The current reverse mortgage rate environment may not completely eliminate the impact of October 2017’s notorious changes to principal limit factors (PLFs), but it is certainly diminishing them, says a prominent reverse mortgage educator.
After sharing with RMD a favorable change in reverse mortgage rates at the beginning of the summer, things have only managed to improve further according to Dan Hultquist, VP of organizational development at Finance of America Reverse.
“We’ve been given a gift in the form of rate cuts,” Hultquist says in a phone interview with RMD. “The market is factoring in more rate cuts, causing treasury yields to continue to drop. Some analysts predicted this [kind of rate environment] in the spring.”
How the PLF changes are being weakened
Favorable lender margins permitted by the drop in rates mean that those seeking a reverse mortgage can now get the same amount of proceeds as they could prior to the changes, while maintaining the mandated slimmer PLFs descending from the infamous changes.
“You can now offer a 1.5% lender margin and give [borrowers] the same amount of money we were providing before FHA handed down the October 2, 2017 changes,” Hultquist says. “The swap rate average last week was 1.54%, and it continues to drop again this week. LIBOR swaps have declined to where we can provide a reasonable lender margin and provide the same amount of money [that we could] prior to the changes.”
Occurrences in the global economy have had a hand in creating this environment as well, Hultquist says.
“We’ve been helped by the fact that the White House is applying pressure on China, so we may see rates continue to drop,” he says. “And who knows? Sometime in the fall we may be able to provide higher lender margins and offer the same amount of money that we could prior to 2018. When the average Home Equity Conversion Mortgage (HECM) prospect can get $35,000 more today than in November, that’s big news.”
HUD’s vindication and halved swap rates
The current rate environment can also likely be seen as a win for the Department of Housing and Urban Development (HUD), vindicating its initial reasoning for making cuts to PLFs in the first place, he says.
“What HUD did [in changing the floor rate] worked to accomplish their intended goal: It forced down lender margins,” he says. “At the end of the day, however, there are two ways we can offer higher principal limits: lower lender margins or long-term rate cuts.”
By making lenders cut back on their margins, interest accruals over the lives of loans were also lowered, which had the effect of reducing crossover risk, he says.
“FHA didn’t want to be insuring loans with 3.5% lender margins,” he says. “HUD forced lenders to compete with lower lender margins, and it worked. Interest on new loans is now accruing at a slower pace.”
Looking at the swap rates themselves helps emphasize the points Hultquist makes even further, since in comparison with late fall, swap rates have been effectively halved.
“We went from 3.26% swaps on November 2 down to 1.54% and falling,” Hultquist says. “So yes, swap rates have been cut in half. Actuaries are now looking at a lower interest rate environment for the foreseeable future, which could change the outlook.”
There’s also the possibility that, in case of an economic recession predicted by some economists, the Federal Reserve could actually pull the proverbial trigger on negative rates, Hultquist says.
What originators are seeing
For the boots-on-the-ground reverse mortgage originators, the changes in rates have also had a demonstrable effect on the amount of proceeds that clients can currently be offered.
“The drop in LIBOR rates have, for the first time since the October 2017 changes, given us access to maximum PLFs, and the difference this makes can be dramatic,” says Laurie MacNaughton, reverse mortgage consultant with Atlantic Coast Mortgage in Virginia in an e-mail to RMD.
While the changes were unwelcome for originators when they were initially handed down in late 2017, credit should be given where it’s due, MacNaughton says.
“However begrudgingly I have to admit it, I now believe HUD was correct in its assessment, and homeowners using a HECM to pay off forward mortgages are deeply benefiting from current rate drops and much lower margins,” she says.
The new environment is also visible on the other side of the country in California, according to an area originator.
“Many borrowers who were right on the cusp of having to bring cash in one to two years ago are now often able to close their HECM today with $0 cash in, and actually receive some proceeds,” says Christina Harmes, co-manager of the C2 Reverse Division of C2 Financial Corp in San Diego, Calif. “This is a rewarding conversation to have, since many times they wanted to do the reverse and didn’t have the funds to bring in. Now they can actually move forward.”
Other industry perspective
Other industry observers are also noting the impact of the current rate environment.
“We don’t directly track loan sale premiums for specific margins, but it’s very clear that falling 10-year LIBOR swap rates can allow lenders to include a higher margin while still offering the maximum PLF to borrowers than any time since the October 2017 changes,” says John Lunde, president of Reverse Market Insight (RMI). “We have seen initial principal limits for the industry rise significantly as lenders have mostly passed through the benefit of lower interest rates to borrowers in the form of higher principal limits.”
The current rate environment also emphasizes that those who left the reverse mortgage industry in the wake of the October 2017 changes to PLFs may have ended up doing so prematurely, Hultquist says.
“I’m curious about those people who left our business in the first or second quarters of 2018,” he says. “If you could go back in time and tell them that long-term interest rates are going to drop so far that the cuts won’t have really mattered, I wonder if they would have made the same choice.”
Originators should find encouragement in this new rate environment, Hultquist says.
“Hey, originators: Get out of the doldrums, and start thinking positively and look at the principal limits we can start offering people now,” Hultquist advises.