The Fed Has Signaled Rate Cuts Sooner Than Later
For the last two years reverse mortgage originators have found more potential borrowers short-to-close as a result of higher interest rates- more specifically the 10-Year Constant Maturity Treasury Rate to which HECM loans are keyed.
However, better days may lie ahead. Will you be prepared?
The Fed Funds rate both directly and indirectly influences interest rates throughout the economy- especially long-term mortgage rates. In fact, the 10-year CMT closely correlates with the average 30-year mortgage rate and the Fed Funds Rate to a lesser degree as seen the this chart.
Therefore, any interest rate cuts by the Fed are likely to favorably impact the HECM’s baseline interest rate.
Over the last year, the Federal Reserve has repeatedly stated that interest rates will remain ‘higher for longer’ until headline inflation reaches the Fed’s target annual inflation rate of 2%. The Fed has made significant progress in slowing the growth of inflation. June’s 2024 CPI report showed that inflation continues its downward trajectory, with an annualized 3% growth rate, which is nearly its lowest level in over three years. A vast improvement from June 2022’s 9.1% headline inflation.
But the Fed may not wait until it reaches its two-percent target rate. CNBC reports that Fed Chair Jerome Powell will not wait until inflation hits 2% before cutting interest rates. This is good news for both traditional and reverse mortgage originators. All this begs the question, will you be prepared?
Closed Doors May Open
As seasoned HECM professionals know, a borrower who may not qualify today may be eligible tomorrow. That’s why closely tracking all of your client interactions, quoted rates, and those homeowners who were short-to-close can make the difference between an opportunity gained or lost. The bottom line is using a Client Relationship Manager (CRM) is not a luxury- it’s a necessity for survival!
Here’s one example from Reverse Focus’ Sales Engine CRM. If you had been tracking each potential borrower pushed out by higher interest rates and gave them a status of Short-to-Close (STC) you could begin to test when lower interest rates may allow them to qualify.
As Abraham Lincoln quipped, “I will prepare and someday my chance will come”.
Prepare today and you can reap the harvest when there’s a strong probability many of your previous prospects may qualify.
Shannon Hicks
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
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One of Zig Ziglar’s famous quotes on what to expect in and prepare for the future goes like this: “Expect the best. Prepare for the worst. Capitalize on what comes.”
Doing the first imperative is a matter of managing our own expectations. The second is to take active steps to be ready to profit if the future turns out worse, even much worse than we would like. Accomplishing the last imperative requires staying on top of what is currently going on in our industry, honing our skills to match what the situation calls for, and understanding the immediate situation well enough that we can apply the necessary skillset to that situation so that we can make the most out of whatever besets us.
In the last six plus months, it has been very awkward trying to explain to many of our peers that fiscal 2024 (ending with HUD’s fiscal year on 9/30/2024) will be the worst fiscal year for HECM endorsements since fiscal 2003. Everyone was so encouraged at the 2023 NRMLA National Convention and all of the reporting on how much better the start of this fiscal year was to last’s. Unfortunately much of that had to do with anecdotal surveys and originators not wanting to appear pessimistic but the facts are much, much different than was reported to the industry during the first five or so months of this fiscal year.
Near the end of fiscal 2022, it was clear that as to HECM endorsements, the next fiscal year was headed for the bottom. It was not until this fiscal year that we are entering it.
Too many have relied and are relying on the Fed to do what not even HUD or FHA will provide us, higher PLFs (principal limit factors). Many relied on a very false premise that since this is an presidential election year, the Fed would have to lower interest rates somewhere in the first quarter of this calendar year. Even though several of us predicted that would not be the case, early this fiscal year I was predicting that the Fed interest rate would not come before June. Now even June has come and gone.
With just two months to go before the start of fiscal 2025, remember to: “Expect the best. Prepare for the worst. Capitalize on what comes.” Other than anecdotal statements, there is no performance mark indicating that fiscal 2025 will be better than this fiscal year. Yet the question lingers, will fiscal 2025 be worse than fiscal 2024 and if so, by how much?