The 10-year Constant Maturity Treasury rate fell to a record low today — 2.54%. We’re in territory where the Principal Limit is maxed out, and the SFSA and tenure conversion factors are the only things moving with rates. Lower rates mean less money since lower rates give higher SFSA’s. This week a Treasury HECM+225 gives $273 more than a HECM+175 (all from a lower SFSA).
This week, all Treasury-based HECM’s with a margin of +289 or less will pay the HECM maximum benefits. Ditto for LIBOR-based HECM’s with margins of +262 or less.
An anomaly is occurring. A 3.10% margin annually-adjusting HECM now gives higher tenure income than a monthly-adjusting HECM. The initial NPL is a couple of notches lower on an annual HECM, but it’s relatively high Expected Rate gives a high tenure conversion factor. Think about tenure income calculations like a car loan — higher rates make for higher payments. Do not let your borrowers think this is a preferred option — they will pay much more interest over the life of the loan — far offsetting any extra monthly income they may receive. The rates as of 12/16/08:
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