3 Ways an Interest Rate Hike Could Impact Reverse Mortgages

There has been a lot of chatter surrounding the possibility that the Federal Reserve may finally increase interest rates this year. And while the financial sector as a whole waits with bated breath for the first potential rate hike in nearly a decade, there are several ways rising rates could impact the reverse mortgage industry, specifically.

Pending the outcome of meetings this week among the Fed’s top officials, this year could be the first time the national bank has raised interest rates after keeping them at historic, near-zero levels for the better part of the past decade.

Longer-term rate increases will have a larger impact on Principal Limit Factors (PLFs) than short-term rate hikes, suggests Jerry Wagner, owner of Ibis Software Corporation, which regularly tracks rate activity associated with Home Equity Conversion Mortgages (HECMs).

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“Short-term rate hikes of 0.5% or 1% will have little effect,” Wagner says. “Long-term rate hikes have big effect as Principal Limit factors will be smaller.”

Rising interest rates also stand to impact reverse mortgages differently depending on whether they are adjustable- or fixed-rate loans.

Adjustable-rate HECM impact

HECMs would be most affected by a move in the 10-year LIBOR rate from an adjustable rate mortgage perspective, says John Lunde, president of Reverse Market Insight.

“Given how much of the industry volume is ARMs, I suspect everyone will continue to watch the 10-year LIBOR closely, as it will determine the principal limit factor which is the percentage of home value/Maximum Claim Amount each borrower can access based on their age,” Lunde says. “Increases in that key rate would lower the amount of cash available to borrowers.”

Fixed-rate impact

Of secondary importance would be the 5-7 year LIBORs which would have a similar effect on fixed-rate HECMs, Lunde says, along with the one-month and one-year LIBOR which drive interest rates accruing on loan balances.

“That presents a borrower cost question, but barring a massive increase there, it’s still a historically low interest rate for borrowers to pay, and thus, a mostly positive part of the sales process,” he says.

LTV issues

A rise in interest rates could potentially call into question the value of a reverse mortgage from a borrower’s standpoint, suggests Bruce Simmons, reverse mortgage manager at American Liberty Mortgage, Inc., in Denver.

“The question is if the economy is strong enough to withstand higher rates,” Simmons says. “If it is, that is actually bad news for reverse mortgage lenders because as the 10-year LIBOR swap rates rise, with the margin, above the 5.06% floor, homeowners will qualify for less and less money.”

Right now after closing costs, Simmons estimates that most borrowers are only receiving 50% to 65% of the value.

“Will anyone be willing (or able) to do it at 40% – 45% LTV?” Simmons asks. “Will HUD change the PLF tables if the 10-year LIBOR goes to 7% or 8%? I don’t know.”

Written by Jason Oliva

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  • Sometimes the content under a heading is confusing in this article. Jason says for example: “Of secondary importance would be the 5-7 year LIBORs which would have a similar effect on fixed-rate HECMs, Lunde says, along with the one-month and one-year LIBOR which drive interest rates accruing on loan balances.” That quotation is taken from the first paragraph under the heading: “Fixed-rate impact.” It is only 5-7 year LIBOR which affect fixed rate principal limits but that same rate is what mainly (other than ongoing MIP) drives the growth in the balance due on a fixed rate HECM. The last part of the quotation after “Lunde says” is all about balance dues on adjustable rate HECMs.

    HUD cannot increase PLFs (Principal Limit Factors) as expected interest rates rise unless it wants to significantly raise MIP, risk substantial losses in the HECM part of the MMI Fund or end with a combination of both. If HUD did risk more losses to the HECM part of the MMI Fund, expect the reaction from a Republican Congress to be to put an end to the HECM insurance program.

    Yet another significant aspect of the program would also change as a result of higher expected interest rates — LESAs as would the amortization of the LESAs since that is based on current note interest rates which can change monthly on some adjustable rate HECM products.

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