The Federal Reserve will be instituting a major shift in its posture toward achieving economic stability, maximum employment and manageable inflation according to a Thursday announcement by Chairman Jerome Powell. This signals an approach that could mean the Fed will no longer raise interest rates in its efforts to keep the unemployment rate low, and will allow inflation to run higher during periods of growth according to the New York Times.
“Our revised statement emphasizes that maximum employment is a broad-based and inclusive goal,” Powell said at the Kansas City Fed’s annual Jackson Hole symposium. He adds that “this change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”
Signalling a change from the central bank’s previous posture — in which it would raise interest rates to coincide with lower levels of unemployment in an effort to avoid high levels of inflation — the Fed’s policies will now be determined by what it describes as “shortfalls” from maximum employment rather than “deviations,” telegraphing that the Fed will not raise rates in concert with lower levels of unemployment, the Times describes.
Possible effects on reverse mortgage volume
All told, analysts believe that this change in posture from the central bank will lead to lower interest rates for longer periods of time, which will reduce the costs of traditional forward mortgages and business loans. It will also likely have an impact on the reverse mortgage industry.
The Fed appears to be targeting higher inflation by removing the ceiling of 2% that had previously been implicit, according to John Lunde, president of Reverse Market Insight (RMI). This could be targeted if the Fed wants higher interest rates as a way to maintain control for adjusting rates to balance the economic cycle, he says.
“If they’re successful, I’d expect a somewhat higher interest rate level and inflation rate level to increase home price appreciation similar to the asset inflation we’ve seen in the past two decades, but also higher interest rates making it harder for HECM to offer maximum PLFs on the current tables,” he says. “That would continue the reverse market becoming more interest rate-sensitive in alignment with the forward market, which is part of maturing as an industry at this point.”
This could have the effect of increasing reverse mortgage volume on the aggregate, though the volume could become more cyclical, he says.
“This would be because home price appreciation creates more equity for most homeowners, particularly ones paying down fixed rate forward mortgages so they end up with lower LTV when age eligible for reverse,” Lunde says.
Lenders see positivity
The general change in posture was largely seen as a positive according to two executives from American Advisors Group (AAG).
“This is great news for us,” said James Mittleman, AAG VP of retail sales. “Low rates give us the flexibility to creatively structure loans and help the highest number of customers possible. When rates are high, it restricts our loan structure and prohibits us from working with some customers who we could have helped in a lower rate environment.”
The new posture should also help to exemplify the importance of utilizing home equity in retirement according to Matt DeSola, fellow AAG VP of retail sales.
“While inflation running hotter than normal can increase cost of living expenses for seniors in an already challenging landscape, the lower interest rates will allow us to help more seniors by maximizing their home’s monetary benefit,” DeSola said.
Additionally, this new posture could have an effect on the yield curve, but it should not dampen any of the positive growth the industry has been experiencing this year according to Jonathan Scarpati, VP of wholesale lending at Finance of America Reverse (FAR).
“Chairman Powell has indicated in the past that moderately higher inflation — higher than the target range — would be acceptable. So, in that respect, not much has changed because we still expect interest rates to be low for a while even if inflation rises,” Scarpati told RMD. “It’s important to note that in the last recession the Fed cut the target Funds rate to zero in 2008 – and kept it there for a full seven years. To the extent that the market expects the Fed to keep key rates ‘lower for longer’ under the new policy, this would serve to limit any increases in short and intermediate bond yields over the next few years.”
Some customers may also start to see instances where a proprietary product may make more sense for them, Scarpati adds, especially if home values continue to rise.
Keep the ‘eye on the ball,’ Fed incentive
One lender, however, thinks that the news about the Fed’s new outlook should not get in the way of the primary reason that the reverse mortgage product category exists.
“We have to avoid allowing the Fed update to take our eye off the ball right now,” said Scott Gordon, CEO of Open Mortgage. “I see their announcement as more of a positioning statement. Rates are great, people have need and the market is booming. Lenders need to stay focused on the pipeline. [The news is] not clear [about] any actions the Fed will actually take and rates should stay low regardless. We need to focus on our clients.”
There are other potential advantages that the Fed may be keeping in mind in regards to interest rates, however, that may spill over into the reverse mortgage industry by virtue of the rate environment that the new posture could create.
“There are other incentives for the Fed to keep long-term interest rates near zero. For example, our national debt now exceeds our national GDP,” adds Scarpati. “In mortgage terms, that means our debt to income ratio is now 100%. Low interest rates have made managing debt easier and opens the door for another stimulus with less fear about potential repercussions.”
Other recent rate reductions
Earlier this year when the Fed announced a reduction in interest rates, lenders were confident that not only would the reverse mortgage business category benefit from that reduction, but that the potential benefits would be effectively communicated to borrowers.
“Rates are at historic lows and this is an opportune time to market to the over 16 million senior households that have a first lien,” said RMF President David Peskin in an email to RMD in March.