The National Reverse Mortgage Lenders Association Annual Meeting & Expo last week was notable for many reasons- most remarkable was the announcement of a major change in the association’s management and leadership.
Continue readingBarrons reports some advisors are touting a different approach to help retirees meet future cash needs: a reverse mortgage line of credit.
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[Fortune] “Moody’s Analytics expects that U.S. home price decline to widen to between 25% to 30% in 210 “significantly overvalued” housing markets.
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In the early spring, you may have been ‘locked down’ working remotely in response to the COVID-19 pandemic and caught a case of cabin fever in the process. Perhaps you over-indulged in binge-watching Netflix to pass the time you would have typically spent going out to social functions. Regardless of what your current situation may be, reverse mortgage professionals have good reason to be excited, grateful, or just simply relieved. Here are five to consider.
Lending Limits are both national and remain high
Despite repeated recommendations to roll back the national lending limits back to regional or county-by-county maximums, today we enjoy a robust $765,600 maximum claim amount (MCA). This is the cap on the maximum appraised home value that can be considered in calculating a federally-insured HECM’s gross principal limit. Fortunately, it covers the majority of homes in most U.S. markets. Eliminating the national MCA in favor of local caps literally requires an ‘act’ of Congress. Both the upcoming election and ongoing stimulus measures have eclipsed addressing any such consideration presently.
Housing prices are booming
A general shortage of housing inventory and record-low interest rates have home prices reaching record heights, some not seen since the 2008 housing crash. Both HECM and proprietary reverse mortgage borrowers are in an advantaged position to tap their home’s value at what may be the peak of the market. Homeowners struggling to pay their existing mortgage may find themselves now able to qualify based on their latest value and low interest rates. The question many market watchers are asking is if the boom will continue or if values will fall.
Historically-low interest rates
Although HECMs will soon be moving away from the LIBOR, all global indexes are setting record lows as governments take stimulus measures to boost their economies struggling in the wake of the coronavirus and economic shutdowns. In some instances, low rates and high home values have all but erased the impacts of the infamous October 2017 reduction of principal limit factors (lending ratios).
When the interest rate floor of the HECM was lowered from 5 to 3 percent we lamented the drop believing we would never see effective interest rates reach such a low. A few short years later many HECM loans are hovering at or just below a meager three-percent.
Financial Advisors seeking alternatives
The stock market’s volatility remains fresh in the minds of both the financial professional and their clientele. Those who once eschewed reverse mortgages are coming around to the realization that all options should be put on the table to form a plan that accounts for stock market volatility, inflation, and sustainable withdrawals. Now could be the time to rekindle your connections with advisors in your market.
HECM-to-HECM refinances
Late last year HUD proposed that FHA move to eliminate all HECM-to-HECM refinances. Fortunately, FHA made no such change. Today nearly one-third of all HECM applications are refinance transactions as borrowers harvest additional funds from their home. As a result, refis have become a significant driver of ordination volume and profitability.
Certainly, we face much uncertainty, however, we have much to be grateful in the midst of the storm. Count your blessings- at least five of them.
1. DEMOGRAPHICS–
Demographics are the data that describes the composition of a population, such as age, race, gender, income, migration patterns, and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand
Urban flight in the wake of COVID-19 lockdowns, closed businesses, widespread civil unrest, riots, and increasing tax burdens in our largest cities. For example, since July 2019 rents are down 10% in Manhattan as former downtown residents move to the surrounding boroughs, to the suburbs, or out of the state.
2. INTEREST RATES-
Today’s average interest rate on an adjustable-rate HECM range from… [read more]
…2.9% to 3.5% depending on the margins offered by the lender. For a 72-year-old man with a $350,000 home, a 3.125% rate would give him a gross principal limit (that’s the funds available before liens, fees, and set-asides) of $202,300… Before the pandemic and central banks slashing rates that the same individual would only qualify for $180,000 with a 4.125% interest rate. That’s a 12 percent reduction in loan proceeds.
Last Thursday Federal Reserve Chairman Jerome Powell announced a policy shift saying the Fed will focus on ‘average inflation targeting’. in essence, this means the prior target of 2% inflation which would typically trigger a rate hike is being abandoned for a higher inflationary tolerance. This means interest rates are expected to remain low for the foreseeable future- the Dow Jones spiked up 300 points in the hours following this announcement.
3. ECONOMIC PERFORMANCE & OUTLOOK. The US. GDP dropped by over 30% in response to the nationwide shutdown to slow the spread of the coronavirus. The GDP is not expected to dramatically improve as today marks Day 168 from the original 15 Days to Slow the Spread which was enacted on March 16th.
4. GOVERNMENT INTERVENTION. Tax credits- stimulus measures. Unemployment may rise when some employers find that some if not all of their forgivable Paycheck Protection Program monies received may be taxable. After 20 interim rule changes to the CARES Act, it’s quite apparent the program is literally evolving before our eyes. The IRS took that position in Notice 2020-32, stating that expenses otherwise deductible in a borrower’s trade or business are not deductible if they result in loan forgiveness under a PPP loan. This could lead to further layoffs for cash-strapped employers who took a PPP loan.
All which leads us to the conclusion that at this very moment, despite the pandemic and economic uncertainty, we are in an ideal lending environment to qualify the greatest possible number of potential homeowners for a reverse mortgage.
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Reverse Market Insight’s recap of June 2019 endorsements states, “2,500 endorsements per month is the default volume setting for the industry right now”. Calculate that out and that would equate to a new low in annual HECM endorsements totaling just over 31,000 loans insured by the FHA this fiscal year (which ends September 30, 2019).
“It’s only up from here” (anonymous)
If there’s a silver lining it would be that perhaps we’ve reached a functional low for HECM loan volumes. Functional in the sense that the remaining large lenders and brokers have found a way to succeed in today’s market.
For those watching our industry’s volume plummet with a growing sense of unease, consider the following:
Barring any further reduction of PLFs or additional restrictions, we may have tested the bottom of the lowest volume of HECM loans. If that is the case, it’s only up from here.
