Reverse Mortgage Lenders Gear Up for New ARM Loan Market

With now six weeks of applications following the suspension of the fixed rate standard reverse mortgage implemented April 1, the market is recalibrating to a proportion of adjustable rate loans that skews upwards of 90%.

While data from the Department of Housing and Urban Development has yet to be published with any conclusion about the loan mix, anecdotally lenders are reporting in some cases, 90% of new applications are for adjustable rate reverse mortgage loans.

The outcome is in contrast to initial predictions by some market participants that indicated a breakdown more along the lines of 50% adjustable rate loans and another 50% comprising the fixed rate Home Equity Conversion Mortgage Saver product.


“I think the difference between earlier projections of an even split were over-emphasizing borrowers’ preference for fixed rate predictability versus maximizing cash available,” says John Lunde, founder and president of Reverse Market Insight.

An initial tally based on activity post-April 1 confirms the estimate of roughly 90% adjustable rate loans, according to RMI’s research.

But the percentage borrowers take upfront will be the most important factor from the standpoint of HUD, executives said during the National Reverse Mortgage Lenders Association conference in Irvine, Calif. last week.

“What we are all waiting for is new utilization applications post-April 1 and looking at utilization of borrowers,” said Colin Cushman, president and CEO of Generation Mortgage.

Prior to April, adjustable rate reverse mortgages insured by FHA represented about 50% utilization at closing, Cushman said. If the proportion remains close to the utilization level prior to April 1, that would be seen as a positive outcome based on the changes implemented.

“If average utilization goes to 80%, that suggests borrowers are taking a full draw ARM and the value of policy would be diluted,” Cushman said. “We are hoping the proportion relieves overall pressure on FHA.”

Written by Elizabeth Ecker

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  • Any FOCUSED REVERSE ONLY LOAN OFFICER, if asked, would have predicted at least 90% Variable would result from the Standard Fixed elimination! WHY? easy – the most money can be gotten through the standard program and with FIXED STD gone, variable STD is all that remained. the SAVERS don’t get them the amount they need. The main question I had was “Will the borrowers draw more at closing with Variable now than previously?” – – and that answer has yet to come in. Many seem to be taking the Variable with little to no draw and using the Line of Credit (LOC) interest (approx. (4.56% now) to cover their high closing costs. EX: If closing costs are $20K on VARIABLE STD. and $10K on FIXED SAVER, the difference can be made up in 1-2 years with the Credit Line Growth alone. In addition, the borrower has more available funds for use for their future. It’s really a “no brainer” for someone properly educated on the LOC. Overall volume has taken a big hit. We in the field should be asked about these predictions in advance, as we are on the firing line with seniors every day, all day, weekends and evening too! Ask the experts and get the correct answers!

    Mike Johnson Sr. REVERSE MLO

    • Mike, you seem to be implying that the borrower is earning interest on their line of credit and that the customer is recouping the additional $10,000 in closing costs in a 1-2 year period.

      “Many seem to be taking the Variable with little to no draw and using the Line of Credit (LOC) interest (approx. (4.56% now) to cover their high closing costs. EX: If closing costs are $20K on VARIABLE STD. and $10K on FIXED SAVER, the difference can be made up in 1-2 years with the Credit Line Growth alone.”

      Can you explain exactly how they can make up the difference in 1-2 years?

  • What the foregoing shows is that industry leadership does NOT understand consumer demand for HECMs. What it believes drives HECM demand is utter folly. The reason is their own agenda blinds them. If they were their own strategic planning group, they would have to fire themselves.

    Even the basic issues are lost in the article above. What the underlying issue is that seniors want Standard Principal Limit Factors (PLFs) over Saver PLFs even if they have to accept an ARM product in order to get the higher PLFs.

    Here we have a reasonably strong rising home appreciation market and yet HUD staff is warning of even a worse negative Net Position for the HECM portion of the MMI Fund at the end of this fiscal year than last, a far worse prediction.

    Many in the industry are projecting irrational endorsement increases based on the loss of the fixed rate Standard. Rather than trying to understand the reasons for our current dilemma they declare that because the HECM market was growing with the fixed rate Standard, it will grow again now that it is gone. With so much silly superstition, will our industry produce a huge demand on voodoo dolls?

    We need facts not the guesses of those who live in ivory palaces or those who strictly live in the past.

  • I had no doubt that a majority percentage of loans being made would be in the ARM product. Even though the saver has a fixed rate product the loan still does not meet the demanded need.

    Until the industry learns how to sell the saver, fixed rate and the ARM, as well as how to target the right market for the saver, it will lag behind between 10% to 18% of the total RM production.

    I feel a greater percentage of borrowers, especially in this market enviroment, will want to utilize as much money as they can get. The saver will not meet that need.

    John A. Smaldone

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