The reverse mortgage industry is beginning to feel the heat of rising interest rates, as originators and borrowers are seeing the impact to the bottom line.
On the heels of historic low interest rates following the Great Recession, rates are beginning to rise for the first time in recent memory.
“Rates have never been as low as they were the summer of 2016,” said Dan Hultquist, vice president of education and organizational development at Live Well Financial and author of “Understanding Reverse.”
On July 8, 2016 the daily 10-year LIBOR swap dropped to a record low 1.279%. This is a sharp contrast to the recent 10-year LIBOR SWAP average effective October 23, 2018: 3.23%. The weekly average of the 10-year LIBOR swap is important because, along with lender margins, it is used to calculate the expected interest rate, which is used in calculating HECM principal limits.
“If you go back to July 2016, swap rates hit rock bottom and it was amazing to see,” Hultquist said. “Swaps dropped to levels nobody ever though would happen. Then when they started to rise in the fall of 2016, I said if this trend continues it will eventually impact our volume.”
Rick Rodriguez, a branch manager at Nationwide Equities Corp in Las Vegas, Nev., experienced his first interest rate impact last week for a potential H4P borrower. The client put an offer on a property last month but cancelled due to a disagreement over the appraisal. Now she is back and interested in another property — but the numbers have changed.
“She is now looking to make an offer on another property, however the cash required is now approximately $5,000 higher due to the change in expected rate and principal limit,” Rodriguez said. “She is currently digesting the change, and she may decide to lower her max purchase price.”
He said there may be similar impacts with refinances requiring a lender to make concessions if they are able or resulting in a borrower who may not qualify.
“I haven’t had any of those situations — thank goodness — but I can see that as a reality right now,” he said.
Mike Branson, CEO at All Reverse Mortgage Inc. in Orange County, Calif., said that borrowers — especially borrowers who have received a previous reverse mortgage quote — are beginning to look at how rate affects their principal limit.
“They are now more aware of the rate as it is more transparent in the final amount available to them from quote to quote with the lowered floor, and we do our best to explain that to each borrower,” he said.
This education about the rate is imperative now, and originators must give borrowers as much information as possible, he said.
“We have always marketed with the goal to educate and now it makes more sense than ever,” Branson said. “Educating borrowers to let them know what factors drive the Principal Limit changes, and what we may be seeing in the future with the constant news of further rate increases, is one way to make sure they aren’t hit with further surprises later.”
Tim Linger, broker and owner of HECM Senior Home Financing in Orlando, Fla., said that for now his company is able to hold the margins as low as possible to maximize a client’s PLF, but he said they cannot do that if the rates continue to climb.
“I know that the next interest-rate hike will cause us to raise our margins — or rates,” he said. “Right now we are at 1.875% margin for ARM and 4.5% fixed. The ARM is definitely causing our borrowers to have less available funds – as the expected-rate is nearly 5% now — sad. It will only get worse as rates increase.”
The rising interest rates may also have an impact on the number of borrowers who qualify, said Beth Paterson, Vice President at Reverse Mortgages SIDAC in Minnesota.
“Especially if the borrowers have a current mortgage that’s being paid off,” Paterson said. “As the interest rate goes up, less money is available and they could run into not having enough money to pay off their mortgage, so it makes it harder to qualify.”
She said she is going to be watching the rates more closely as they rise.
“For years it has not really made a difference, but it’s going to come in to play more.”
Written by Maggie Callahan