In the life of the fixed rate reverse mortgage, the industry has seen the product go from a small percentage of the reverse mortgages done annually to the vast majority over the last two years. Today, at nearly 70% of total reverse mortgages, lenders say most borrowers are choosing a fixed rate product where they can borrow the largest amount of money upfront. Saver market share still hovers around 10% as borrowers gravitate to products where they can borrow the greatest amount of money.
But the economy and the current need for seniors to borrow a large amount isn’t the only factor in today’s product mix, says John Lunde, co-founder and president of Reverse Market Insight.
The population of borrowers with the highest home values are far more likely to choose the Saver product and are less likely to choose a fixed rate reverse mortgage, RMI’s analysis shows.
The 25% of borrowers with the highest home values choose the fixed rate product 60% of the time, while the lowest quarter of borrowers opt for the fixed rate 80% of the time, the data shows. Similarly, the highest home values are most likely to use the Saver product versus the standard, and vice versa. The trend holds along the home value scale, Lunde says.
But home values aren’t the only clue.
The No. 1 factor is that the borrower is incentivized by the principal limit floor in the calculation, Lunde says. Additionally, on the lender side, a fully drawn loan gives a higher premium when the lender sells or securitizes the loan, as the industry moves toward HMBS.
“It really depends on what the borrower values most,” Lunde says. “What has driven the change from historically almost entirely an ARM product to a majority fixed-rate product is the gap between where interest rates are today and the principal limit floor that FHA has in place.”
As for what will shift the product mix back in favor of the adjustable rate product, several changes would likely need to be in place.
“Two important things we’ll see in terms of where the fixed, variable and Saver, Standard mixes go is one, interest rates and rates relative to the principal limit floor. Two, how effective the industry is marketing to consumers who don’t need as much money as possible.”
Written by Elizabeth Ecker