[vimeo id=”108623612″ width=”625″ height=”352″]
Part 2 of our interview with Jack Guttentag: Rising Mortgage Rates and HECM Impact
In part two of our interview The Mortgage Professor discusses rising mortgage rates, proposed interest rate disclosure to borrowers, longer interest rate lock periods, industry preparedness for a rising interest rate market and more.
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7 Comments
Shannon, thanks so much for posting that interview with The Mortgage Professor. I love his insights and it was a pleasure to listen to.
Not sure how many other lenders do this but AAG uses the expected rate in the amortization tables (it can be modified as desired) which gives a better picture of what can happen with increased rates. That, in addition to the 5% Cap products should allow originators to provide a more comfortable scenario to the people they are working with.
Mr. Groening,
Despite the current trend between initial and expected interest rates, historically, we have seen significant periods of time where the initial rate exceeds the expected rate. It all depends on how interest rates are trending.
As to use of the amortization schedule in showing possible HECM outcomes, it can be handled through a simple Excel worksheet. While it may seem difficult, it is really rather easy. The problem with using the amortization schedule is that the senior can be confused by what is part of the application and what is supplemental to it. On an Excel worksheet, distinguishing from the amortization schedule can be easily handled through the header.
Does the annual adjusting arm product with the first year lock and the 2% cap in any one year and the 5% max cap not help mitigate this problem?
Mr. Guerrero,
Not as to what happens to the initial rate during the period from application to closing. In that time period, there is no protection even as to the 2% annual cap during the first year or the 5% cap during its lifetime.
Since the offering of the annual adjusting has a volatile history and like HECMs for Purchase is not a very significant type of HECM from an endorsement volume perspective, few of us refer to it when discussing the general terms of a HECM in a forum as large as this.
BUT your point at least as to the period following initial funding is well taken.
Dr. Guttentag makes a number of valid points about concerns that may grow in the borrower community. It seemed, however, that his focus on possible changes to the initial rate rather than simply notifying the borrower about possible but unlikely margin risk was odd in the current mortgage market.
The real problem the industry ran into in early 2009 when we moved to Fannie Mae live pricing was that margins had to be changed due to the feasibility of providing margins which would result in loss to a lender at funding. Changing the margin at the last minute was a common practice in early 2009. The index was never a problem but the margin was.
If the borrower does not realize that indices will change, then we have failed to properly educate the senior on adjustable rate HECMs. Perhaps in more volatile times there will be a need to inform applicants of changes to the initial interest rate but as of now, it seems to be a little overkill.
Focusing on the “growth” in the HECM line of credit is useful, but only if the borrower will have a substantial line of credit. Yes, it needs adequate disclosure with some emphasis but it can become a distraction for many borrowers who are unlikely to have any significant amounts in the HECM line of credit.
On the other hand for those who have significant lines of credit, focusing on the growth discussion can be meaningful and useful to the prospect. But many today are still paying off large mortgages with their HECM proceeds.
Shannon, all in all, it was a great discussion. Thanks for interviewing Dr. Guttentag.
(The opinions expressed in my comments and replies in this thread are not necessarily those of RMS or its affiliates.)
In so many discussions like this one about how the HECM balance due grows, we hear nothing about ongoing AND accruing MIP. Why? At 1.25% compounding monthly it is no longer insignificant. So again why is it ignored? It is almost as if a HECM is too complex for “experts” to discuss the loan without significant errors and oversights.