The reverse mortgage industry in the United States has seen some significant changes since September 2006: Ginnie Mae's Home Equity Conversion Mortgage (HECM) mortgage-backed securities, new products, AARP's proposal to cut HECM origination fees, new players, fixed-rate HECM, U.S. Department of Housing and Urban Development (HUD) HECM termination study, the Reverse Mortgage Market Index (RMMI) and others.
To put these game-changing events in perspective, I spoke with James R. Mahoney, chair of Financial Freedom Senior Funding Corporation (a subsidiary of IndyMac Bank FSB).
Through a combination of deft acquisitions and steady double-digit internal growth, Mahoney led the team that built Financial Freedom from a small firm doing a few loans a month into a multi-billion dollar enterprise, the largest and most profitable reverse mortgage company in America. Mahoney did not just build the biggest company in the industry, Financial Freedom funded more than $5 billion in loans in 2006—approximately 50 percent of all reverse mortgages funded. He also helped create the industry as one of the founding directors of the National Reverse Mortgage Lenders Association (NRMLA) and four-term co-chair of the trade group. The following is a transcript of our conversation.
Atare E. Agbamu: Jim, let's start with Ginnie Mae's HECM mortgage-backed security. How did it happen? What does it mean?
James R. Mahoney: All of this did not just suddenly happen. A lot of background work was done. Specifically, Financial Freedom and other industry leaders have been working on these fronts for years. The Ginnie Mae effort started through an introduction that Peter Bell [NRMLA president] made to previous Ginnie Mae President Ronald Rosenfeld. We probably started working with Ginnie Mae two years ago to educate them about reverse mortgages and get them interested in HECM securitization.
Their announcement is a result of our work and other industry players. They didn't just wake up one morning and decide they want to get into the reverse mortgage business. They had been working, researching and learning to understand the product, and the nuances and economics of this market as opposed to the traditional mortgage market. Now Ginnie Mae will expand the secondary market further, which will accelerate product development.
AA: What is your take on the new products?
JM: We believe the maturation and evolution of the industry are great for consumers; they gain choice and lower entry costs. This, in turn, is great for lenders and originators, because it means the industry will continue its rapid expansion. New products and product evolution will bring reverse mortgage further into the mainstream.
That said, we are really not seeing innovations. We are really seeing adjustments and modifications to existing products. Lower priced HECMs are simply a tweak to the margins. It was just a matter of waiting for enough volume for the industry to bring the costs down.
When you look at the market, there are really just two products: HECMs in a few different forms, including our HECM Advantage and HECM 100, and jumbos, like our Cash Account Advantage, which has been on the market since 2001. What we're seeing is a lot of copying of our jumbo, with some minor modifications. But as they say, imitation is the best form of flattery and we are very, very flattered.
Kidding aside, these modifications are very positive and likely a precursor to innovation.
At Financial Freedom, we think to truly innovate will require changing the overall value proposition for seniors. As you know, it is not just up-front costs, it is not just rates. It is a combination of things that we have to look at over the life of their loan to really get the best value. That's what we are looking to do.
AA: How about AARP's push to peg HECM origination fee to principal limit?
JM: Through NRMLA, with Peter's outstanding leadership and the current board leadership, including Bart Johnson, Financial Freedom's president and NRMLA co-chair, the industry has done an excellent job of presenting the facts and issues of reverse mortgages, of the pricing to the customer [and] of what it means to the lender and the secondary market. We are seeking modifications to that amendment that AARP pushed to have added to the bill. We are hopeful that we will see changes that will maintain reasonable economics to the lender and, at the same time, enhance the product to the consumer. That will drive more volume, which will benefit seniors too.
Atare, it is a fine line between when can you make the product a better gain for the customer and drive more volume, and cutting too much and making it too difficult for lenders to do business. The industry is working with AARP and Congress to get that balance.
AA: Financial Freedom seems to have decided (and you know I have been advocating this for years) to use third-party originators, specifically Mortgage Brokers, as advisors. Why are you coming to that strategy now?
JM: You want to marry the opportunity with the desire for the opportunity. I think in the years where our industry was smaller, we couldn't demonstrate demand. And particularly, the forward business was booming and people had more business than they could handle. They didn't have the time, the energy or the inclination to work backward. Atare, you know reverse mortgages are counterintuitive to everything a Mortgage Broker knows. It strains belief to begin with. To stop them and say, "Okay, you are going to unlearn many things you learned as a forward Mortgage Broker. We are going to tell you it is a different customer, a different sales approach (it is not your rate and fees; it is a relationship sale) [and] you need dedicated resources." It was hard to get that attention.
Now, people are saying, "I've plenty of capacity. I don't have enough business. I should look at new products and markets." And they see the positive press from folks like yourself, writing, "Look, this business is growing significantly when everyone is running for cover in the forward mortgage business; the headlines are negative every day. Why don't you look at this product?" So Mortgage Brokers are asking for the opportunity. And obviously, we are quite excited to provide it to them to help make them more successful in the short run, as well as the long term. We can help them become more successful more quickly now. That will help grow their business. We can grow our business and grow the industry, which is the goal. We have 14 to 16 million homeowners, at least $4 trillion in home equity. Weve got a lot of future business out there.
AA: What do you think of the fixed-rate product? When is Financial Freedom going to come up with its version?
JM: We will shortly have fixed-rate in all of our products including the Cash Account, but I don't think it will overtake the variable rate. In HECM, there may be some trade-off between fixed-rate and principal limit. It's about options. It will have value for some customers. If you look at what drives the customer—amount of money they can get, flexibility—a fixed-rate will not be for everybody. The current version of fixed-rate reverse mortgages requires 100 percent draw. We're continuing to work with HUD to find other acceptable structures so we can provide borrowers with more options.
AA: I agree. From my reading of HECM regulations, there is no prohibition against fixed-rate. Fannie Mae, as sole investor in HECMs for a long time, refused to buy them. So the mythology developed in the industry that HECMs are variable rate products by design.
JM: Right. That's correct. But the fixed-rate products that are out there have limitations on the borrower's options. That is, in our view, potentially non-compliant with FHA [Federal Housing Administration] regulations. Obviously, the folks at HUD want a fixed-rate product. We want them too, and we are working with them to help refine the regulations to yield the best fixed-rate product. That should be happening soon.
AA: What is the importance of the recent data HUD released in the HECM termination study? It is a significant development, yet the financial media, including the Wall Street Journal, didn't pick it up. Why do you think they didn't get it? JM: I don't know. I won't speculate on why the media do not write about something. In some respects, it is probably harder for someone who does not write about reverse mortgages every day to really understand the nuances of data as opposed to the headline value of the release of a product.
Obviously, the secondary market and the ratings agencies are quite excited about it. Financial Freedom already has similar data so it didn't have as big an impact on us. And we've been working with our investors to provide them additional data. But it is great to publish the study and educate further. It is a sign the industry is maturing, and I think it will help lead to better product development.
AA: In your opinion, what was the most surprising thing about that data?
JM: Since over half the dataset is ours, it is hard to find anything surprising. But it allows us to substantiate our internal data regarding draw and repayment, buttressing the credibility of the data we have been providing investors. We expect it to improve investor confidence and the liquidity of HECM securities.
AA: What is the significance of the RMMI that NRMLA and the Hollister Group announced in June?
JM: It's a great illustration of the ongoing potential of the reverse mortgage market for all current and potential industry participants. It also underscores how much interest there is in this industry. By figuring out a way to simply communicate the market opportunity, NRMLA and Hollister have provided all of us with an important reference and educational tool for communicating the wow factor: $4.3 trillion in senior home equity. That's a significant statistic. Previous data was vague. We spoke about home value and the number of seniors. The RMMI provides a level of precision that is important to [this] industry.
AA: With more big players coming in or getting ready to come in, where do you see this business in a year or two?
JM: There will be more players. Anyone who has a mortgage lending operation or has a customer base of seniors should be in this business. What we see happening is competition. We always preach that competition is a good thing for the industry. The hardest part about this industry is the education part: Meeting with the customer, getting the right facts out about reverse mortgages [and] getting more credibility for our industry. There is a need for reverse mortgages to become a commonly utilized retirement planning tool where every senior will have a choice of many products and options. With that comes more competition, but it also means that the industry grows faster than it has been growing in the past. As I have said to the media and our own employees, I think the rate of change in this industry is going to accelerate because of the new entrants and the fact that we can devote more resources to product development. We will see more growth, and the rising tide will lift all boats. We've always believed in that premise, and that is one of the reasons why we've supported the industry so heavily.
AA: Jim, on a personal level, what sustained you over these years as you built Financial Freedom into the leading company in the industry? Even the biggest companies that are jumping into the reverse arena now probably thought reverse mortgage was a joke. What kept you going?
JM: Well, I think, again, the bigger the company, the harder it is for them to move into new markets unless they can justify the commitment of resources. Fortunately, the co-owners of the company always believed in the long-run and the acquisition by IndyMac Bank in 2004 took us to the next level. So, everything Financial Freedom has always done, and everything I did as CEO for many years, has been to build for the future. We know what the demographics are and our time would come.
In the now-distant past, we definitely had to work hard to sustain in the short-term because you can't run yourself out of money or alienate the shareholders to the point that they won't support you. At the same time, we were very fortunate that we always had people who shared the same passion for building a company that serves seniors and embraces the senior market by helping people well into retirement. That's first and foremost. Every partner we've ever had has shared that vision. That's really the starting point, and they really understood the concept that we are changing seniors' lives to make retirement better.
Couple that passion with financial and other types of support to let us do our thing at Financial Freedom and accomplish our vision. It starts with the vision. You have to want to serve the seniors.
What keeps me going? It is the same thing: I get letters every week about how we've changed seniors' lives. It is the passion for the individual customer. You just can't replace that.
I have gone around the country to a lot of our correspondents and brokers and I've asked the principals, who are making good money in the business now but who still take loan applications: "Why did you come in? Why did you stay in? Why are you still structured the way you are that you take loan applications?" One and all said, "We love what we do; we've made money in other businesses, but you don't enjoy it like you do in this business. We're helping seniors." That's the bottom line.
AA: If anyone is qualified to give advice to those who are trying to come into this business, you are the person. What would you say to the leadership of the companies that are now coming into the business?
JM: I think first and foremost, they have to safeguard the senior. And ensure that, at all times, they are dealing with the utmost integrity and the utmost care and the highest level of customer service. And to make sure their organizations live that every day, not just talk it.
AA: How about what to expect in terms of building talent and stuff like that? Is this a business that somebody can just jump in with a ton of money and succeed in?
JM: Again, I think you have to dedicate resources to this business, to this market and to this customer. It is important to dedicate resources and become specialized.
AA: How about training and having talented people?
JM: Without a doubt! When I say "dedicated resources," that is a combination of first hiring people who are committed and share the same passion as the rest of us who really see this as a career do. It then has to follow with training and support all the way through the process until the loan is repaid. That's why we say "dedicated resources." If you are just going to put a product out and a rate sheet, forget it. Success will never happen.
You need to educate these people on the market (not just the product), on customer service, the relationship sale, nuances, the fears that the customer has and the reassurance that they want. What they are seeking are solutions for retirement, not just a product. It is all-around training, and that's why Financial Freedom has developed the most extensive and comprehensive training materials to help brokers and correspondents get into the [reverse mortgage] business and become successful now!
AA: So you would say training, training, training.
JM: Training, training, training and support of training.
AA: I know you've said in the past that this has to be maintained as a specialized mortgage operation, not integrated with forward mortgages. Do you still believe in that?
JM: I still believe strongly that you can utilize leverage, like we are leveraging our parent IndyMac Bank for technology, shared services, appraisal, corporate functions and all the reporting functions, things of that nature, to lower costs and enhance success. But I think, as far as the customer service and the handling of the customer, in particular, dedicated units are best, without a doubt.
If you look at Financial Freedom, it is a separate entity from IndyMac, even though it is a wholly owned subsidiary now. It is a separate entity because it specializes in reverse mortgages only and not other mortgage products.
We leverage IndyMac because they are bigger and better than Financial Freedom is at many things. But at the same time, our group, our 1,500 employees, is dedicated to seniors. We are not trying to do home equity lines or any other types of loans. We are trying to do reverse mortgages. IndyMac is the specialist at all those other products.
AA: Jim, thank you very much. Atare E. Agbamu, CRMS formed ThinkReverse LLC to help originators address demographic change via reverse mortgages. A specialist with Credo Mortgage and a member of the BusinessWeek Market Advisory Board, Atare is the first to propose reverse mortgages as risk-management tools for forward originators. Besides marketing, originating and researching reverse mortgages since 2001, Atare has authored more than 80 articles and a book on reverse mortgages. He may be reached by phone at (612) 203-9434 or e-mail [email protected]