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.
“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