Rising rates and the impact on reverse mortgage proceeds

Sounding like some alien character in a science fiction story, LIBOR is actually a critical financial factor in determining how much money a senior can receive in a reverse mortgage transaction, especially when borrowers may or may not qualify depending on how the index moves.

LIBOR, an acronym for London Interbank Offered Rate, is a “daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market),” according to Wikipedia.

It’s good news for reverse mortgagors when the 10-year LIBOR index drops – used to calculate the expected rate – but not so good when it rises, driving down principal limit factors – and the aforementioned proceeds. Cliff Auerswald, All Reverse Mortgage Company, is concerned about seeing the “swap rate” affecting the LIBOR go up “pretty consistently over the last two months,” he says, driving down significantly the amount of money reverse mortgage recipients could obtain.

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Auerswald cites one example where a client would have qualified for $286,194 in proceeds on a property valued at $455,000, but waited just long enough to sustain a loss when the LIBOR rose. As a result, the client could only qualify for $243,000. “I think it’s going to affect the viability of the [reverse mortgage] program for many borrowers,” he worries, acknowledging that this rate rise “has happened before – a couple of years ago.”

He notes that the new HECM Saver product, which has a separate and much lower, initial mortgage insurance premium (MIP) option, “uses both the same initial and expected LIBOR rates as the Standard.” One big deterrence, though, is that since the Saver is new to secondary markets, it has been priced at about a .25 percent to .50 percent higher margin, which will produce even lower principal limit factors.

As interest rates continue to climb and values have not made a comeback, borrowers will be left with less money. Auerswald’s concern is that in addition to more borrowers finding themselves short-to-close a reverse mortgage transaction, as rates rise, instead of the HECM Saver product becoming more and more popular as HUD hopes, the even higher margins on the already lower principal limit factors may make the product even less desirable, he says.

Written by Neil Morse

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  • We will give FHA applause for trying to untangle the (HECM) conundrum.
    Critical analysis cast a shadow of gloom over the Saver Program. Interest rates are reportable higher, which translates into a cloud of reduced
    funding. Likely , not what the market needs. Concept rates A for trying:
    the results are yet to be related to Senior Homeowners acceptance.

  • The Bible states that a people without a vision perish. The same principle seems to apply to most originators as well as most industry executives when it comes to Savers. The statements in the article and in the thread only reinforce the belief that the current core of originators are very good at what they do but are ill equipped to push a new product into the other segments of the senior homeowner market. They are comfortable with what they do, what they already know, and whom they serve, the financially desperate.

    For example, the Saver is not just a LIBOR structured product. It is both fixed rate and adjustable.

    With little understanding of other segments of the senior homeowner market we already see the Saver being pigeonholed. As one who comes from the tax and financial planning segment of the financial community, it is odd to see those who believe themselves to be financial advisors overlooking the real value of the Saver.

    There is another strange tone to the article and thread. There is a feeling none of these individuals remember when initial note rates were greater than expected interest rates or when the expected rate was above six percent. Up until November 2008, county lending limits were as low as just over $200,000 and as high as a little over $362,000; the maximum proceeds were much lower in many cases than the maximum offered by Savers on higher valued homes, yet we did a growing business, larger than it is right now.

    This comment began with a statement about a vision and will end the same. The industry is in desperate need of originators with stronger financial advisor backgrounds, not just those who have sold financial and insurance products. It seems only those with a planning emphasis see the value and the need, the key elements needed to have and retain a vision, this time of Savers.

  • The Bible states that a people without a vision perish. The same principle seems to apply to most originators as well as most industry executives when it comes to Savers. The statements in the article and in the thread only reinforce the belief that the current core of originators are very good at what they do but are ill equipped to push a new product into the other segments of the senior homeowner market. They are comfortable with what they do, what they already know, and whom they serve, the financially desperate.

    For example, the Saver is not just a LIBOR structured product. It is both fixed rate and adjustable.

    With little understanding of other segments of the senior homeowner market we already see the Saver being pigeonholed. As one who comes from the tax and financial planning segment of the financial community, it is odd to see those who believe themselves to be financial advisors overlooking the real value of the Saver.

    There is another strange tone to the article and thread. There is a feeling none of these individuals remember when initial note rates were greater than expected interest rates or when the expected rate was above six percent. Up until November 2008, county lending limits were as low as just over $200,000 and as high as a little over $362,000; the maximum proceeds were much lower in many cases than the maximum offered by Savers on higher valued homes, yet we did a growing business, larger than it is right now.

    This comment began with a statement about a vision and will end the same. The industry is in desperate need of originators with stronger financial advisor backgrounds, not just those who have sold financial and insurance products. It seems only those with a planning emphasis see the value and the need, the key elements needed to have and retain a vision, this time of Savers.

  • I don’t mean to come across negative, I’m just a realist. There certainly is a place for the saver and we have originated several within the last few months, but my point was geared towards the pricing as well as those who fall short from qualifying in general. I think any originator in the daily grind will agree with me that lower values and higher expected rates will affect many potential homeowners from qualifying. We are seeing this now on the libor and hopefully not too soon on the fixed products.

    I respect your opinion and as for the saver in the financial planning world I invite you to run an amortization on say a hecm standard libor 175 and the saver 275. Unless you are only planning to keep the saver for a short amount of time you will see that the standard is the real “saver” at least for now. I believe that if the saver turns out to be a short term solution we will continue to see less appetite because the margins will further increase and the PLF’s will be so far from the standard hecm that it absolutely would affect its viability. If the standard and saver shared the same margins we would talking a different story. It’s just difficult for me to imagine a 30% market for the saver in ’11.

    • Mr. Auerswald,

      I agree with your comment immediately above even as to your projected make up of the endorsement volume this year. It took 15 fiscal years before the Traditional HECM reached a fiscal year total of more than 20,000 endorsements. Why would Savers be north of 20,000 endorsements in their initial fiscal year?

      By profession, prognostication is not a strength. Observing the debate between The_Cynic and Mr. John Lunde has been “entertaining”. Mr. Lunde and Mr. Jeff Lewis seem overly optimistic in their projections of over 95,000 endorsements this fiscal year especially when looking at the HUD reported FHA Case Number assignment totals so far for this fiscal year. Mr. Lunde is of the opinion that well before the end of this current decade over 50% of all HECMs will be Savers. I love that outlook but again I do not see that occurring before the end of the decade. But then again “prognostication is not a strength.”

      There is a strong possibility that the endorsement volume for this fiscal year will be less than last and that despite the introduction of Savers. HUD has indicated it is their view that the endorsement volume will be around 75,000 HECMs.

    • Mr. Auerswald,

      I agree with your comment immediately above even as to your projected make up of the endorsement volume this year. It took 15 fiscal years before the Traditional HECM reached a fiscal year total of more than 20,000 endorsements. Why would Savers be north of 20,000 endorsements in their initial fiscal year?

      By profession, prognostication is not a strength. Observing the debate between The_Cynic and Mr. John Lunde has been “entertaining”. Mr. Lunde and Mr. Jeff Lewis seem overly optimistic in their projections of over 95,000 endorsements this fiscal year especially when looking at the HUD reported FHA Case Number assignment totals so far for this fiscal year. Mr. Lunde is of the opinion that well before the end of this current decade over 50% of all HECMs will be Savers. I love that outlook but again I do not see that occurring before the end of the decade. But then again “prognostication is not a strength.”

      There is a strong possibility that the endorsement volume for this fiscal year will be less than last and that despite the introduction of Savers. HUD has indicated it is their view that the endorsement volume will be around 75,000 HECMs.

  • I don’t mean to come across negative, I’m just a realist. There certainly is a place for the saver and we have originated several within the last few months, but my point was geared towards the pricing as well as those who fall short from qualifying in general. I think any originator in the daily grind will agree with me that lower values and higher expected rates will affect many potential homeowners from qualifying. We are seeing this now on the libor and hopefully not too soon on the fixed products.

    I respect your opinion and as for the saver in the financial planning world I invite you to run an amortization on say a hecm standard libor 175 and the saver 275. Unless you are only planning to keep the saver for a short amount of time you will see that the standard is the real “saver” at least for now. I believe that if the saver turns out to be a short term solution we will continue to see less appetite because the margins will further increase and the PLF’s will be so far from the standard hecm that it absolutely would affect its viability. If the standard and saver shared the same margins we would talking a different story. It’s just difficult for me to imagine a 30% market for the saver in ’11.

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