As the world continues to react to the widening spread of the COVID-19 coronavirus, the global economy has so far reacted strongly to the increasing possibility of social disruption that has been brought about by preventive measures being put into place by nations, communities and companies around the world to further contain the virus’ spread.
One of the larger economic occurrences related to the virus in the United States has been a major reduction in interest rates instituted by the Federal Reserve in an effort to stimulate American market activity as various industries react to the economic shock of the virus.
The interest rate cut has also been instituted in an attempt to counteract the additional volatility being observed in the U.S. stock market, which briefly halted trading shortly after the opening bell on Monday morning in response to a 7% drop in the S&P 500, according to the New York Times. Late day trading indicated that the market was heading toward the worst single day drop since December of 2008, at the height of the financial crisis.
While the reverse mortgage industry is relatively isolated from some of the larger volatility caused by the coronavirus outbreak, there are still some repercussions that can ultimately affect the way that reverse mortgage companies conduct business, and how borrowers may interact with a new or existing reverse mortgage loan.
Effects on forward and reverse mortgages
In terms of the traditional mortgage industry, a reduction in interest rates by the Fed does not cause a direct impact. This is according to Jonathan Scarpati, VP of wholesale lending at Finance of America Reverse (FAR).
“When the Fed cuts their benchmark interest rate, traditional mortgages often are not directly impacted by the cut,” Scarpati tells RMD. “This is because traditional (forward) mortgages are generally long-term, fixed rate, loans. By contrast, variable rate loans, and short-term forms of credit like auto loans or unsecured credit debt are more directly impacted by the Fed’s actions.”
Adjustable rate products like most reverse mortgages could ultimately see an effect on their loan by a certain point, Scarpati says.
“Many reverse mortgages are adjustable rate products, and therefore many existing borrowers will see their interest rates drop upon their next rate adjustment,” he says. “Even though most reverse mortgage borrowers don’t make monthly payments, this is still a very good thing. When rates drop, the borrower’s loan balance will accrue interest at a slower rate and preserve more equity in the home.”
Lenders communicating potential borrower benefits
When asked if a lower rate environment is an optimal time for existing reverse mortgage borrowers to refinance their loans, Scarpati says that while that may make sense for some borrowers, the potential benefits may not always come in a form that they’ll be able to immediately discern.
“Refinancing to lower interest rates can definitely make sense for homeowners. This is true for both forward and reverse mortgages. While reverse mortgage borrowers can often refinance at lower interest rates, that doesn’t always mean they can get more money or a larger line of credit,” Scarpati says.
While reverse mortgage refinances are usually driven by more than one factor, several of those common drivers seem to be visible right now which may inspire some loan originators to recommend a refinance transaction, he says.
“Reverse mortgage refinances are usually driven by increased property values, new product availability, or increased principal limits – all of which become available when long-term rates fall,” he says. “Fortunately, for loan originators, all three seem to be occurring at once right now! The time to be in reverse mortgages is today.”
When asked if FAR is taking steps to make the possible benefits of the current environment known to borrowers, Scarpati says that the company is absolutely trying to take the best possible advantage of the greater interest and potential benefits that could be made available to borrowers.
“We send rate updates regularly and try to keep our loan originators updated on interest rate fluctuations,” Scarpati says. “Our wholesale team does a great job of updating our broker partners on the rate environment. When long-term rates are lower, new reverse mortgage applicants often qualify for higher principal limits.”
That, in turn, leads to more qualified buyers, he says.
“We are seeing prospects qualify for reverse mortgages when a year ago those homeowners could not receive enough funds to pay off their existing mortgages,” he says.
Originators, brokers field more consumer calls
Because an interest rate cut from the Federal Reserve is always such a high-profile occurrence, reverse mortgage originators often have to field a higher volume of calls related to how it might be able to affect potential borrowers’ reverse mortgage prospects. This is according to Christina Harmes Hika, originator at the C2 Reverse division of C2 Financial Corp in San Diego, Calif.
“Anytime the Fed adjusts the prime rate it causes an increase of calls from existing clients and prospects. It’s a great opportunity to update their reverse mortgage analysis or show a new prospect how the reverse can work for them,” she tells RMD. “Since reverse rates have been low lately anyhow, they are often pleased with the updated figures and larger principal limits they can access and want to move forward.”
People can have a tendency to lump the idea of rates all together when there’s a concentrated focus of news on the Fed’s actions in the mainstream media, so that story can act as something of a “cue” for consumers to call their mortgage broker to see if something should now be done in relation to their reverse mortgage, Harmes Hika says.
“With the forward mortgage rates having been down lately, there’ve been a lot of calls and it’s been nice to have such large principal limits relatively speaking from the last two years,” she says. “People who didn’t quite have enough equity at higher rates in past years can now do their reverse without any cash in, which is welcome news for many longer term prospects who are now ready to move forward.”