Why refis may persist despite rising interest rates
Twice in 2021, I predicted that we would see the pace of HECM refinances slow. In both instances I was wrong. Knowing that there is a finite number of homeowners with a reverse mortgage who would qualify I reasoned that the well would eventually run dry.
The most recent FHA Single Family Production report reveals in November 44% of all new HECM case number assignments for new applications were for HECM-to-HECM refinances. A one-percent drop from October. However, there’s one factor that could boost or prolong the surge of refinances. The 2022 increase of the HECM maximum claim amount or lending limit.
Thanks to 2021’s average home price appreciation and the FHFA mandatory calculation of lending limits, the 2022 lending limit was increased by $148,425 to $970,800. Homeowners with properties near or above the 2021 limit of $822,375 that took out their loan in 2020 0r could see a net benefit in refinancing their existing reverse mortgage despite recent increases in the Constant Maturity Treasury rate.
While refinances have provided a boom in overall HECM volume investors are less than enthused. Not surprising considering payoffs of HMBS exceeded $1 billion for 10 months in a row. New View Advisors noted, “December came close in both dollar amount and speed: $1.28 billion, representing a 24% annual payoff rate”. Faster prepayment speeds of existing securitized HECMs, they noted, means investors will see smaller yields.
Where moderate interest rate increases may temper the pace of HECM refinances the higher lending limit will provide a new source of refis from higher-valued homes.
New View Advisors: Refinancing is the Holiday Guest That Won’t Leave