The Big Squeeze

Equity-rich homeowners find themselves squeezed between inflation and a volatile stock market

We should never forget that today’s economy isn’t just a hardship for retirees, for many it’s an outright nightmare. Older Americans are seeing their purchasing power evaporate as they ratchet up retirement withdrawals in the effort to stay afloat. Older renters who don’t have a nest egg of home equity built up are feeling the worst effects of inflation. 

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The Pensacola, Florida station WEAR-TV reports one 64-year-old retiree, Ruby Gilbert, is going back to work and is looking for a job after the rent on her Lantana, Florida apartment was increased from $1,450 per month to nearly $2,000. 

Inflation has another insidious side-effect; reduced retirement savings. Many pre-retirees have reduced or halted their automatic retirement savings investments finding life is getting just too expensive to save for tomorrow. The impacts of depressed savings will be felt in the next five to ten years.

All is not lost, however. In fact, one group of retirees may unwittingly be sitting on top of a potential solution to their inflation-driven cash flow woes. Homeowners. Some of the same policies that led to a surge in domestic inflation also inflated home values. And that’s good news for seniors on a fixed income who feel the brunt of inflation with housing, food, energy, and gasoline accounting for 75% of a typical senior’s budget. The challenge is the growth in home values that may help older homeowners has also damaged the overall housing market.

The run-up in home values has become so absurd homebuyers are finally deciding to stand on the sidelines.  That’s not surprising considering the recent surge in 30-year fixed-rate mortgage rates coupled with peak home prices has made homeownership unaffordable for millions. Once again the housing market would have been relatively undamaged by a sudden rise in home mortgage rates if home appreciation grew at typical rates of 3%-4% a year. However, the Fed’s policies stoked another irrational white-hot housing market.

That leaves retirees facing uncertainty. For example, the S&P 500 index closed down 18% year to date while Moody’s Analytics data suggests the average home value is inflated by 24% with values outpacing income growth. In such circumstances, older homeowners are being squeezed on all sides with a declining retirement portfolio, inflation, and hundreds of thousands of dollars in equity that could begin to erode this year. Right now it’s too early to tell if we’ll have a housing market crash or a correction but mark my words, we will have one or the other. Housing prices cannot remain at these inflated values without the support of underlying economic fundamentals. Home sales have fallen four months in a row while the number of new home listings is surging across several key U.S. metros. And there’s a dirty little secret hiding in plain sight. The U.S. Census Bureau reports that 13.4 million Americans are either currently in default on their home payments for a mortgage or rent. Nearly 5 million of these households will be foreclosed on or evicted in the next two to three months. While these displacements are genuinely tragic they will substantially increase housing inventory putting pressure on home prices and rental rates.

Ironically loan delinquency rates are down 1.93% month-to-month and 42% less than they were one year ago according to Black Knight data. If the U.S. enters a recession, which seems a likely outcome, expect to see foreclosure start and filings surge. All things considered, older homeowners with considerable equity stand best-prepared to cope with the increasing cost of living. The question is are they aware of their options?

Census Bureau housing foreclosure & eviction data

Black Knight’s mortgage data

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HECM Interest Rate Pain & Perspective

The immediate pain is real but don’t overlook the long-term ramifications

The Federal Reserve is frantically pulling at its last lever to curb runaway inflation, which is a series of increases in the central bank’s benchmark lending rate. 

For many, this comes as no surprise. On this show, I predicted that the Fed would have to enact more drastic interest rate hikes and more often than announced. And that’s exactly what happened last Wednesday when the Federal Reserve’s Board of Governors voted to increase its benchmark lending rate by .75 basis points. The largest single increase since 1994. And the Fed has signaled another three-quarter point rate hike is likely in July. 

Consequently, the index that’s keyed to the federally-insured reverse mortgage has been climbing. In fact the index has more than doubled since March 1st of this year.

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Consequently, the index that’s keyed to the federally-insured reverse mortgage has been climbing. In fact, the index has more than doubled since March 1st of this year. As of last Thursday, the 10-year Constant Maturity treaty rate was hovering just below 3.5%. As an originator, this can be both frustrating and disheartening. Borrowers who once qualified no longer have the funds required to close due to a spike in the expected interest rate. Pricing on HECM loans deteriorates from market conditions outside your control.

But before your throw in the proverbial towel consider the following. The last time the HECM’s average expected rate was nearing six percent (that is the base 10-year constant maturity treasury rate or CMT + plus the lender’s margin) was in 2005 and 2006 as housing prices began to take off in the years leading to the housing bubble and economic crash. In 2005 the national median home price was $241,000. In 2022 that number has nearly doubled to a median home sales price of $428,700.

Of course, the HECM’s principal limit factor ratios were much more generous at that time and the outstanding mortgage balance owed for most was nearly typical of that which we see today. However, unlike in 2005 older homeowners are facing historic inflation. So much so that some fear we will see hyperinflation or runaway inflation where a consumer’s pay raises or retirement adjustments are not enough to keep up with the increased cost of living.

In such circumstances, older homeowners could quite frankly care less what their expected interest rate may be. They just want to know if they simply qualify. And, yes, certainly many who would have qualified a few short months ago are no longer eligible due to rising rates but here’s the silver lining. Outside of those on the cusp of qualifying for a reverse mortgage and waiting too long are hundreds of thousands of seniors with ample equity and a genuine need. A need that is no longer easily swept aside. That need is for increased cash flow.

While we sought to move further away from the ‘needs-based-borrower’ another cohort of potential borrowers was silently surging. Those with moderate to low mortgage balances never gave a reverse mortgage serious consideration. After all, why would they 5 years ago? Inflation was at a meager 1.7% and the national average for a gallon of gas was $2.42. But how quickly things change. Even the so-called mass-affluent retiree with between $100,000 to $1 million dollars in liquid assets may find themselves needing to tap other assets to offset the ravages of inflation.

Certainly, the immediate effects of surging interest rates are downright ugly for pricing, eligibility, and your income but don’t forget that the reverse mortgage that so many once rejected or even repudiated is going to become much, much more appealing. And you are the one who knows how the largest asset they’re living under may in fact be their saving grace. 

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An avoidable tragedy

Don’t let those on the edge of eligibility fall through the cracks

Sadly many tragedies are preventable. Tens of thousands of older homeowners are on the edge of financial collapse due to their rapidly-dwindling purchase power and fixed income. Perhaps they’re just getting by today but who’s to say they’ll be able to financially survive two years from now? The tragedies that sting the most are those we could have avoided.

While the real estate market and interest rates have radically changed the HECM program has remained relatively unchanged in recent years. However, one thing has changed considerably -the 10-year Constant Maturity Treasury rate to which federally-insured Home Equity Conversion Mortgages (HECMs) expected rates are keyed.

Since November 2018 the US 10-year Constant Maturity Treasury (CMT) steadily declined until it hit a pandemic low of .54 percent in March of 2020- the same month when the median listing price of a home was $322,000. By March 2022 the median price has surged 26% to $405,000 and the 10-year CMT had increased over three-fold to nearly 2.5%. As of June 13th, the 10-year CMT rate is 3.09%. 

The rapid increase of the 10-year CMT not only diminishes the funds a HECM borrower may qualify for but also reflects the surge in the 30-year fixed-rate mortgage rate which is softening buyer demand and putting pressure on home listing prices in several markets. Higher rates and slipping home values mean the window of opportunity is closing for many homeowners who previously inquired about the loan.

Here are 5 ways to find and reengage with prior reverse mortgage prospects.

  1. Search in your CRM for a date range for records you haven’t opened in the last two years. Sales Engine CRM by Reverse Focus makes such a search a snap.

    Sales Engine CRM’s powerful search function
  2. Research the cities or regions where home sale prices are dropping or have already begun to decline. Use your CRM search for records with no sales in these areas.
  3. Schedule two hours each week to personally call each of your previous contacts who were potentially eligible for a reverse mortgage. Check in and let them know you’re reaching out considering the recent changes in interest rates and the housing market.
  4. Create an email series (drip-marketing). Make sure you don’t fatigue them with too many emails in a period of time. Typically, one email every 3 to 5 weeks should not annoy people to the point of unsubscribing.
  5. Get an SEO landing page for a specific region where home values and typical mortgage balances provide more potential reverse mortgage borrowers. This is a great way to target specific markets you’ve researched- especially if you’re using RMI’s Dashboard tool.

At this very moment, the window of opportunity is closing for those who previously inquired about a reverse mortgage. Don’t let them miss out just because they were not reminded that they may have an option to doing without. And don’t miss out on building your loan pipeline while helping older homeowners improve their quality of life in retirement. 

 

The bitterest of economic pills

The bitterest of economic pills

Stagflation is a particularly ugly word for those old enough to remember the brutal effects of high inflation and high unemployment in the 1970s. And speaking of inflation if we measure it by the same basket of goods used in the late 70s and 80s the annual inflation rate would be 15%, Apparently, inflation is neither 8.5% nor transitory. With inflation surging as the economy stagnates concerns of stagflation have returned. Stagflation, the dreaded S-word of the 1970s or what some economists call the bitterest of economic pills.

Stagflation is the bitterest of economic pills

However, all is not lost. What we are witnessing is an economic cycle, one that reminds us that every bill eventually comes due. A bill for decades of government largesse, easy money, and trillions of dollars in Covid stimulus. Ironically, the pandemic didn’t crush our economy but our response to it will harm millions of Americans. Today we are just beginning to see the outcome of central bank policies and political will. Both stand to especially harm those who are retired and living on a fixed income.

And speaking of a fixed income, often the image of a poor miserly penny-pinching pensioner often comes to mind. But, truth be told, a retiree bringing in precisely $60,000 a year is just as much on a fixed income as the one earning $90,000. Beyond their income disparity, each will feel the brunt of inflation differently; what some financial planners call their individual inflation rate. For example, a 70-year-old widower who’s renting is exposed to more inflationary pressures with rising rents than a 70-year-old who’s living in a home with a fixed mortgage payment. Yet both are experiencing consumer price inflation in non-discretionary items such as gasoline, food, prescriptions, electricity, natural gas, and heating fuel.

So where does this leave future reverse mortgage applicants? In short, they’ll need to have considerably more equity accumulated to offset the impact of higher interest rates and the subsequent lower principal limit factors that determine how much money for which they may qualify. I say considerably because an effective interest rate of 7.5-8.5% for a HECM loan is not far-fetched. And, keep in mind in the years 2005-2007 during the heydays of HECM lending, the average expected rate hovered just below seven percent. Certainly, the presence of large retail banks originating HECMs helped, but the pool of eligible homeowners with adequate equity was there and remains today.

Looking back to interest rates keep in mind that the Federal Reserve has only just begun to throw cold water on inflation by increasing interest rates to slow the economy. Rates that many economists say must be higher than the rate of inflation to be effective. If true, this leaves much headroom for future rate hikes unless inflation shows early signs of retreating or unemployment begins to spike. 

Granted, entering a period of inflation, economic contraction, and possible stagflation is somewhat unnerving. However, it is during these times of upheaval that economic solutions, such as reverse mortgages may regain their luster and appeal. After all, where else will older homeowners find the additional ten, fifteen, or twenty percent additional cash flow to offset the increased cost of living?

 

Should you loan money to someone who is house rich and cash poor?


Unable to use the embedded player? Listen here.

EPISODE #723
Should you loan money to someone who is house rich and cash poor?

A financial advice columnist was asked if it was a good decision to loan money to her 60-year-old daughter who has a home worth $800,000. Here’s what she said…

Other Stories:

  • A daunting time for retirees in the age of inflation

  • Reverse mortgage ‘Market Minute’ with Reverse Market Insight

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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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Most likely it won’t be falling home prices. The Federal Reserve’s planned series of interest rate hikes are unlikely to cause a bust in home values. Sure, home prices were propped up by untenably low interest rates helping create an asset bubble, however, it’s a continued lack of housing supply that is likely to protect home prices from falling as interest rates climb. 

Bank of America predicts that U.S. home values will be up 10% by the end of 2022. Truth be told, real estate companies and economists have a mixed record forecasting where the housing market is headed. For example, early in the pandemic Zillow and CoreLogic predicted home values would drop by spring 2021. Instead, home values posted an 18% gain that year. 

So what’s the potential future impact of eligibility? Today a 74-year-old homeowner with a $350,000 home would qualify for $183,400 with an expected rate of 4.25%. Having a mortgage payoff of $175,000 that would leave them approximately $8,400 remaining to finance fees, closing costs, and insurance.  Fast forward to 2023 and the home has appreciated 5% to $367,500 but the expected rate that determines his borrowing power has jumped to 5.25%. Despite a gain in home value and being one year older their gross principal limit is $176,000 thanks to a higher interest rate which leaves them short to close to cover the loan fees and insurance after paying off their mortgage. Had they secured a reverse mortgage today they could have created a buffer against the ravages of inflation by eliminating their monthly mortgage payments.

Until unemployment climbs or foreclosures surge beyond expectations, home values are unlikely to crash. The bigger threat for future eligibility will be increasing interest rates. If the housing market is truly in an asset bubble, then declines in home values would follow. For now, we should keep a watchful eye on the central bank’s rates. 

Resources:

Fortune: Where home prices are headed through 2023, as forecast by Bank of America

SOFX: 80% of all US dollars in existence were printed in the last 22 months

Washington Post: Inflation has Fed critics pointing to spike in money supply

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