EPISODE #677 The Consequences of an Unnecessary Interest Rate Hike
The Federal Reserve’s Fair Open Market Committee (FOMC) in its quarterly projections published after the meeting, 13 of 18 officials saw a likely need for higher rates by the end of 2023, with seven of them seeing a need to begin raising rates as soon as next year.
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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.
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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.
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.
Historically-low interest rates have pushed up HECM-to-HECM refinances to nearly one-third of all loan volume. Originators share their thoughts on what the refi boom means for our industry.
Record-low LIBOR rates and competitive margins erase most of 2017 PLF reductions
Dan Hultquist of Finance of America Reverse returns for another exclusive interview; this time discussing how a record low-interest-rate environment do erase most of the impact of the October 2017 PLF reduction and much more.
What recent changes in the housing market and mortgage interest rates mean for HECM lenders
We rarely discuss what is happening in the traditional mortgage market. Yet the larger overall mortgage market and prevailing 30-year mortgage rates have a direct impact on reverse mortgage borrowers and our industry at large.
Despite challenges there is reason for measured optimism
HECM originators in the state of Connecticut have their own October surprise. The state’s governor signed into law Senate Bill 150 which goes into effect October 1st, 2018. It requires that prospective borrowers receive HECM counseling and provide a certificate of completion to the lender before any final and complete application is accepted. Good record keeping is essential as Connecticut HECM lenders must keep the counseling certificate for ‘the term of the reverse annuity mortgage loan’. An interesting choice of words. Any violation of the new law will be considered an unfair or deceptive trade practice. Our friends in Connecticut will want to mark their calendars.
Divorce is perhaps one of the most devastating events for one’s retirement. A recent column at PlanSponsor.com cites a study by the Center for Retirement Research at Boston College that shows the net worth of non-divorced households is about 30% higher than divorced households. Those at risk of being unprepared as measured by the Retirement Risk Index rises 6 percentage points for divorced men but is statistically insignificant for divorced women. One reason given for this difference is that single women are more likely to own a house which they can use for a reverse mortgage according to the study. Perhaps now is a good time to consult with your local family law attorneys on how the HECM can help mitigate the impacts of divorce.
More homeowners are making peace with appreciation sharing loans. A MarketWatch column last week tells the story of Mike Lindsay, an Orange County widower who found himself devastated with medical bills and childcare costs in the wake of his wife’s death. His surest bet turned out to be his house. Unable to refinance his home which was valued at $1.2 million he turned to Unison. The company offered Lindsay $200,000 in exchange for a share of the future appreciation of his home as part of its HomeOwner program. Karen Kaul with the Urban Institute who has discussed reverse mortgages reverse mortgage on several occasions said “it’s good to see people experiment with this. I hope this eventually takes off.” He did add his specific concerns about the lack of consumer protection in such arrangements. The question is, will more senior homeowners find such an arrangement an attractive alternative to a reverse mortgage?
We often hear financial pundits espousing the pitfalls of a reverse mortgage, but few explain the risks of loaning your elderly parents money to stay in their home. The Pittsburgh Post Gazette featured two elder law attorneys who cautioned readers of the risks involved when lending money to parents- namely being an ‘unsecured creditor’ This means if their parents receive any state assistance for nursing or homeware services the kids risk not being repaid as the state’s lien takes precedence. What’s a better approach? “Parent and son could have entered into a simple loan documentation agreement whereby parent signs a note for the loan tied to a mortgage which secures the debt to the parent’s home. Result under this improved arrangement: son gets $100,000, state gets whatever is left after that.”
In our last story, the Federal Reserve has raised their 2018 economic outlook forecasting a median real GDP of 2.8 percent for the year and consequently increasing rates. The Fed raised it short term rate a quarter of a percentage point to 2% and hinted at two more hikes which would bring the total of four interest rate increases in 2018. Watch your rate sheets closely in the coming weeks and months.
The Federal Reserve has already increased the benchmark federal funds rate and has telegraphed their intention for additional hikes this year. Do reverse mortgage lenders and borrowers need to worry?
Be careful what you wish for. Monetary policy dictates that as the economy improves, interest rates are adjusted to more normative levels in the efforts to curb inflation and prevent market bubbles triggered by cheap money.
Reverse mortgage borrowers reluctant to pay higher closing costs were often won over with lender pricing concessions. IBIS’s weekly rate updates show the gradual erosion of lender margins, eroding the ability of HECM lenders to reduce origination fees or to cut other costs…. Download the video transcript here.
3 reasons why you should expect big changes in 2017
The political landscape changed with a sudden seismic shift felt across the world. Domestically the impacts of a new populist, small government philosophy may manifest themselves in a variety of ways that will impact reverse mortgage lending this year.
Slashing Domestic Spending:
The Trump administration is contemplating substantial cuts in excess of $6 billion dollars from HUD’s budget, according to documents obtained by the Washington Post. While alarming to some, would such cuts, if realized, substantially impact the Home Equity Conversion Mortgage? The short answer is no as most are speculated to be directed at housing initiatives such as Section 8, community housing projects and assistance programs for elderly low income Americans. Some industry participants however, wonder if continued budget subsidies for the HECM program would place the program in the crosshairs of the federal government’s efforts to reign in domestic spending.
Trump vs. The Fed:
Will Trump regret his comments about the Fed? Throughout his presidential campaign, Donald Trump criticized the Federal Reserve and it’s chair Janet Yellen, of maintaining artificially low interest rates to help Hillary Clinton. In December the Fed raised interest rates on quarter of a percent, the second rate increase since June 2006. Central banks have been reluctant to raise interest rates in the wake of the 2008 financial crash, and home prices have consequently been on a tear. Today, the Fed is projecting three rate hikes this year alone. The impact would be felt by
Trump vs. The Fed: