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).
“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.”
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.
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