‘Unfrozen’ 10-Year LIBOR SWAP Could Spell Gains for Reverse Mortgage Borrowers

The Intercontinental Exchange (ICE) Benchmark Administration published a new 10-year London Interbank Offered Rate (LIBOR) SWAP rate for the first time since February 27 on Tuesday, which will likely sit at 0.68% as of next week. The last published rate at the end of February sat at 1.22%, which means that the new rate could represent a drop of as much as 45%, potentially presenting a new opportunity for reverse mortgage borrowers to get a higher level of proceeds from their loans.

While the effect of the new rate publication on the reverse mortgage industry will not be immediate, it will likely spell a change in principal limits on new HECM loans and closings as early as next week. This is according to Dan Hultquist, VP of organizational development at Finance of America Reverse (FAR)

“This should impact principal limits for many new HECM prospects and closings next Wednesday,” said Hultquist in an interview with RMD. “Keep in mind, loan originators and closers will have to wait to realize lower expected rates and presumably higher principal limits as Monday is a federal holiday. Therefore, we’ll calculate the weekly average on Tuesday, and new rates will become effective on Wednesday, May 27.”

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The importance of the SWAP rate, and a long dry spell

Since October 2016 and as outlined in Mortgagee Letter 2016-16, mortgagees must use the ICE Benchmark Administration for obtaining the 10-Year LIBOR SWAP rate. The 10-year LIBOR SWAP is used to calculate the principal limit of new Home Equity Conversion Mortgage (HECM) loans. For the HECM program in particular, the LIBOR 10-year SWAP rate is of vital importance, since the sum of the weekly 10-year SWAP average plus the lender margin accounts for the loan’s “expected interest rate.”

“This is a key driver of the borrower’s principal limits at application,” Hultquist explains. “When the Department of Housing and Urban Development (HUD) created the HECM program, they wanted principal limits to be based on longer term maturities of 10 years. When these long-term rates drop, new HECM prospects will either qualify for higher principal limits or have more flexibility in pricing (i.e. lender credits or broker credits).”

Prior to this instance, the longest period of time in which a 10-year SWAP was not published was far shorter than the “dry spell” that was recently experienced, Hultquist says.

“Prior to the last 12-week stretch, the record was 3 weeks ending January 31 of this year,” Hultquist explains. “LIBOR-based SWAPs are posted daily through ICE. To my knowledge, the first unpublished 10-year SWAP was February 6, 2018. In fact, that was the only occurrence that year.”

In 2019, however, instances of unpublished 10-year SWAP rates occurred 37 times.

“Originators didn’t notice, because it wasn’t until the holiday season that we went a full week without the critical 10-year SWAP figure,” Hultquist says.

Effects on the reverse mortgage market, how lenders and originators should prepare

Although the drop in the 10-year SWAP will likely lead to greater amounts of proceeds for reverse mortgage borrowers, the industry should not expect an automatic loan volume increase right away, Hultquist says.

“We often don’t see an uptick in loan volume when long-term rates drop because forward mortgage rates generally drop at the same time,” he says. “Obviously, that provides competition for refinance business. However, this time should be different – the 30-year fixed has already been very low, and we are now catching up.”

Nevertheless, the publication of a new, more potentially beneficial rate for borrowers likely means that some leads that had dried up over quotes under previously-published indices may want to be revisited, Hultquist says.

“Next Tuesday we’ll have a clearer picture of exactly where we’ll land on Wednesday, but we’ll want to revisit those borrowers who were short-to-close or unsatisfied with their quoted principal,” Hultquist says.

Still, the previously-published rate at the end of February was already an historic low, but there is a climate of new opportunity based on the new rate that originators and borrowers will want to explore, he says.

“Keep in mind, 1.22% was already an all-time low,” Hultquist says. “But if we end the week with a 0.68% SWAP, it will mean that loan originators and borrowers will have more flexibility in pricing loans.”

Originators may be able to reduce upfront costs to a borrower while still providing them with maximum principal limits as a result of this new rate, Hultquist says.

What this could mean for the future of rate publications

Because of the upcoming holiday next week, reverse mortgage industry participants may want to heed the words of the original Mortgagee Letter that codified the use of the ICE 10-year LIBOR SWAP when making decisions about closings over the next week. This is according to Ibis Software CEO Jerry Wagner.

“Next Monday is Memorial Day. ML 2016-16 says ‘To ensure consistency, the weekly average of the ICE 10-Year swap rate is effective on the Tuesday following the previous week. If there is a US Federal Holiday on a Monday, then the 10-Year SWAP rate is calculated on Tuesday and becomes effective on the next business day,'” Wagner recounted in an email update on the rate climate.

Because the new 10-year SWAP rate could have a material effect on principal limits, it may be worth it to consider holding off on loan closings until Wednesday, May 27, Wagner says.

Now that a 12-week stretch without a published 10-year LIBOR SWAP rate has passed, it could have broader implications for the ways in which future rate publications may play out, Hultquist says.

“ICE has volume requirements in order to post a daily rate, so we may not have rates published frequently, or at all for long stretches,” he says. “In addition, the financial world is moving away from LIBOR-based indices. Therefore, today’s news is a welcome gift at a very good time.”

In the end, this development has the potential to bolster the cases of reverse mortgage lenders who are trying to find financial solutions for their clients.

“We are now offering both expected rates and note rates that are comparable to, or lower than, conforming rates,” Hultquist says. “This is something to celebrate. We now have the tools to solve critical cash flow and liquidity issues for homeowners at their time of need.”

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  • Will the decrease cause a flood in demand before June 1, 2020? Absolutely not.

    While HECM fixed rate volumes are at 2007 levels (when first introduced into the industry), they are unaffected by the 10 Year LIBOR SWAP rate. Remember that this rate only affects the adjustable rate HECM’s expected interest rate which, in turn, impacts the initial principal limit, initial LESA Set Aside amount.

    Right now the principal area for endorsement growth has come from refinances. So will this drop in the SWAP rate continue that growth pattern? Most likely to some degree.

  • To your point, Jim, I’ve also been disappointed in the fixed rate volume. It is currently less than 1% of HECM volume (March HECM snapshots). We can blame some of that on initial disbursement guidelines. I’m hoping lower fixed rates and improved pricing put the fixed in back in play. I believe it should be closer to 5-10% of endorsements.
    Nevertheless, that leaves 99% of the current HECM market impacted by SWAP rates. I hope it’s not just refi business. Those homeowners looking for a risky forbearance need to look at the safer deferment option the HECM provides.

    • Dan,

      I agree that fixed HECM endorsements look unreasonably low. Based on past endorsement history, I would expect a percentage closer to 15% to 20% of all HECM endorsements. As older Baby Boomers pass away, that percentage should be much closer to the percentage range you suggest. The oldest Baby Boomers were purchasing their first or second principal residences in the Carter Administration and the first part of the Reagan Administration when overnight bank interest rates over 20% and residential mortgages had interest rates as high as 17%. Many of us still fear adjustable rate mortgages as a result.

      It seemed like the HECM refi business might be running out of steam until this latest drop in the SWAP rate. The growth in HECM endorsement volume for the first six months of fiscal 2020 over the first six months of fiscal 2019 is 3,196 (or 18,812 versus 15,616), while the growth in HECM refis for that same time period in fiscal 2020 over that same time period in fiscal 2019 is 2,300 (or 3,025 versus 725). That means that 76.6% of the growth in total HECM endorsements for the first six months of this fiscal year comes from HECM refis.

      3.2% of the increase in Total HECM endorsements in the first six months of this fiscal year comes from H4P while the remaining 20.2% in total growth for the first six months of this fiscal year comes from Traditional HECMs.

      Without HECM refis, total growth in HECM endorsements in the six month period ended 3/31/2020 over that same six month period in fiscal 2019 would only be 5.7% rather than 20.5%.

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