EPISODE #677 The Consequences of an Unnecessary Interest Rate Hike
The Federal Reserve’s Fair Open Market Committee (FOMC) in its quarterly projections published after the meeting, 13 of 18 officials saw a likely need for higher rates by the end of 2023, with seven of them seeing a need to begin raising rates as soon as next year.
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Richmond Biz Journal: Sentencing delayed for former Live Well financial bond trader
Washington Post: “Should you tap into your home equity to fund your retirement?”
It’s perhaps the most important question every older homeowner could be asking. Should you tap into your home equity to fund your retirement? That question is the title of a recent column written by David Mount in the Washington Post. Mount presents a fair and factual representation of reverse mortgages. However, we will also examine his approach as to when one may be appropriate.
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“The strong stock market and a new perspective from the coronavirus pandemic may have you considering home equity as a way to accelerate a move in retirement”, writes Mount. An interesting point and one that leads me to reflect on the present state of both the real estate and equities markets. Much like we rush to buy replacement wiper blades during the first week of the rainy season, homeowners considering a reverse mortgage often wait until it’s too late. In some cases that means they no longer qualify lacking the required proceeds to pay off their mortgage. In other instances, they can no longer make a monthly withdrawal from their investment accounts due to stock market losses. In a nutshell- a proactive strategy will always outperform a reactive one.
Mounts cautions if one is to use their home equity for retirement “it should be done at the right time and for the right reasons”. Mount notes three of the most popular options for tapping into home equity. The first two are to refinance your existing mortgage to lower your payments or taking out a HELOC or home equity line of credit. Each will only improve a homeowner’s cash flow position modestly not to mention the inherent risks with variable rate HELOCs and payment shock after the initial draw period ends. The third option Mount presents is a reverse mortgage.
When should an older homeowner look to their home’s equity? “Overall, using home equity toward retirement works best for those with a high level of equity in their home,” Mount writes. That position makes sense for someone taking out a line of credit or a cash-out refinance but with one caveat: their cash flow must support the new loan.Does that mean seniors with sizable savings should only consider these typical home equity extraction methods? Not necessarily. And that’s where Mr. Mount and I would disagree when he writes, “Reverse mortgages are a viable option for those with limited access to funds and a sizable amount of equity in their home.”
Let’s unpack that statement. Should homeowners with adequate funds steer clear of a reverse mortgage as a rule of thumb? It really depends on their unique situation. Perhaps some moderately affluent homeowners and their advisors not only see the benefit of a reverse mortgage but are using it as part of a larger financial strategy. “As with any big financial decision, you should work with a financial adviser to create a plan and strategize scenarios that will help you stay financially independent into and through retirement.” Now that’s a statement I can agree with.
Omaha, NE – Mutual of Omaha Mortgage recently launched amobile app forits reverse mortgage loan programs, including the HECM for Purchase (H4P) product. The free app is an industry-first toolfor potential reverse mortgage clients, their family and friends, and their trusted advisors to learn more about the programs offered and start the loan application process.
“We are excited to bring this new technology to our Reverse Mortgage customers,” said Chris Kargacos, executive vice president of national sales for Mutual of Omaha Mortgage. “We feel this innovative solution will allow us to better serve our customers at the highest level, especially in this current environment.”
The app uses new technology to offer users convenience at their fingertips, including the following features:
An online applicationallows borrowers to begin the application process using a mobile device or a desktop computer.
Borrowers can easily take pictures and upload required supporting documents to their account via mobile device or desktop computer.
Loan milestone notifications keep borrowers and real estate agents up-to-date on the status of their transaction.
A built-in chat feature allows users to communicate in real–time with their loan officer and/or real estate agent.
Mortgage calculators provide borrowers or real estate agents a convenient way to calculate their loan amounts or proceeds from a HECM for Purchase or reverse mortgage.
Additional informationabout the HECM for Purchase and other reverse mortgage programs.
“This app is a game-changer for our reverse mortgage industry,” said John Metcalf, vice president of sales technology and strategy for Mutual of Omaha Mortgage. “Its features help keep our customers informed and connected, makes processes faster and more efficient, and provides them with the option to conduct their business virtually. Historically, much of the process was done face-to-face, so being able to facilitate these activities from a mobile device or a computer is a big advantage, especially right now.”
For more information, visit mutualreverse.com/app/. The app can be downloaded for free in the App Store and Google Play Store by searching “Mutual of Omaha Mortgage”.
About Mutual of Omaha Mortgage Founded in 1909, Mutual of Omaha is a highly rated, Fortune 500 organization offering insurance and financial products for individuals, businesses, and groups throughout the United States.As a mutual company, Mutual of Omaha is owned by its policyholders and committed to providing outstanding service to its customers.Mutual of Omaha Mortgage offers a variety of home financing and refinancing options as well as industry-leading reverse mortgage products to help its customers through life’s transitions. For more information about Mutual of Omaha Mortgage, visit mutualreverse.com.
Widower abandons his property in The Villages retirement community
On January 13th a long-time resident of ‘The Villages” lost his wife of 67 years ‘Terri’. Later he walked away from his home which was the subject of a recent hearing before the Development District 4 Board of Supervisors following complaints of uncut grass and weeds.
Negative Interest Rates?! It’s not what most think
Negative interest rates? You heard that correctly. No, you don’t have to turn up your volume. In fact negative interest rates in the U.S. are here. (CNBC article). While you most likely will not see this economic anomaly mentioned on your local or national evening news, financial outlets have assiduously reported on central banks around the globe who are now pulling out all the stops in the effort to stimulate the economy. The European Central Bank, Sweden, and Germany currently are in negative interest rate territory and the U.S. may follow.
Does this mean the banks will pay you to borrow money? Not quite.
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Negative interest rates penalize banks for hoarding cash reserves instead of lending to consumers and businesses and earning interest income. It’s an unusual economic tool and a rare one at that. So closer to home- how will this impact our industry and older homeowners?
Savers and older retirees stand to feel the immediate impacts being unable to count on interest earnings to offset inflation. That could conceivably increase demand for alternative sources of cashflow such as a reverse mortgage. Last Monday the 1-year US Constant Maturity Treasury rate was just .10% or one-tenth of one-percent! The 1-month LIBOR index was a mere .157% and the SOFR (Secured Overnight Financing Rate) was just .09%. Let’s assume the base index for the federally-insured reverse mortgage fell below zero percent. What impacts would existing borrowers see? First, their principal limit or line of credit growth rate would slow significantly- but not altogether thanks to the lender’s margin in the loan. Something to keep in mind when touting the benefits of future borrowing power with financial pros and homeowners.Next, future home equity will be consumed at a much slower rate as the loan’s balance grows much more slowly than it would in a normal interest rate environment. Lastly, with the average lender margin hovering around two-percent new HECM borrowers will benefit by being in the lowest interest rate tier of the HECM’s principal limit factor tables bumping up the present three-percent interest rate floor. While the word ‘unprecedented’ has become increasingly popular in the wake of the COVID-19 pandemic, the truth is negative interest rates have been employed on a few occasions.
And speaking of rates, Ginne Mae- the issuer of HECM Mortgage Backed Securities has provided a reprieve of sorts. In September our industry found itself somewhat caught off guard when Ginnie announced that any HECM mortgage-backed securities tied to the LIBOR index would not be accepted for any HMBS received on or after January 1st, 2021. That news came as a surprise as NRMLA was in active discussions Ginnie Mae, HUD and others on what replacement index would be used for future HECM loans. The good news is the deadline has been extended to March 1st. As RMD reported, “Ginnie Mae did contact the [reverse mortgage] industry, the members of which provided us with additional feedback relating to the volume of applications received by the initial publication date,” a Ginnie Mae spokesperson said.
Despite improvements, the HECM remains a reliable target of fiscal scrutiny
In its Fiscal Year, 2020 Financial Report the Department of Housing and Urban Development called out the HECM program saying it ‘undermines’ the financial soundness of FHA’s Mutual Mortgage Insurance Fund which backs both HECMs and traditional FHA loans. There have also been repeated statements that the program is being subsidized by traditional FHA mortgages- a claim that has been recently challenged in a recent blog post by New View Advisors writing,
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“We think Forward Mortgage does not subsidize Reverse Mortgage now any more than Reverse Mortgage subsidized Forward Mortgage in 2009. A true subsidy would mean outsized realized HECM losses, and a compelling case that this will continue. This is not demonstrated in the report.” New View concluded by referencing a recent revision to the Actuarial review of FHA’s insurance fund. That revision increased the HECM’s economic net worth in the MMI fund from a negative $5.4 billion to a positive $1.268 billion. That revision was made after Jim Veale- an industry watcher and HECM originator contacted Pinnacle Actuaries in late November. Veale noted a discrepancy between the actuaries calculation of Total Capital Resources of a negative $5.64 billion versus a positive $1.597 billion shown in HUD’s report to Congress. As a result, Pinnacle updated their report which now has added $7 billion dollars to make the HECM’s economic net worth a positive $1.2 billion. This strengthens the argument that the HECM is presently not a drag on the overall FHA fund which backs the program.
Looking back the HUD’s recent annual report released December 4th, one area of concern that rightly deserves focused effort and attention is monitoring the servicers of loans that have been been placed into assignment with HUD. That oversight is crucial as HUD states the majority of losses from Type 1 claims are the result of the borrowers no longer occupying the home as their primary residence (or in some cases even living in the property at all) and the failure to pay property charges such as taxes and insurance. Such instances call for active and prompt intervention by assigned HUD servicing vendors to preserve the economic values of properties, and preventing occupancy fraud- both which stand to substantially contribute to continued and avoidable insurance claims and losses.
HUD Secretary Ben Carson’s comments became somewhat political in the December 9th official HUD press release which accompanied the agency’s financial report which reads in part, “When an institution becomes insulated from the success or failure of its policies, it loses its incentive to operate efficiently. Private businesses, while engaged in different work than the federal government, do not have the luxury of being protected from their failures or maintaining damaging courses of action,” adding, “Irv Dennis was able to accomplish the impossible task of providing the financial stability that had gone left unchecked for so many years.” Keep in mind, January will bring us a new administration and agency heads which are certain to have a direct impact on housing policy and the HECM program.
Setting politics aside much has been accomplished to improve the HECM program since the great recession of 2009. However, merely increasing oversight of lenders. “HUD must strengthen its effort to ensure that the lenders participating in the HECM program comply with its regulatory and administrative requirements and minimize claim costs” reads the agency’s 2020 financial report. With very few notable exceptions, HECM lenders have worked closely with HUD to ensure ethical and efficient lending to today’s older homeowners. Chances are that the largest liabilities to the economic value of the program can be found in the servicing of assigned loans for non-compliant borrowers as mentioned earlier, and reexamining the structural change of upfront FHA insurance premiums charged made in October 2017.
Revision Improves HECM’s Economic Net Worth by $7B
One industry observer noted a difference between HUD’s Annual Report to Congress and the actuarial review of the HECM in FHA’s insurance fund. Here’s how a $7 billion difference was found and why.
