Reverse Mortgage Funding announced on Monday the launch of a new Home Equity Conversion Mortgage (HECM) product to protect against future interest rate increases, while also preparing for the industry’s imminent switch from the London interbank Offered Rate (LIBOR) index to the Constant Maturity Treasury (CMT) index.
The new product, the HECM “MAX5,” is described by the lender as the industry’s first monthly adjustable rate, CMT-based HECM with a lifetime cap of 5% over the initial rate. The HECM MAX5 brings no change in the proceeds available to the borrower and all payment plan options are available, but comes with “increased protection” against potential interest rate increases, according to RMF.
MAX5 is available to RMF’s retail team and third-party origination (TPO) partners as of Monday, October 26.
Bringing back MAX5
This is not the first time that RMF has launched a HECM product called the MAX5, but the prior version introduced in 2014 was based on industry norms at the time including a basis on the LIBOR index. Reviving the product on the basis of the CMT index helps borrowers to avail themselves of a more modern product made for the current reverse mortgage landscape, while also looking ahead beyond the current low-rate environment according to David Peskin, president of RMF.
“The HECM MAX5 was reintroduced during the transition to the CMT index,” Peskin told RMD in an email. “We wanted a way to offer borrowers some peace of mind when interest rates eventually increase. The 5% lifetime cap over the initial rate does that.”
As with the prior version of MAX5, with the exception of the lifetime cap, the new variation’s features are identical to the current monthly adjustable-rate HECM in that it offers all payment plan options, as well as an open-ended loan with no minimum initial draw and a rate based on the one-month CMT index. The previous version of the MAX5 was based on the one-month LIBOR index.
While RMF doesn’t necessarily expect a change in the currently low-rate environment, having a product that allows borrowers to prepare for a change when it comes will certainly be beneficial, Peskin says.
“We are in a period of historic low rates and while we don’t anticipate rates making a dramatic shift in 2020 or 2021, rates will likely increase,” he says. “The cap provides a sense of comfort for borrowers in the future.”
Observing secondary markets
Representatives from RMF indicate that they have been observing some of the larger market activity to determine a product offering which would be best suited to meet the needs of borrowers in this moment, while also providing an additional level of protection for future rate changes.
“We’ve been working closely with our secondary markets teams and based on our internal analysis and feedback from Wall Street, we feel there is a great opportunity for a monthly ARM with the same 5% upside protection that borrowers found attractive with the HECM annual,” according to Mark O’Neil, national sales leader for RMF’s wholesale and correspondent lending channels.
The HECM annual product was a previous variation of the HECM that RMF launched in the summer of 2014, which featured a 5% interest rate cap that is applied to the company’s first annual adjusting HECM. The major philosophy in bringing back the MAX5 in the current environment is to provide a semblance of stability that could be sorely needed for seniors considering many of the problems they face today, Peskin explains.
“The HECM MAX5 brings a benefit to borrowers – and that’s peace of mind,” Peskin tells RMD. “When compared to traditional monthly adjustable HECMs the available proceeds are about the same, it is an open-ended loan with no minimum draw, and all payment plan options are available. It is a great alternative.”
RMF’s proprietary Equity Elite product suite is still being originated on the LIBOR index as of right now, but that is likely to change at some point in the future, Peskin tells RMD.
“Currently, the transition to CMT is affecting HECMs only,” he says. “Our loan specialists and partners continue to originate Equity Elite loans based on the LIBOR index. At some point, we will transition to another index, but no plans have been finalized.”
The change to the CMT index has altered some of the company’s plans in the shorter term, but now that the change appears settled for the time being, RMF is remaining focused on some of its longer-standing priorities as the new year approaches, Peskin shares.
“The index change has been a short-term distraction,” Peskin tells RMD. “Now that the transition to CMT is behind us, we are focused on developing products and pricing options that make reverse mortgages a mainstream solution. Specially focusing on markets where the products are underserved [continues to be a priority], such as alternatives to home equity lines of credit, various financial planning use cases and funding home health care, which is a byproduct of the COVID-19 pandemic.”
RMF previously related to RMD that it would be ready for the upcoming shift to the CMT rate index by the end of the year, describing it was “in final planning stages” a couple of weeks after Ginnie Mae announced new restrictions on the eligibility of HECM-backed Securities (HMBS) for adjustable rate loans operating off of the LIBOR index, effective for all HMBS issuances dated on or after January 1, 2021.
Over the summer, RMF announced a new product variation to its “Equity Elite” line of proprietary reverse mortgages that would have a line of credit (LOC) feature, available to seniors at or over the age of 60 in some states while also featuring a reusable line of credit that grows at 1.5% annually for seven years, with a lending limit of $4 million. RMF launched the Equity Elite LOC product in August.
RMF President David Peskin also recently expressed agreement with another leading lender’s CEO in terms of the likelihood that the HECM product could lead the reverse mortgage market in the near future, though additional proprietary innovation is also likely to spur market activity, he said.
“Rates are so low that you can obviously pull out a substantial amount of equity right now, as compared to even a proprietary product,” Peskin said during RMD’s HEQ event in September. “When you’re getting into similar home values, the HECM product is very attractive. But I think that with some innovation, which is coming around the corner, I think we’re going to start to see more and more proprietary products for those other types of customers.”