HECM Proceeds will Drop Because of this

Defying Gravity- It’s not falling home prices that will reduce reverse mortgage eligibility

To see how first-world economies may react to the pandemic’s repercussions we may need to look no further back than the 1970s stagflation- That is an economy with increasing inflation and a stagnant economic output or GDP. Think of it as a recession coupled with the increasing cost of goods and services.— That is an excerpt from my comments from August 10th, 2020 on this show. Unfortunately, stagflation appears not to be such a far-fetched possibility. Let’s examine our current economic state of affairs and the potential impact on the eligibility of older homeowners to qualify for a reverse mortgage. 

First, there’s no denying that supply chain interruptions and shipping costs have contributed to the increasing cost of goods and services, but there’s something much more significant the media is not telling you. 40% of US dollars in circulation were printed since the Covid-19 pandemic began.

Is there any chance that too many dollars chasing goods and services are driving record inflation? The Federal Reserve Chairman thinks not. Fed Chair Jerome Powell dismissed money printing as the source of surging inflation and instead points to an imbalance of supply versus pent-up demand as the economy reopens up in the wake of the pandemic. Powell believes financial innovations- whatever those are, mean that there’s is no longer a link between massive money-printing and inflation. Perhaps there’s ‘nothing to see here’ as some say. 

While this massive injection of money has benefited Wall Street and hedge funds, it is average Americans who will be stuck paying the bill. 

So in these uncertain economic times what stands to reduce the future eligibility of older homeowners to get a reverse mortgage?

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David Edel March 21, 2022 at 5:21 am

Excellent! Thank you,

RM Advisor March 21, 2022 at 5:30 am

We are NOW in an era where the least talked about change that was implemented on 10/2/2017 by FHA/HUD
is placing more and more stress on HECMs to provide sufficient principal limits to garner a significant increase in new FTHB (First Time HECM Borrowers) endorsements and continue the HECM Refi phenomenon. On 10/2/2017, the three major categories of changes made were the following:

1. a single upfront MIP rate was reestablished at 2% and a 60%
reduction was made to ongoing MIP (from 1.25% to 0.5%);

2. a very harmful reduction to principal limit factors was
mandated; and

3. the one we will feel more and more is the lowering reduced
the floor for the expected interest rate — dropping it from
5.06% to 3.06%.

It is the combination of the rise in the CMT 10 year interest rate index plus the current Expected Interest Rate Floor that will negatively impact adjustable rate HECMs the greatest (by dropping down principal limit factors yet further). By that both FTHB endorsement numbers will dissipate and the eligible HECM Refi market will diminish.

Despite all the flap about the value of such theoretical strategies as the often overworked coordinated distribution strategy and the maligned maximizing Social Security benefits strategy, the horrible current stats for FTHBs will only get worse.

One member in the industry in the last couple of years has been saying that the 10/2/2017 changes will hold back the industry to a range of just 40,000 to about 50,000 in HECM endorsements each calendar year. By the end of 2023, we may be looking back at those numbers and WISHING they were true.

While it is very hard to believe the reverse mortgage industry will vanish any time soon, the ever shrinking (since 2013) inventory of HECMs that have been originated but not yet terminated creates the image of a dying industry. That is what happens when terminations exceed originations for almost a decade. How can we turn that around? The industry has been deflecting the answer to that question.

So while inflation plagues retiree, in particular, the lack of FTHBs is creating an image of a dying RM industry. Our industry needs help. So far NO ONE is steeping up to the plate. Thank goodness one lender is at least speaking up and addressing the issue to the industry by taking actions that have shaken lenders and some originators as well. BUT progress is very very slow.


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