Chart of the Day: Consumers Overwhelming Choose Fixed Rate Reverse Mortgage

While it’s no secret fixed rate reverse mortgages have become more popular, you don’t understand how much has changed in the last year unless you look at a chart showing what type of loans are being endorsed each month.

Data from the US Department of Housing and Urban Development shows only 3.9% of endorsements during January 2009 were fixed rate HECMs.  The adjustable rate reverse mortgage product dominated the marketplace with 95.87% of total volume during the same month.

Only a year later, fixed rate reverse mortgages grew to 68.28% of endorsements during January 2010, while adjustable rate products fell to 31.69% of endorsements.

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Driven by investor demand for Ginnie Mae fixed rate HMBS product and lower costs for consumers, it’s no surprise there has been such a large shift.

Chart: RMD – Product Type 2009-March 2010

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RMD - Product Type 2009-March 2010

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  • No surprise here, but I know it means severe trouble in a few years when all these big balance fixed rate HECM's start to have negative equity positions.

    • Oldtimer2,

      Perhaps even worse is the potential impact on defaults for insurance and taxes. Expect these defaults to multiply over the next few years.

  • The real issue is: Are there a lot of borrowers, who should not be taking a full draw, getting pushed into fixed-rate loans vs. adjustable rate loans because of the huge premiums or because of the cost reductions that fixed rate loans give. I don't know the answer, but if the answer is yes, then all of the new “improvements” that many in our industry are crowing about, are not doing what is best for our clients.

  • Oldtimer and Critic,

    You're unfortunately correct. Until the March 2009 1.25% ARM margin jump, the ARMs were much more competitive with the Fixed Rate loans in terms of Principal Limit and historical interst rate estimates of future loan balance.

    While the first Fixed Rate HECM back then had some appeal to the segment of borrowers that irrationally equated potential rate increases with Armageddon, the rate hikes they feared have so far never really materialized. A little borrower education went a long way towards helping them realize that the HECM Program was designed around the ARM model. HECM ARMs were a long-term and flexible and liquid financial instrument that could help them adjust to the life-changing events that occur much more frequently among retirees than the younger general population.

    The HECM loan calculations contain a series of progressive hedges to restrain the loan balance from overtaking future property value: first is the Principal Limit calculation based upon life expectancy itself, second is a deeper recognition of historical higher prepayments with higher interest rates (yielding shorter loan terms). The third line of defense came about largely because the ARM model was the only working model at the time the HECM program was designed, and this is the HUD insurance that steps in if all the prior steps failed.

    Until the Fixed rate HECM came into being, all the statistics showed that the Line of Credit option was the favored method by which most borrowers received their net loan amounts. That's because the number one REAL fear of retirees is outliving their money, NOT interest rate increases that might affect them or their heirs. The Line of Credit offset a corresponding amount of the loan balance, and did not force the borrowers to make a second decision about what financial instrument they would use to store any excess funds.

    Our initial judgement was that the Fixed Rate HECM was designed for the benefit of the mortgage industry and investors instead of the borrowers or the HECM Program's sponsor. The “Fixed Rate HECM” is a marketing solution to a problem that had not materialized; it plays to and encourages fears of consequences which were largely offset by the HUD insurance in the first place. It's introduction made reverse mortgages work more like forward mortgages as it outsourced financial management to the borrower, eliminated servicing complexity, maximized investor profits since the maximum loan amount is drawn out for the maximum term, and paid significantly more YSP to the Loan Officer. A product that's easier to explain and pays more on the backside also changed the modus operandi of the reverse Loan Officer population to one more closely resembling the forward industry, and it definately eased the marketability and profitability of unsuitable cross-sales of deferred annuities.

    The Fixed Rate HECM currently yields more Principal Limit than any ARM now, so I have to use it like everybody else now, but it represents more danger to the borrowers, to the industry, and to HUD than any other reverse mortgage product development. This is the reverse mortgage industry's contribution to excessive financial risk-taking. We did in the mistaken belief that the increased risk has been somehow truly out-sourced away from us. It is the tradeoff our industry decided was a good idea: dumbing down our flagship for reaching the mass market and getting to the steep part of the Boomer and retiree 'S-curve' faster.

  • The real issue is: Are there a lot of borrowers, who should not be taking a full draw, getting pushed into fixed-rate loans vs. adjustable rate loans because of the huge premiums or because of the cost reductions that fixed rate loans give. I don’t know the answer, but if the answer is yes, then all of the new “improvements” that many in our industry are crowing about, are not doing what is best for our clients.

  • Oldtimer and Critic,rnrnYou’re unfortunately correct. Until the March 2009 1.25% ARM margin jump, the ARMs were much more competitive with the Fixed Rate loans in terms of Principal Limit and historical interst rate estimates of future loan balance.rnrnWhile the first Fixed Rate HECM back then had some appeal to the segment of borrowers that irrationally equated potential rate increases with Armageddon, the rate hikes they feared have so far never really materialized. A little borrower education went a long way towards helping them realize that the HECM Program was designed around the ARM model. HECM ARMs were a long-term and flexible and liquid financial instrument that could help them adjust to the life-changing events that occur much more frequently among retirees than the younger general population. rnrnThe HECM loan calculations contain a series of progressive hedges to restrain the loan balance from overtaking future property value: first is the Principal Limit calculation based upon life expectancy itself, second is a deeper recognition of historical higher prepayments with higher interest rates (yielding shorter loan terms). The third line of defense came about largely because the ARM model was the only working model at the time the HECM program was designed, and this is the HUD insurance that steps in if all the prior steps failed. rnrnUntil the Fixed rate HECM came into being, all the statistics showed that the Line of Credit option was the favored method by which most borrowers received their net loan amounts. That’s because the number one REAL fear of retirees is outliving their money, NOT interest rate increases that might affect them or their heirs. The Line of Credit offset a corresponding amount of the loan balance, and did not force the borrowers to make a second decision about what financial instrument they would use to store any excess funds.rnrnOur initial judgement was that the Fixed Rate HECM was designed for the benefit of the mortgage industry and investors instead of the borrowers or the HECM Program’s sponsor. The “Fixed Rate HECM” is a marketing solution to a problem that had not materialized; it plays to and encourages fears of consequences which were largely offset by the HUD insurance in the first place. It’s introduction made reverse mortgages work more like forward mortgages as it outsourced financial management to the borrower, eliminated servicing complexity, maximized investor profits since the maximum loan amount is drawn out for the maximum term, and paid significantly more YSP to the Loan Officer. A product that’s easier to explain and pays more on the backside also changed the modus operandi of the reverse Loan Officer population to one more closely resembling the forward industry, and it definately eased the marketability and profitability of unsuitable cross-sales of deferred annuities.rnrnThe Fixed Rate HECM currently yields more Principal Limit than any ARM now, so I have to use it like everybody else now, but it represents more danger to the borrowers, to the industry, and to HUD than any other reverse mortgage product development. This is the reverse mortgage industry’s contribution to excessive financial risk-taking. We did in the mistaken belief that the increased risk has been somehow truly out-sourced away from us. It is the tradeoff our industry decided was a good idea: dumbing down our flagship for reaching the mass market and getting to the steep part of the Boomer and retiree ‘S-curve’ faster.rnrn

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