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.
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.
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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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2 Comments
The Cynic
It is odd to read and hear that Ginnie Mae was the one to reach out to our industry. Why wasn’t the industry reaching out to Ginnie Mae for relief?
As to negative index interest rates, the question is who is receiving the interest on the negative rate? If not the borrowers, Is it the central banks? Also who is setting the negative rates? Negative rates are easy to work with if there is general consensus on the margin so that a yield spread premium still exists but due solely to the margin (which is generally the case anyway). So who really benefits in a negative index rate world/
2 Comments
It is odd to read and hear that Ginnie Mae was the one to reach out to our industry. Why wasn’t the industry reaching out to Ginnie Mae for relief?
As to negative index interest rates, the question is who is receiving the interest on the negative rate? If not the borrowers, Is it the central banks? Also who is setting the negative rates? Negative rates are easy to work with if there is general consensus on the margin so that a yield spread premium still exists but due solely to the margin (which is generally the case anyway). So who really benefits in a negative index rate world/
Always good information, thank you for doing these videos.
Happy and Healthy New Year