The Federal Reserve raised the federal funds rate for the third time in a little more than a year last week, an expected move that experts say will have a mixed effect on the reverse mortgage market in the coming months.
“The recent rate increases by the Fed are probably not much of a surprise to those in the lending industry, since the economy has been showing signs of improvement in recent months,” said Mike Gruley, executive vice president of reverse mortgage lending at 1st Nations Reverse Mortgage in Ann Arbor, Mich., in an e-mail to RMD.
Borrowers looking for a fixed rate, one-time draw will likely see the most immediate effects, as rising interest rates mean a lower principal limit, which could possibly turn off needs-based consumers who have to cover immediate expenses with the Home Equity Conversion Mortgage proceeds. Michael McCully, partner at New View Advisors, said declines in principal limits could lead to a dip in origination volume as interest rates rise.
These trends also put competitive pressure on originators as margins decline: Gruley notes that borrowers could previously get the maximum principal limit amount at a margin of 3.25%, but now that number is closer to 2.5%. This puts lenders in a bind, Gruley said, as offering the maximum principal limit increasingly hamstrings their ability to sweeten the deal with reduced origination fees and lender credits; but were they to set rates that exceeded the expected rate floor in order to achieve a higher margin, any credits or reduced fees they’d offer would be offset by the resulting lower principal limit.
“Eventually, in a higher interest rate market, originators will have to make a competitive decision to either quote rates and margins that provide borrowers with the maximum funds at closing, or maintain their revenue margins by exceeding the floor,” Gruley said.
Shelley Giordano, chair of the Funding Longevity Task Force at the American College of Financial Services, said rising interest rates are a prime example of why the industry needs to market reverse mortgages as retirement tools, and not just as one-time fixes for the desperate.
“The fact that the rates will go up and the principal limit will go down [illustrates] even more that people should have diversified their business, and be appealing to people who don’t necessarily so-called ‘need’ a reverse mortgage,” Giordano told RMD.
She noted that when she started in the reverse mortgage industry, interest rates were almost 9%.
“I would say that it’s not a mortal blow to have higher interest rates,” Giordano said. “We’ve had higher interest rates over the years.”
McCully noted that modestly rising interest rates could be a good thing for HMBS issuers, as it quickens the pace of negative amortization — the rate at which interest is added onto the loan balance. In turn, the loans would reach 98% of the home’s value and see reassignment to HUD faster, potentially reducing loss exposure to issuers.
However, rising rates could also lead to lower valuations on adjustable-rate HMBS, which McCully said would likely put a damper on new HECM originations.
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