an average of $2,109 on every loan produced.
Furthermore, servicing was a net financial loss for the group of $24 per loan, while operating income for this function, which excludes amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses, and gains/losses on bulk sales, was $108 per loan.
Mortgage servicing rights proved to be a double-edge sword in the fourth quarter. Companies reported fair-value losses on their MSR portfolios — a requirement of mark-to-market accounting that is tied to potential prepayments — but servicing fee income was up.
The publicly traded nonbank lenders tracked in the Morningstar DBRS report had a 6% increase year-over-year in their portfolios. But that ranged from a 14% gain at Mr. Cooper, which was active in the bulk purchase market, to declines of 5% at Rocket and 4% at United Wholesale Mortgage; UWM has been a strategic seller of servicing rights as part of its risk management strategy, executives noted on its fourth quarter earnings call.
FOA actually had a larger percentage increase at 38%, but that was primarily reverse servicing picked up in the AAG deal, and among the nine companies listed, it has by far the smallest portfolio.
Even though its portfolio is now smaller, Rocket bought MSRs originated with high rates for the potential refinancing opportunity.
“Given where mortgage rates currently are, borrowers have little incentive to refinance,” Ahmadi said. “However, some companies indicated that they expect a meaningful rebound in refinance activity when rates fall below 6%.” While the MBA thinks rates will sink under that mark, Fannie Mae’s latest forecast calls for them to just get to that level by the end of next year.
For the group losses narrowed as improved gain on sales margins were partially offset by lower origination volume.
Gross gain on sales margins, inclusive of fee income, net secondary marketing income and warehouse spread, was 334 basis points in the fourth quarter, up from 329 basis points three months prior, the MBA survey reported.
“We would expect margins to remain under pressure in 1Q given the negative impact seasonality typically has on both 4Q and 1Q,” Bose George, an analyst with Keefe, Bruyette & Woods said in an April 1 note on the survey. “Industry profitability is likely to be flat to down in 1Q as volumes should once again be low due to the seasonality associated with the quarter and the elevated average mortgage rate.”
Several public companies also reported major one-off expenses, including Pennymac Financial Services, which recorded $158.4 million in expenses from an arbitration ruling in favor of Black Knight (now part of Intercontinental Exchange) over mortgage servicing technology including allegations of breach of contract and misappropriation of trade secrets.
Meanwhile, Mr. Cooper’s November 2023 cybersecurity incident hit its results to the tune of $27 million.
Ahmadi also noted that the nonbanks had higher leverage ratios year-over-year for the fourth quarter, as debt levels increased slightly but was primarily caused by financial losses eroding company equity.
“During [the fourth quarter], nonbank mortgage companies were active in the high yield market, raising unsecured funding, which was partially used to pay down upcoming maturities in 2025, which we view positively for their credit profiles,” Ahmadi said. “Indeed, unsecured debt issuances increase nonbank mortgage companies’ financial flexibility by decreasing balance sheet encumbrance.”
Both Rocket and Pennymac Mortgage Trust were able to reduce their leverage ratios. But FOA’s debt-to-equity ratio increased to 97.8x compared with 49.7x one year prior, while Ocwen’s was at 27.2x, versus 22.9x over the same period.
A home equity loan or line of credit (HELOC) leverages your ownership stake to help you finance large costs over time.
Home equity financing offers more money at a lower interest rate than credit cards or personal loans.
Some of the most common (and best) reasons for using home equity include paying for home renovations, consolidating debt and covering emergency or medical bills.
Although allowable, it’s best to avoid using home equity for discretionary purchases and expenses.
The U.S. seems to have dodged a recession, but elevated interest rates, rising prices and shrinking savings continue to imperil many Americans’ financial security. Borrowing hasn’t been this expensive in 20 years and, to add insult to injury, it’s harder to get financing or credit, too. Half of Americans who’ve applied for a loan or financial product since March 2022 (when the Fed started raising its key benchmark rate) have been rejected, according to Bankrate’s recent credit denials survey).
But amid still-high mortgage rates and home prices, there’s a silver lining for homeowners. The rise in property values has increased the worth of their home equity, or outright ownership stake. You can borrow against that equity to meet new expenses — or settle old ones.
Two options to tap into your equity are home equity loans and home equity lines of credit (HELOCs). They may not be as well-known as other financing options (in Bankrate’s credit denials survey, only 4 percent of Americans have applied for one since March 2022), but they have several advantages.
If you’re a homeowner needing cash, here are 10 reasons to use home equity — some better than others. In each case, we’ve noted the pros and cons.
$299,000
Amount the average mortgage-holder had in home equity as of year-end 2023, up $25,000 from 2022
Source:
ICE Mortgage Technology
Why use home equity?
Key terms
Home equity
Home equity is the difference between what your home is worth and how much you still owe on your mortgage. As you pay down your mortgage and your home’s value increases, your equity stake grows.
Home equity loan
A home equity loan is a type of second mortgage in which you receive a lump sum upfront and then make regular monthly repayments over the loan term, usually at a fixed interest rate.
HELOC
A HELOC is a revolving line of credit, much like a credit card, that comes with a variable rate. You can borrow, repay and then re-use funds as needed during a set draw period and then pay off your balance during a repayment period.
Tapping your home’s equity can help you cover significant expenses, improve your financial situation or achieve any other money goal. The interest rates on a home equity loan or HELOC are usually lower than those on other forms of financing, and you can often obtain more funds with an equity product compared to a credit card, which might have a lower limit, or a personal loan. Home equity loans and HELOCs are also repaid over a longer term, meaning you’ll have more manageable payments month to month.
10 reasons to use a home equity loan
There aren’t any restrictions on how to use equity in your home, but there are a few ways to make the most of a home equity loan or HELOC. Here are 10 ways to use your home equity, along with their pros and cons.
1. Home improvements
Home improvement is one of the most common reasons homeowners take out home equity loans or HELOCs. Besides making the home more comfortable, upgrades could make it more valuable.
“Home equity is a great option to finance large projects like a kitchen renovation that will increase a home’s value over time,” says Glenn Brunker, president of online lender Ally Home. “Many times, these investments will pay for themselves by increasing the home’s value.”
Another reason to consider a home equity loan or HELOC for renovations: You could deduct the interest paid on the loan, assuming you itemize your deductions on tax return.
Pros
You can reinvest your home’s equity to increase the value of your property.
If you itemize your tax return, you could deduct the interest on your home equity loan or HELOC, up to the limit.
A HELOC, which allows gradual withdrawals, in particular can be ideal for long-term projects in which you pay contractors at set intervals, or ones in which the final cost is indefinite.
Cons
The monthly payments on a home equity loan or HELOC, coupled with your monthly mortgage payments, could stretch your budget too thin.
Depending on the scope of the remodel, you might need more than what you can borrow from your equity.
If you can’t repay the home equity loan or HELOC, the lender could foreclose on your home.
2. Education costs
A home equity loan or HELOC can help you fund higher education or continuing education, whether for you, your children or other loved ones. This route typically only makes sense, however, when home equity rates are lower than student loan rates. That doesn’t happen often, especially compared to federal student loans.
Consider, too, the type of education you’re financing. Someone obtaining a teaching certification, for example, might be able to get the cost covered by their future employer. Some public service professions are also eligible for student loan forgiveness after a period of time. In these cases, it wouldn’t be smart to put your home on the line with an equity loan.
Pros
Could be a lower-interest option than a private student loan, a federal parent loan or a personal loan.
HELOC gradual withdrawal structure tailor-made for annual or semi-annual tuition payments.
Could furnish a greater sum than a student loan.
Cons
Repayment starts sooner (with a home equity loan).
Rates not as competitive as federal student loans’.
Tapping home equity is riskier: If you default, you could lose your home.
The student might be able to get financial help in other ways, such as from a future employer or via loan forgiveness.
3. Debt consolidation
Americans’ credit card debt is skyrocketing. According to Bankrate’s recent credit card survey, nearly half (49 percent) of credit card holders carry a balance from month to month, up from 39 percent in 2021. Given their average interest rate of 22.75 percent, paying down that debt can be tricky — and expensive.
A HELOC or home equity loan can be used to pay off the plastic, along with other high-interest loans. “This is another very popular use of home equity, as one is often able to consolidate debt at a much lower rate over a longer term and reduce monthly expenses significantly,” says Matt Hackett, operations manager at mortgage lender Equity Now.
Home Equity
According to Bankrate’s February 2024 credit card repayment strategies survey, only 10% of credit card-holding U.S. adults report using a home equity loan and/or line of credit to consolidate and pay off credit card debt.
Pros
You could save on interest and lower your monthly payments.
Eliminating credit card debt boosts your credit score.
Cons
You’re turning an unsecured debt, such as a credit card, into secured debt now backed by your home. If you default on your equity loan or HELOC, you could lose your house to foreclosure.
If you haven’t broken the financial habits that got you into debt in the first place, or come up with a plan for repayment, you’re simply swapping one form of debt for another.
4. Emergency expenses
Many financial experts agree you should have an emergency fund to cover three to six months of living expenses, but that’s not the reality for many Americans, according to Bankrate’s 2024 annual emergency savings survey. If you find yourself in a costly situation — maybe you’re facing large medical bills or unexpected home repairs — a home equity loan or HELOC can be one way to stay afloat.
However, this is only a viable option if you have a plan for how to repay the debt. While you might feel better knowing you could access your home equity in case of an emergency, it still makes smart financial sense to set up and start contributing to an emergency fund. Plus, the application process for a HELOC or home equity loan takes time (though it’s speeded up of late: Some online lenders, such as Better, are offering approval decisions within one day). In a true emergency when you need cash fast, you’d need to already have the loan in place to use it.
Pros
If you’re in an emergency situation and have no other means to come up with the necessary cash, a home equity loan or HELOC could be the answer.
Cons
If you don’t have a HELOC or home equity loan already established, you’ll need to complete the application process first. So these loans won’t do you any good in a time-sensitive emergency.
You’re depleting your ownership stake, diluting the worth of a major asset: your home.
5. Weddings
The average cost of a wedding in 2023 was $35,000, according to the planning site The Knot — up $5,000 from 2022. For some couples, it might make sense to take out a home equity loan or HELOC to cover this expense, rather than a wedding loan, a type of personal loan. That’s because the interest rates on personal loans are typically higher than interest rates for home equity loans and HELOCs.
The major disadvantage, however: You’d be putting your home on the line for a discretionary expense. This can be risky if you don’t have a solid plan to repay the loan. It also tacks on interest to an expense that didn’t have interest to begin with, ultimately costing you more.
If you do go this route, be careful not to take out more than you need. If you’re unsure of the total tab for your big day, a HELOC is the better option.
Pros
Rates probably cheaper than those of personal loans or credit cards.
You may be able to access more funds than you would with other loans.
Cons
It’s a questionable move to put your home on the line for what’s essentially a big party.
You’re paying interest, so your wedding will cost more than you think: You could be paying for it decades after you wed.
When the loan’s used this way, the interest isn’t tax-deductible.
6. Business expenses
Some business owners use their home equity to start or grow their company. If you need capital, you might be able to save money on interest by taking equity out of your home instead of taking out a business loan. Before you commit, though, run the numbers. A return on investment isn’t guaranteed, and you’re putting your house on the line.
Pros
You might be able to borrow money at a lower interest rate with a home equity loan than you would with a small business loan.
It might be easier to obtain capital with a home equity loan than with a loan tied to your business, especially if you’re just starting out.
Cons
If your business fails, you’d still need to make payments on what you borrowed, regardless of lack of earnings. If you can’t, you could face foreclosure.
7. Investment opportunities
It’s possible to use home equity to invest in the stock market or buy a rental property — though both propositions are risky and require serious care and consideration. A well-qualified borrower might be able to take out a home equity loan on an investment property, as well.
Consider the interest rate on home equity borrowing, especially if you’re using the funds for investment purposes. “With interest rates of 9 percent, 10 percent or even higher, this is no longer low-cost debt,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “At rates that high, it is a tough hurdle to clear to get a positive return on your investment.”
Pros
Investing in the stock market or real estate can be a great way to build wealth.
Leveraging assets to invest increases your rate of return.
Cons
Investments always carry risk, but that’s especially true when you’re putting your home on the line. It’s possible that you won’t earn a high enough return to outweigh your loan debt.
You can’t take advantage of the home equity loan’s tax deduction on interest, except in a few cases, such as buying adjacent property or land.
8. Retirement income
If your retirement savings are falling short, tapping home’s equity can help supplement your income so you can better manage expenses. These funds can be used to cover bills, emergency expenses or even home improvements to make you more comfortable as you age. A big caveat: This strategy relies on your ability to repay the loan or HELOC. If you’re not yet drawing Social Security, you might be able to repay HELOC funds with the benefit money later on. If you’re fully retired and struggling to make ends meet, however, it’s possible you won’t have the means to repay the debt, even if you have a HELOC you don’t have to pay back right away.
There are other roadblocks to this strategy, too: If you’re still paying your first mortgage, tapping your equity adds to your expenses and puts you in debt that much longer. It might also be harder to even get an equity loan if your income has decreased in retirement.
Pros
Using your hard-acquired home wealth as source for retirement income can be a smart use of assets.
Cons
You’ll need to think through how to repay your loan while you’re retired, and even afterwards. Home equity debt doesn’t disappear when you pass away — your heirs will have to work with your lender if they want to keep the home.
It could be harder to qualify for a home equity loan with a lower retirement income.
Home Equity
If you need retirement income, a reverse mortgage may be a better option than a home equity loan or HELOC. With a reverse mortgage, your lender pays you a lump sum or a series of monthly payments; how much you can get is based on your home’s value. The loan balance (plus interest) becomes due when you move out, sell the home or pass away. Most reverse mortgages include a “non-recourse” clause, which stipulates that you (or your estate) can’t owe more than the home’s value when the loan becomes due (so if the home’s depreciated and worth less than the loan balance, no one is on the hook for the difference). The advantages: There are no monthly repayments while you’re living in the home, and there are no income or credit score requirements, so you can qualify even if you’re struggling financially. However, to get a reverse mortgage, you usually need to be 62 or older and have substantial equity in your home — meaning, your primary mortgage be substantially, if not entirely, paid off.
9. Funding a vacation
Traveling can come with a steep price tag, and tapping your home’s equity could help cover the costs without having to increase your credit card debt. Even the best vacations don’t last forever, though, and home equity debt can linger for decades, so weigh your decision carefully. Is the trip worth potentially risking your house to pay for?
Pros
Home equity loans typically have lower interest rates than credit cards, which could save you money.
Cons
Putting your home on the line is an extremely risky way to finance a trip that will be over in a matter of days — and you’ll still be paying for it many years after it’s over, which could ultimately cost you more in interest.
10. Other big-ticket items
It’s possible to use your home equity for big-ticket purchases, but it doesn’t add up in many cases. Home equity loans have much longer repayment terms than auto loans, for example, resulting in lower monthly payments, but much more interest over time. Cars are also depreciating assets, meaning your car will be worth much less than you paid for it by the time you finish repaying the equity loan.
Pros
You could finance a larger purchase, like a car.
Cons
Your home’s equity isn’t worth leveraging on an expense that won’t give you a solid return. With the example of buying a car, you’ll be risking your home for an asset that will be worth less than what you paid for it by the time you’ve finished repaying the loan.
Using home equity FAQ
The amount of home equity you can borrow against depends on a number of factors, including how much the home is worth, the outstanding balance on your mortgage and your credit score. Assuming you’re well-qualified, many home equity lenders allow you to tap up to 80 percent of your equity.
As with any loan product, a home equity loan or HELOC can hurt your credit score in the short term, in part because you’re taking on more debt and potentially raising your credit utilization ratio. Over time, however, your credit score could go up as you make regular monthly payments on your home equity loan. It’s possible to get a home equity loan with bad credit, too.
It can be. You can deduct home equity loan interest if you use the funds to “buy, build or substantially improve” the home that was used to secure the loan, according to the IRS. You must itemize deductions on your tax return, and — similar to the mortgage deduction — there are limits as to how much you can deduct.
Yes. The closing costs for home equity loans and HELOCs can range from 1 percent to 5 percent of your loan amount. These can include many of the same closing costs as a typical real estate closing, such as origination, appraisal and credit report fees. HELOC lenders also often charge annual fees to keep the line open, as well as an early termination fee if you close it within three years of opening. You could also incur a charge if you decide to convert your HELOC balance to a fixed interest rate.
If you’ve just closed on a home and need cash, you can generally tap into your home equity right away. However, some lenders require borrowers to wait several months before applying for a home equity loan or HELOC. And whether there’s a waiting period or not, you’ll have to meet the lender’s eligibility requirements. These can include credit score minimums, income verification and debt-to-income (DTI) ratio maximums. Most importantly, you’ll also need at least 20 percent equity in your home to qualify, though some lenders accept 15 percent.
Late last week, Indiana Sen. Mike Braun (R) submitted a letter to Ginnie Mae president Alanna McCargo asking about what he identified as recent bouts of instability in both the Home Equity Conversion Mortgage (HECM) and HECM-backed Securities (HMBS) programs, which stemmed from the collapse of a major lender and challenges that Ginnie Mae has described in maintaining a large portfolio of reverse mortgages.
To get a better idea of what prompted the letter and his interest in the reverse mortgage program, RMD reached out to Braun’s office with a series of questions about his perspectives.
‘Red flags’ and OIG inquiry
When asked about what first caused the senator to pay more attention to HECM and HMBS program issues, he explained that the late 2022 failure of Reverse Mortgage Funding (RMF) and the subsequent assumption of is reverse mortgage portfolio by Ginnie Mae were major influences toward his decision to inquire about the program’s challenges.
“RMF’s failure raised serious red flags,” Sen. Braun said in an email to RMD. “The scope of this failure is glaring, comprising 36 percent of all existing HECM loans at the time. I am seeking clarity about Ginnie Mae’s actions in dealing with this distressed issuer and their actions to fix underlying programmatic problems.”
In late 2023, the U.S. Department of Housing and Urban Development (HUD) Office of the Inspector General (OIG) announced that it was initiating an inquiry into how Ginnie Mae monitored RMF, as well as Ginnie Mae’s extinguishment of the failed lender from its HMBS program. OIG Rae Oliver Davis said at the time that the inquiry was being initiated “because extinguishing issuers and seizing their portfolios places significant stress on Ginnie Mae’s operations.”
When asked why he was not willing to wait for the OIG to finish its own inquiry before making his own overtures, Braun said that he feels like waiting may not be an option.
“The timing is important as Ginnie Mae explores improvements to the HMBS program,” he said. “The Senate Aging Committee strives to protect seniors and prioritizes oversight of aging-related issues, like reverse mortgages, and my letter highlights information that is vital to the longevity and stability of the program.”
Additional scrutiny, bipartisan potential
In his letter, Braun alluded to the potential for additional “congressional scrutiny” related to the oversight of the federally backed reverse mortgage program. When asked to expand on that thought, Braun explained that additional transparency into an important event like the RMF collapse is necessary.
“There needs to be more information on their dealings with RMF as it fell into distress,” Braun said. “It’s also important to know about the RMF assets that Ginnie Mae is now servicing, since they have never extinguished an HMBS portfolio previously. We need to have congressional oversight over their efforts to improve troubled issuers’ management practices and their proposals to improve liquidity in the HMBS program.”
With both the House of Representatives and the Senate having such narrow divides along party lines, the potential for added partisanship — especially headed into a hotly contested presidential election — remains high. RMD asked Braun if he feels this issue could descend into the same kind of pattern, but he seemed to be open to the idea of both parties coming together to address HECM and HMBS program challenges.
“It’s a nonpartisan issue,” he said. “While I sent the letter alone, there is a great opportunity to work with the other side of the aisle if further action occurs.”
He added that it’s important for the industry itself to be present during such discussions.
“Transparency is vital to the function of the HECM/HMBS program, and it’s important for Ginnie Mae to make sure Congress and industry professionals are at the table when it’s time to make decisions,” Braun stated.
The state of California is maintaining its mortgage relief program funded by the 2021 American Rescue Plan, which includes assistance for reverse mortgage borrowers. But the funding is running low and could soon be exhausted soon, according to estimates from state housing officials as reported by the Los Angeles Times.
After extending availability for the program to more qualified recipients in February, officials now warn that those who could benefit from the financial assistance — designed primarily as an option for homeowners who were financially impacted by the COVID-19 pandemic — will need to act quickly if they want help.
A tally on the program’s official website shows that more than $823 million of the original $1 billion allocation to California has been used and the remaining $177 million could evaporate within the next couple of months.
“When you look at who received those funds, it’s been a real success,” Rebecca Franklin, president of the California Housing Finance Agency’s Homeowner Relief Corp., told the Times, adding that “we really were successful at getting the money to those populations who really were hit harder by the pandemic.”
The average amount of assistance provided by the program stands at just over $24,000 per household, and grants have been issued to more than 33,000 households across the state. The program rolled out in California in late 2021.
The federally created Homeowner Assistance Fund (HAF) is available to all borrowers, including reverse mortgage holders, in an effort to keep them compliant with their loan obligations, which was explained to RMD in early 2021 by Biden administration officials.
“The Homeowner Assistance Fund would be a way in which to provision funds to help homeowners, including seniors with [Home Equity Conversion Mortgage (HECM)s], that may have back tax or insurance payments that need to be made due to hardships related to the pandemic,” an administration official told RMD in February 2021. “And that would be one of the measures in which seniors and the HECM portfolio can be addressed.”
But for forward and reverse mortgage borrowers across the board, the HAF has had challenges reaching full deployment nationwide. Last month’s effort in California to expand the base of qualified beneficiaries was partially done to get more aid to homeowners faster, since there has been an awareness problem across the country.
This has been particularly true of potential reverse mortgage beneficiaries. HECM servicing professionals explained at reverse mortgage industry events that there have been difficulties in making reverse mortgage borrowers aware of the available funding — which is overseen by individual states — and had requested the help of loan originators to get the word out to their clients.