In 2022, Annapolis, Md.-based South River Mortgage launched its own proprietary reverse mortgage loan, “HomeForLife,” that it said had managed to avoid some of the challenges afflicting other private-label products in the space.

Now, the company aims to carve a new place for itself in the reverse mortgage business by transitioning into the role of a direct lender after serving as a broker.

To better understand what informed the decision and its reverse mortgage business ambitions, RMD sat down with South River Mortgage President Tyler Plack.

South River’s broker beginnings, meeting challenges

In 2019, South River formed as a broker, and immediately benefitted from the comparatively stronger business environment that year. After the outbreak of the COVID-19 pandemic, the tailwinds for its reverse mortgage operations increased. Despite the challenges that began emerging in early-to-mid 2022 for the industry, South River had decided that it wanted to make the transition to become a direct lender.

The company’s experience brokering loans had a lot of value in the transition, and only solidified why transitioning into a lender was a good move for them, Plack said.

“We decided as one of our strategic initiatives over the last year or so that we wanted to move to become a full FHA-approved lender, and that has been a really great move for us,” Plack said. “I think one of the things that we all learned, or we always had a sense of as a broker, is that you’re kind of last in line.”

Brokers wait longer for underwriting, and Plack said that South River would wait “a little bit longer” for its loans to be processed.

“So, having transitioned to an FHA-approved lender has been, strategically, one of the best moves that we’ve made,” Plack explained.

That’s not to say that the move was without challenges, but the transition was helped along by the company’s personnel, he said.

“Our team is incredible,” Plack said. “We have really great operations, legal compliance and finance teams. They’ve certainly had to work together in new ways because the expectations of someone who’s a mortgage broker simply are not on the same level as an FHA-approved lender, but I’m really happy to say that our team has done such an incredible job of pulling together in really making it happen for us.”

Some bumps along the way

While the transition has “not been nearly as bumpy” as Plack expected, some of the challenges that emerged included underwriting, closing and funding, but the acumen of the team has helped the company meet those challenges, Plack said.

“I came from being an originator years ago, so I was expecting underwriting to be a much larger challenge,” he said. “Underwriting operations are expected to be a much larger challenge, but I think that we had a little bit of an advantage in that area because we were already lending, but we weren’t lending for an FHA-approved product.”

The company understood the requirements for direct lenders even if most of its closing, funding and selling activity was for its proprietary reverse mortgage offering before the transition.

“I think that’s why underwriting wasn’t as big of a challenge as we thought it would be,” he said. “Closing and funding, I’ll say, has surprisingly been an area of focus for us, just because of the increase of volume.”

Roughly 80% of the company’s business is through Home Equity Conversion Mortgage (HECM) loans, while the private-label product makes up the remaining twenty percent, Plack said.

“Seeing that influx helped push our team to have to deal with much higher volume than they were accustomed to. But again, as they always do, they rose to the challenge.”

Investor activity

HECM-backed Securities (HMBS) issuance is down materially from recent years, as liquidity challenges continue to impact the reverse mortgage business broadly. South River keeps those concerns in mind but has been generally satisfied with investors’ appetites.

“I think that the investor premiums are not at the same levels that they were, everybody knows that,” he said. “That just shows the need for us to continue to be creative and to continue to be thoughtful. It speaks to one of our strengths, which has been the lower cost of origination in the direct-to-consumer space.”

If cost synergies are too high and a business is unable to deal with reduced premiums and loan amounts, then it can present a serious challenge to lenders, Plack said.

“But if you can run at a lower cost, then you have a certain advantage there,” he explained.

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