Treasury Sec & Former Fed Chair’s candid comments on inflation & interest rates signal a reality check
Last Tuesday brought us a rare display of sanity from Washington D.C. Economically speaking it was as if the fact that the earth isn’t flat but round had been discovered. Eureka! Treasury Secretary and former Federal Reserve Chair Janet Yellen conceded that interest rates may have to rise to prevent the economy from overheating. That’s D.C. jargon for preventing runaway inflation, something the Federal Reserve has not always succeeded in doing.
Yellen tempered her comments stating she’s not so much concerned about inflation but should it require attention there are tools to address it. That tool is for the central bank to raise interest rates. Does this mean the government’s spending spree is over? Doubtful. Both parties have proven themselves to be accomplished spendthrifts.
While Yellen no longer pulls the levers at the Federal Reserve, her words did capture the attention of Wall Street, economists, and President Biden himself. The factor that will determine if or when the Fed raises rates is if transitory inflation becomes entrenched in the American economy for an extended period of time. On this show, I’ve repeatedly expressed my concerns that our central bank’s massive infusion of cash into the economy may dramatically increase the costs of goods and services.
Outside of what a gallon of gas or milk may cost in the future, any policy change by the Federal Reserve will have a notable impact on reverse mortgage borrowers and lenders. A good place to begin to measure the potential fallout of rate increases can be found in HECM-to-HECM refinances.
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Like a drug, we are now overly dependent on HECM Refis to increase our volume. Without any data released by HUD on the composition of HECM activity for April 2021 (other than total HECM endorsements for the month), clearly the HECM Refi endorsement volume for March 31, 2021 is the highest ever seen in the industry to date at 1,675. That barely beat out that same volume from January 2021 of 1,653.
March 2021 is the ninth straight month in a row where HECM Refi endorsements exceeded 1,122 HECM endorsements. In the history of the industry only one month that had more than 1,000 HECM Refi endorsements and that was January 2018 with 1,3,18 such endorsements, i.e., until NOW. The first HECM Refi was endorsed in fiscal 2004.
The highest number of HECM Refis ever endorsed in a single fiscal year before fiscal 2021 is fiscal 2009 with 8,968 such endorsements but due to the peak for total HECM endorsements in that year of 114,692 the percentage of HECM Refi endorsements to total HECM endorsements was just 8%. Currently through just the first six months of this fiscal year, out of 24,030 total endorsements there are 8,752 HECM Refi endorsements, which is 36% of the total endorsements generated in those six months (ended March 31, 2021).
The annualized and modified conversion rate for March 2021 was barely over 75%. Even though some months have come close, that barrier has not been crossed since June 2009.
What is amazing is that the total CNAs (Case Number Assignments) for March 2021 were 7,556 but never seen before, 48% of that total came from HECM Refis. The highest CNAs of all time for a single month was September 2017 with 20,405 total HECM CNAs. Out of that total 22% (or 4.430) were HECM Refi CNAs, which is also an industry record. Those records resulted, no doubt, from a pulling forward of applications and counseling in order to avoid the 10/2/2017 “haircut” in PLFs.
With six more months of detailed data on HECM monthly production to be released by HUD for fiscal 2021, this fiscal year could easily become the all time record for HECM Refi endorsements especially since the estimated CNA inventory and conversion rate point to at least 6,000 HECM Refi endorsements in the next three months. With this kind of data, it is very easy to speculate that HECM Refi endorsements could exceed 19,000 this fiscal year and may be even 20,000. Will fiscal year 2022 be even better when it comes to HECM Refi endorsements? Maybe but the current odds are against it.