What can we expect in 2023?

To say the last three months have been tumultuous would be an understatement. Three factors will shape 2023 production: interest rates, lender contraction, and home values. Adapting to an adverse market requires an honest assessment of today’s larger economic headwinds, and a perspective rooted in indisputable facts. And that’s what we are here to accomplish today.

First came…

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a series of interest rate hikes by the Federal Reserve that began in March 2022 with a modest quarter-percent increase as the promise of transitory inflation began to fade. May brought a 50 basis point increase followed by a series of 75 basis point or three-quarter percent increases in June, July, September, and November.

While not tied directly to the target federal funds rate the hikes naturally drove up the 10-year Constant Maturity Treasury rate which is used to determine the available funds in the federally-insured reverse mortgage or HECM. As a result, the CMT index climbed from a low of 1.62% in January to 3.68%. There was some improvement in the index in November with the index falling from a high of 4.25% in late October.

Federal Reserve Chairman Jerome Powell confirmed last Wednesday that smaller interest rate increases are likely ahead beginning in December. “Despite some promising developments, we have a long way to go in restoring price stability. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in remarks delivered at the Brookings Institution.

The question is what if inflation doesn’t moderate? Then the Fed may return to more aggressive rate hikes. 

Next is lender contraction. Reverse Mortgage Funding announced its sudden cessation of originations earlier this month. Last week brought the news of the lender’s filing for Chapter 11 Bankruptcy protection which allows the company to continue operations while it reorganizes its finances and works with creditors. RMF has been regularly ranked in the top 5 retail HECM lenders for some time generating just over 5,000 loans in the fiscal year 2022. The impact on total HECM endorsements will be noticeable in February of next year as submitted loans work their way through the pipeline and eventual endorsement. Over 400 employees were laid off last week with many likely seeking employment opportunities with other lenders. The nation’s largest lender American Advisors Group has also reduced its workforce but continues originating reverse mortgage loans. Reverse Mortgage Daily reported on November 8th that AAG cut 204 jobs, most being retail field loan officers. 

Last are home values. The Fed’s repeated interest rate reductions in the effort to stimulate an economy on its heels from the Covid-19 pandemic will have far-reaching repercussions. A potent combination of tight housing inventory combined with extraordinarily low interest rates created a rush of homebuying activity driving up home values an average of 43% from the spring of 2022 until the market’s height in June of this year. The Fed’s repeated rate hikes had its intended effect of cooling an overheated housing market- a condition the central bank created in the first place. Affordability is the primary factor pushing both homebuying activity and listing prices down. Market equilibrium will require either home values or interest rates to return to levels that make homebuying possible for those currently priced out of the market. 

In conclusion, HECM endorsements will naturally see a significant drop throughout 2023 due to fewer industry participants, interest rate pressure reducing HECM principal limit factors, and softening home values. Unfortunately, this is the natural economic hangover after a 3-year bender of unchecked spending and artificial market conditions. However, while more difficult, lenders and originators who hone their ability to uncover qualified homeowners in this most challenging market stand to gain market share as competitive pressures recede. 

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