[vimeo id=”107951033″ width=”625″ height=”352″]
Part 1 of our interview with Jack Guttentag: Double Digit Mortgage Interest Rates
In part one of our interview The Mortgage Professor discusses the possibility of double-digit mortgage interest rates which have not been seen since the HECM program’s inception. We explore the industry impact, consumer awareness, disclosures and more.
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3 Comments
The lock in features of the expected interest rates discussed in the video are presented in Mortgagee Letter 2006-22. What was not presented is when a lender takes a defensive position against losses due to below market margins, lenders withdrawing lower marginal rates effectively defeating the expected interest rate lock in information contained in Mortgagee Letter 2006-22. This became a somewhat frequent occurrence during the early days of Fannie Mae forcing HECMs into the live pricing environment.
The Professor takes the discussion in a direction that few consider when it comes to originating HECMs. Putting a borrower into a HECM when other options are available can be detrimental to the senior in future years.
For example, a senior is in the final 6 years of a fixed rate mortgage which has a current current balance due of $180,000. His monthly interest and principal payment is based on a 6.5% interest rate making the mortgage payment $3,026 per month. Based on his current credit, collateral, and capacity, he is eligible for a refinance of 15 years at 4.9% for a monthly principal and interest payment of $1,414 or a 30 year refinance at 5.15% for a monthly payment of $983.
The senior has a home whose value is in excess of the HECM maximum claim amount, is 65 years old, has sufficient rental and investment income so that he has no major cash flow concerns in the foreseeable future, and has minimal Social Security income. He has deep concerns about his inability to get any forward mortgage in the future if interest rates increase substantially. Yet he has a fully paid for second home near his grandchildren who live in a nearby state; over time the second home will be his principal residence but he wants no debt against it.
The senior wants to lower his mortgage payments so that he is prepared if his rents drop dramatically due to changing home market conditions and neighborhood obsolescence. He expects his investments to continue to do well but they are growth stocks paying minimal dividends. To avoid income taxes, he only want to sell loss stocks which are unlikely to recover their stock values; he has about $50,000 in value in those stocks.
The senior has looked into HECMs and finds the cost of a fixed rate HECM to be excessive in today’s environment. In his views an adjustable rate HECM is enticing. He likes the line of credit but is very concerned about rising interest rates since he wants to pass as much of his estate as possible to his children, grandchildren, his church, and a few other charities. He has concluded that the 30 year forward mortgage is a little pricey but comes with few risks.
What is your advice?
What Jack did not say, but we all should know, is that double digit Expected Rates would put an end to the HECM program.
In fact, anything above 9.99% is not doable. For a 70-year old, a 5.00% expected rate has a PLF of 0.576. Increase that rate by only 3%, which is entirely probable, and not even in the “double digit” range, and the PLF is whittled down to only 0.23. For a 62-year old, its only 0.179.
Every single senior who has the option of putting a RM in place today, and who believes that rates are bound to go up, should be running to the nearest HECM Originator and putting a LOC in place……. before its too late, and we are all out of business.
This scenario has so many “moving parts” it would take 5 pages to address all the possibilities.
He could consider a low MIP 3.00 margin hecm, given his plans to relocate in the near future his “risk over time” would not be too great.
He could pay down his current mortgage balance with the “loss stock” sale proceeds beforehand regardless of his decision.
He could consider asking his lender about “premium pricing” on the 30 year forward mortgage to eliminate any closing costs and make a little higher monthly payment until he decides to sell.
I am probably missing some twists and turns but I’ve got to get back to work! ha ha.
Live pricing was the most disastrous thing to happen to the hecm program and rate locks should be not only available on ALL products but they should be made very clear and straightforward.