Interest Rate Movement Could Skew Positive for Reverse Mortgage Market

After a rocky 2018, reverse mortgage prospects may be getting a bit brighter for borrowers and lenders as the year comes to a close. As the market approaches its final days of 2018, originators and borrowers could stand to benefit from the current interest rate environment, according to Understanding Reverse author and Live Well Financial vice president of education and organizational development Dan Hultquist.

“The good news is that long-term rates are dropping,” Hultquist told RMD in an interview. “The end result is that you’re going to see that [new] forward mortgage borrowers […] can more easily qualify for higher-priced homes. On the forward side, when long-term rates drop it’s obvious how that benefits them.”

Additionally, the benefits for reverse mortgage borrowers and the reverse mortgage industry as a whole will also be felt by this change in interest rates, he said.

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“The good news for the reverse side is that when you have prospects right now, and you’re looking at how much they’re going to qualify for, they’re going to qualify for more money, to the tune of about $2,000 for the average borrower,” he explained. “Now, it’s trending down so rapidly that we might see another $2,000 the following week.”

The average 10-year LIBOR swap average rate at the end of last week – when Hultquist spoke with RMD – was at 2.98 percent, but the prior week sat at 3.10 percent.

“That’s a pretty big shift in long-term rates,” he said. “And when long-term rates drop, borrowers qualify for more money. So, that’s huge for us. The big news is that short-term rates haven’t dropped. So, now you have what’s called a flattened yield curve, where both short-term and long-term rates are about the same.”

According to recent data concerning LIBOR rates, the yield curve is showing signs of an inversion. Among most recent recessions, an inverted yield curve has historically preceded an oncoming economic downturn.

But despite greater economic implications and negativity in recent months stemming from volume declines and reduced principal limit factors, the news could provide a positive boost for originators, Hultquist says.

“We see a lot of negativity, but now we’ve got something positive to look at. Number one, long-term rates have gone down to where borrowers are actually qualifying for more money, and that’s huge because it hasn’t happened in the last year. We’ve seen a steady rise since a year ago, so now we actually have something good to talk about. The long-term rates are going down, borrowers are qualifying for more money, they may give you a little more flexibility with lender margins, which ultimately means loan originators might make a little more money,” he said.

He also added that a reduction in long-term rates will see another positive result. “We should actually see an uptick in volume from long-term rates coming down a little bit.”

Even with a reduction in principal limit factors brought about by the instituted HECM rule changes from October 2017, Hultquist thinks this could give the industry a shot of positivity going forward. Industry tailwinds may be a long way away, but the change in rates combined with a prospective loan limit increase if FHA follows Fannie Mae’s recent increase, could counter some of the “bad news” of 2018.

“Now, we could have some reason to cheer. Long-term rates have dropped a little bit, giving our borrowers a little more money, and then you’ll find in some pockets of the country that it’s more attractive for a million dollar homeowner,” Hultquist said.

Written by Chris Clow

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  • Dan does a great job of finding the silver lining even in the obscure. The information in this article is an excellent example. By no stretch of the imagination are we out of the woods just yet but even a little more sunshine in a depressingly dark forest is something to put a little more spring in the step. Yet it is volume that is troubling.

    Today I read comments of some normally optimistic originators talking about a new normal of about 30,000 originations per annum. While it seems that we will see a drop in endorsements of about 25% this fiscal year, as of yet there is nothing to indicate that 30,000 is the new norm for either originations or endorsements. In the past 14 years, we have yet to see monthly endorsements go below 2,550. At this point in time 33,000 to 36,000 annual endorsements (and originations) do not seem unrealistic for either fiscal 2019 or even fiscal 2020.

  • George,

    I do understand where you are coming from and from a factual stand point it would be hard to argue your point of view.

    However, from the originators standpoint, this is something positive to capitalize on and it can help in increasing origination’s.

    Our originators and the industry as a whole needs to get out of this negative deep hole we have put our-self into. Yes, there are many reasons since 2015 through 2017 up to present day to give us good reason to be in that hole! However, we are either going to stay in the whole or drag our tails out of it and do something about it!

    I see the light at the end of the tunnel, the road is not an easy one to travel, but those who have the guts, the stamina and the creative mind to do it, will prevail!

    I believe this with all my heart and I will still plug forward. I hope I can get the opportunity with a firm out there that will recognize what I can do for them!!!!

    By the way George, this is not an advertisement:)

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

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