New Interest Rate Data Could Signal Reverse Mortgage ‘Economic Gift’

Recent changes in long-term metrics could indicate that the reverse mortgage market is charting a path for borrowers toward higher loan proceeds. This is according to data compiled and provided to RMD by industry expert and VP of Organizational Development at Finance of America Reverse Dan Hultquist.

“Many in the reverse mortgage industry focus on production numbers, but very few understand all of the forces that impact industry-wide trends,” Hultquist tells RMD in an email. “I don’t claim to understand all of those factors either, but an often overlooked influencer is long-term interest rates.”

The way it works

The calculation of a borrower’s expected interest rate is not calculated via short-term metrics like the one-month or one-year LIBOR index, but instead by the previous week’s average of the 10-Year LIBOR SWAP rate.

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“For LIBOR-Based HECMs, the lender must use the average of the previous week’s daily 10-Year LIBOR SWAP figures,” Hultquist says. “We simply call this the 10-year SWAP average.”

When expected rates round down to the next 1/8th percent, borrowers qualify for higher principal limits, Hultquist explains.

“In addition, HUD allows a float-down at closing,” Hultquist says. “This helps borrowers get an additional bump in principal limit when SWAP rates drop. In essence, the effective SWAP rate on the day of application or closing can have a dramatic impact on the borrower’s proceeds [available].”

For those of average borrower age (currently 73 years old) and home value ($330,000), every 1/8th percent change will alter a prospect’s principal limit by approximately $2,300-$2,700 depending on the chosen lender margin, he says. While that may not seem like much, the magnitude of the change needs to be considered, Hultquist says.

Current trends

Because the 10-year SWAP rate has been declining steadily since the winter holidays, factoring in rounding has led the trend to result in higher principal limits in three of the past four weeks, Hultquist says.

“That alone is great news and should offer encouragement for dedicated loan originators looking to increase their volume,” Hultquist says. Looking at the data since November also could point to a coming increase in principal limits through the remainder of the summer.

“I don’t want loan originators to miss this opportunity,” Hultquist tells RMD. “Traditional loan originators naturally know how to take advantage of rate decreases. But reverse specialists tend to be hyper-focused on regulatory changes and often fail to recognize an economic ‘gift’ when it comes along.”

HECM rates graph. Dan Hultquist
The 10-year SWAP rate weekly average between November 2, 2018 and June 21, 2019. Data provided by Dan Hultquist.

A summer opportunity

Because the weekly SWAP average peaked at 3.26 percent for the week ending November 9, 2018, comparing those with more recent figures draws a stark comparison.

“Last week’s average through Thursday, June 20th was 1.99 percent,” Hultquist explains. “That is a whopping decrease of 127 basis points (1.27 percent). Using a 2 percent lender margin, with the same borrower age (73) and home value ($330k), a prospect today qualifies for $23,100 more than they did prior to the 2018 holiday season.”

Such an increase in principal limits has the potential to result in an increase in reverse mortgage volume over the summer, Hultquist explains, but loan officers need to connect with their leads to make that possibility a reality.

“I think it can [increase summer volume],” he says. “But originators need to follow-up with prospects that were either short-to-close or less interested in their net figures when rates were high.”

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  • This is a particularly important topic. Dan faithfully discusses this topic as does Jerry Wagner.

    There are four things by which principal limits can increase. In no particular order, one is the lending limit, two is the age of the youngest potential borrower, three is the appreciation on the home, and finally four is the expected interest rate. Today age and the lending limit need to be monitored at critical dates generally once a year. Home appreciation is hard to monitor but cultivating friendships with appraisers can be helpful since facts and circumstances unknown to the originator can mean more home appreciation. Keeping on top of appreciation can unexpectedly turn apps that cannot be closed because of insufficient proceeds into closed HECMs due to higher principal limits.

    The expected interest rate is something that needs to be followed on a weekly basis and can turning apps that had insufficient proceeds into profitable closing. Having a strong follow up system to ensure that expected interest rates are properly monitored may be a new source of making lemons (principal limits too low to close) into lemonade (closed loans).

    It is far better to be a proactive HECM originator like Dan than to be passive and lose loans to those who are more proactive. Origination is too competitive today to ignore possible changes that could mean more closed loans.

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