What the Fed’s Interest Rate Cut Means for Reverse Mortgages

The Federal Reserve announced on Wednesday that for the first time since the 2008 financial crisis, it will cut interest rates in order to try and shield the U.S. economy from signs of growing volatility and a potential downturn. In terms of this move’s impact on the reverse mortgage industry, there are still some factors that need to be determined before it can be fully measured.

The Fed announced that the central bank’s Federal Open Markets Committee (FOMC) would cut its baseline interest rate range to 2-2.25 percent, a 0.25 percentage-point cut, and has stated an intent to try and push the rate of inflation closer to its 2 percent annual target after spending much of the past year well below that threshold.

“The performance of the economy has been reasonably good, the positioning of the economy is is as close to our objectives as it’s been in a long time, and the outlook is also good,” Fed Chairman Jerome Powell said at a Wednesday press conference, according to The Hill. “But again, the issue is more [related to] the downside risks and the shortfall and inflation and we’re trying to address those,” he said.

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In terms of the rate cut’s impact on the reverse mortgage market, it may not be pronounced, but has the potential to determine the amount of loan proceeds that could go to future reverse mortgage borrowers. This is according to Dan Hultquist, VP of Organizational Development at Finance of America Reverse.

“The 10-year U.S. Treasury Yield dropped a few basis points by the end of the day to 2.01 percent. Of course, the 10-year SWAP rate is the more closely watched index for reverse mortgages because it is critical for determining HECM proceeds for new applicants,” Hultquist told RMD in an email. “The SWAPs have been flat this week at just under 2 percent, but only time will tell if the rate markets will help, or hurt, principal limits moving forward.”

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