What the Federal Reserve Rate Hike Means for Reverse Mortgages

This week, the Federal Reserve decided to raise the benchmark short-term interest rate for the second time in nearly a decade. But while the impact will be more immediate for some forms of home equity lending, the Fed rate hike will have a more muted effect on reverse mortgages.

In a move that was widely expected by investors and mortgage industry lenders, the Federal Reserve on Wednesday raised the target range for the federal funds rate to 0.50-0.75%, up from the previous range of 0.25-0.50% announced in December 2015.

Because mortgage rates tend to follow long-term bond rates, such as the 10-year U.S. Treasury note, the Fed’s move this week will indirectly impact rates for traditional mortgages like the 30-year fixed mortgage, which has already increased 50 basis points—more than double the quarter-point increase the Fed voted on this week—since the election of Donald Trump in November.

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Changes to longer-term rates will have more of a direct impact on reverse mortgages compared to short-term rate increases, as longer-term rate hikes will translate into lower Principal Limit Factors for Home Equity Conversion Mortgage (HECM) borrowers.

Experts indicate that HECMs would be most affected by movement in the 10-year LIBOR rate, from an adjustable rate perspective, rather than a move in the federal funds rate.

“There’s not a cause and effect relationship between the Federal Reserve’s actions and the movement in LIBOR rates,” Bankrate.com Senior Vice President and Chief Financial Analyst Greg McBride told RMD. “If anything, movement in LIBOR rates precedes actions by the Federal Reserve.”

Home equity lines of credit (HELOCs) will feel a more immediate impact on the Fed’s decision to raise rates since most HELOCs follow the prime rate, which is based on the federal funds rate.

“Rates on home equity lines of credit are going to increase in step with what the Federal Reserve has done,” McBride said. “So borrowers will see that increase passed directly through to them, typically within 60 days.”

A quarter percentage point increase in HELOC rates likely won’t break the bank for borrowers, as a 0.25 point rise on a balance of $25,000 means an increase of a little more than $5 on a monthly payment, according to estimates from Bankrate.com. For a borrower with a $50,000 HELOC, a 0.25 increase would result in a $10-$11 monthly payment hike.

“Keep in mind this is a variable rate so you will see continued increases in 2017 and beyond if the Fed continues to raise interest rates,” McBride said.

And the Fed plans to raise rates next year, which could see possibly three rate increases likely at a clop of 0.25 percentage points apiece, according to various reports following the Federal Open Market Committee meeting this week.

In response to the Fed’s rate move, mortgage industry experts are projecting lower origination amounts for next year. For 2017, the Mortgage Bankers Association (MBA) expects total mortgage originations will decrease to $1.57 trillion, down from $1.89 trillion in 2016.

“Once we start to receive more information on any possible changes to tax, trade, or government spending policies by the Trump administration, we will reassess these estimates,” MBA wrote in an economics and mortgage finance commentary published the day after the Fed’s rate announcement.

Written by Jason Oliva

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  • in order to support the current expected interest rates, lenders seem to be dropping margins. Where such action is not being taken, can those lenders reasonably expect endorsements to even stagnate?

    To be caught in a position 1) where the start of fiscal year endorsements are the worst they have been since fiscal 2004 and 2) with interest rates rising when expected interest rates are near or above the floor for principal limit factors, the outlook for the remainder of fiscal 2017 as to endorsements, originator compensation, and lender profits is not as hoped just three months ago. While the Fed is advising very reasonable interest rate increases over the next 12 months, such increases will put ever greater pressure on this very volatile industry.

  • I realize everyone is talking and expressing as well as feeling doom and gloom but did we all think the FED rate was going to remain where they were forever?

    In the first place, everyone needs to face reality and face up to the facts, rates had to go up, we have been living in a dream world! Rates will go up again and they need to!!

    Markets will adjust, they always do. 10-15 years ago, we never had yield spread premiums that we were paid on, we never made the amount of money that LO’s have realized on loans over the recent years and with all the industry changes.

    Heck, we made a great living then, we loved what we did and had the passion it took to be successful with our senior borrowers. We did volume back then, more than I see today out of a loan officer per month!

    If you are in the reverse mortgage space or industry or what ever you want to call it for the right reason, you will make it and so will the companies that are originating, processing, underwriting, funding and creating GNMA securities make it and make with success!

    I am not ignorant and I do understand that this will have a psychological and financial effect on most but it will not last forever, unless you make it that way for yourselves?

    This will not hurt our borrowers as much as you think, yes, HUD will have to make adjustments accordingly as rates go up but we have more potential borrowers than we ever have had since the beginning and creation of the reverse mortgage.

    Go create new markets for yourselves, look for ways to create volume, if you truly love this industry we are in, you can make it work better than ever, trust me, those are just not words, I believe what I am saying from the bottom of my heart!!

    John A. Smaldone
    http://www.hanover-investment.com

    • John,

      Before finding the positive, let us first be real.

      The HECM program is about insurance. The insurance program must be at least self-sustaining in the MMI Fund or we will need help from the forward mortgage programs in that fund just as we have taken funds from those programs in the past seven fiscal years.

      As long as FHA is seeing the HECM program incurring losses with insufficient income offsetting it, how can HUD increase principal limits if expected interest rates suddenly rise? More likely our margins will need to drop with loss of some premium to lenders.

      The positive is we are not there YET. So as the old saying goes, make hay while the sun shines.

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