Last week, the Federal Reserve announced that it would be cutting interest rates for the first time since the onset of the 2008 financial crisis. The move was made in an effort to preserve the growth currently observed in the United States economy.
The full effect of the rate cut is still to be determined, however there are three potential ramifications on the reverse mortgage industry that could spin out of this measure regarding loan proceeds for borrowers, the level of the expected rate that determines qualified borrowers and the financial options available for retirees.
While the rate cut has the potential to stimulate a growth in loan proceeds for borrowers, the impact is uncertain according to Michael McCully, partner at New View Advisors.
“All else equal, lower rates provide more proceeds to borrowers, so the 0.25 percent cut should help, albeit modestly,” McCully tells RMD in an email. “But, rates peaked last November and are now about 1.25 percent lower. Where’s the commensurate increase in volume over the last 8 or 9 months?”
Wholesale lenders could also be taking action that could mitigate the potentially positive effects an interest rate cut could have, according to Michael Mazursky, owner of iReverse Home Loans in Carlsbad, Calif.
“In theory, a Fed rate cut should lower the expected rate. This should help some borrowers qualify that otherwise could have a shortfall,” Mazursky says. “However, I have observed over the last several weeks wholesale lenders have cut pricing across the lower utilization tiers. This drastic change in pricing could actually have the opposite effect, where borrowers may end up with a higher interest rate margin.”
Taking an action like that would potentially negate the positive effect that a rate cut would have on the market, Mazursky says.
There could also be some other unique effects the cut could have on the reverse mortgage market according to Professor Jamie Hopkins, director of retirement research at Carson Group.
“Continued low interest rates could spur and help the housing market in the sense of home building,” he says. “Continued cheap capital generally results in expanding economies, borrowing, and growth.”
Another thing to be on the lookout for in an environment combining a strong market with low rates is additional private equity and purchase deals of companies, Hopkins says, but there could also be some increased difficulties for certain retirees.
“Low rates also hurt retirees that are looking for secure income from annuities, bonds or CDs,” Hopkins says. “So, now they might be more open to looking elsewhere. While a 25 [basis point] cut is small, it can trigger behavior.”