How the Fed's rate hike pause will impact the HECM - HECMWorld.com Skip to content
Advertisement

How the Fed’s rate hike pause will impact the HECM

Advertisement


Here’s how the Fed’s pause on rate hikes will impact the HECM

After 10 consecutive interest rate hikes of the Fed Funds rate, the Federal Reserve hit the pause button last Wednesday. The 12 members of the Federal Open Market Committee that directs the Fed’s monetary policy voted unanimously to leave the Fed Funds rate at 5-5>25%. It’s essentially a wait-and-see approach. “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the Federal Open Market Committee (FOMC) said in the June statement.

The next FOMC meeting is scheduled to be held July 25-26th.

So what is the relationship between the Fed Funds rate and the 10-year Constant Maturity Treasury rate which is used to determine the federally-insured reverse mortgage or HECM’s expected rate? To put it simply, it’s complicated.

[read more]

While the Fed funds rate is expected to continue to rise later in 2023 and perhaps into 2024 the question arises: what impacts will this have on long-term interest rates such as Treasury bond yields, and mortgage rates?

First, let’s look at this chart from the Federal Reserve Bank of St. Louis. It appears that the Fed funds rate and the one-year Treasury track very closely. However, the 10-year Treasury while showing some correlation between the fed funds rate follows its own trajectory. It’s important to remember that correlation is not causation.

How does the 10-year Constant Maturity Treasury rate compare with longer-term interest rates? Much more closely. This chart from FRED overlays the average 30-year fixed-rate mortgage and the 10-year Constant Maturity Treasury. There are very few disparities. While the spread of the two rates is notable, so also is how to the two rates track very closely together. It should be noted that traditional mortgage rates could diverge away from the 10-year CMT should banks begin pricing loans for increasing risks in an uncertain economy. 

Between May 15th and June 13th. the benchmark rate for the HECM’s expected rate rose 34 basis points to 3.84%. That’s actually a notable improvement from March 2nd’s 4.08% CMT rate. What can we expect 10-year CMT rates to be in the future?

Bankrate surveyed market experts slightly increasing in the next 12 months as the Fed still has much work to do in pushing inflation down to its target of two percent from its present 4% annual CPI. The First-Quarter Market Mavens survey found that market analysts expect the 10-year Treasury yield to climb to 3.7 percent a year from now, up from 3.38 percent at the end of the survey period on March 24, 2023. A majority of survey respondents expect rates will be higher a year from now. Just how high depends on how successfully the Fed can reduce inflation while not overly stressing the banking sector in its high-wire act. 

The Fed’s pause on interest rate hikes may slow the erosion of the median home sales price. However, the Fed isn’t the only one who’s hit the pause button, so have home sellers. The historic rate and frequency of rate hikes have decimated homebuyer demand. Consequently, many home sellers found out the hard way that they couldn’t sell their homes at 2021 prices with 2023 interest rates and pulled their listings from the market. This has further constrained home inventory and slowed the decline in overall home values. However, some markets are seeing significant declines in year-over-year home listing prices.

In the final analysis, what we do know is this. Despite volatile interest rate fluctuations and an unstable housing market millions of older homeowners likely need a hedge against inflation and the means of tapping into their largest asset to weather an uncertain economy.

Resources:

 

[/read]

Share:

Leave a Comment

9 Comments

  1. Thanks Shannon. Always good info for we Reverse Originators.

  2. Some what helpful can always use good information from those in the know. .

  3. The issue will be how much buying power does the senior have when utilizing the HECM in a volatile market as this. Regardless of the “pause” in interest rates we have already seen the impacts with lower than normal LTV tables. It use to be age minus 10 would give you the LTV percentage but today it’s more like age minus 30.

    • Thank you, Brian. I would like to use your comment in our upcoming show. Would that be okay?

  4. Absolutely

  5. At 62 through 70, the approximation was your age in 2009 and earlier.

  6. What are LTV Tables? Are you referring to PLFs? Learn the industry’s terminology.


Add a Comment

Your email address will not be published. Required fields are marked *

Must Read:

Advertisement
Advertisement
Advertisement

Recent Stories

Topics

Subscribe to join our World

Get the latest reverse mortgage news delivered straight to your inbox.