NEW YORK — In a time of increasing interest rates, reverse mortgage brokers and lenders have a wide variety of options to thwart the potential negative effects — and potentially take advantage of certain benefits that arise as the federal funds rate rises.
Craig Barnes of Reverse Mortgage Funding on Tuesday presented a series of tips and tricks for brokers during a morning seminar at the National Reverse Mortgage Association’s eastern regional conference and exhibition, telling the crowd that despite rising interest rates, the Home Equity Conversion Mortgages remain “a great product.”
“You have different triggers that you can pull in order to make it an attractive offering to a potential borrower,” Barnes said.
The biggest impact that rising interest rates and general economic uncertainty have on reverse mortgages, Barnes said, is on margins, especially for borrowers that are looking to extract the greatest amount of equity from their homes: For instance, Barnes cited data showing that before the election, a HECM borrower could get maximum proceeds with a margin of 3.625%, but on November 15, that margin had dropped nearly a full point to 2.75%.
“After the election, markets became more volatile,” Barnes said.
And that was before the Federal Reserve increased the federal funds rate to a range of 0.75% to 1.0%, the first of three expected hikes before the end of the year as the Fed creeps toward its goal of 3.0% by the end of 2019.
When margins constrict, Barnes said, brokers can’t always provide the same kind of incentives to entice borrowers, such as credits toward closing costs or other potential carrots. As a result, he said it’s important to explain to clients exactly what they’re paying and why to assuage sticker shock, with a particular focus on the mortgage insurance premium.
“Everyone talks about non-recourse, everyone talks about how the home is really the source of repayment, how there’s no deficiency judgment on their heirs,” Barnes said. “We all know that. But for that peace of mind, that’s why we have MIP.”
He advised brokers to emphasize that borrowers can save on MIP costs by keeping their mandatory obligations under 60%.
Noting that many borrowers are still looking for the maximum proceeds possible from their HECMs, Barnes told the crowd to review rate sheets often to identify products that provide an expected interest rate at or below the magic number of 5.06% as the federal fund rate rises. He gave a quick example of a 72-year-old borrower with a maximum claim of $300,000. At an expected interest rate of 5.06%, that person would have a principal limit of $177,300,* but only $168,000 at a slightly higher rate of 5.25%.
“It’s not always the best product, but for the borrower that needs max proceeds, you’ve got to know how to get them there.”
If a potential borrower doesn’t need to draw the maximum possible amount of cash from his or her house, Barnes said, it might be better to point to an adjustable-rate product with higher margins, which would allow the unused line of credit to grow at a faster clip.
Finally, Barnes brought up a small but potentially effective way to lower origination costs: breaking out a separate serving set-aside. By subtracting the $30 to $35 per month servicing fee from the principal limit, Barnes said, lenders can sometimes pay originators a little bit more, and originators can in turn offer credits or reduced origination fees in kind.
“It’s just another tool in your toolbox as the margins change,” Barnes said.
*Editor’s note: a previous version of this article had an incorrect principal limit figure in this scenario. The principal limit calculation has been updated to the correct value.
Written by Alex Spanko