The US Department of Housing and Urban Development’s (HUD) financial year runs from 1st October to 30th September, so another 12 months is now in the books for the primary US reverse mortgage market.
And, for many, it is yet another one to forget. HUD publishes a list of Home Equity Conversion Mortgage (HECM) endorsements on its website, and the data for FY 2023-24 makes for grim reading, with only 26,521 endorsements, the lowest observed since 2003, according to data on industry group the National Reverse Mortgage Lenders Association’s website.
The main driver of the pull back in activity in the past few years should come as little surprise; higher interest rates have led to a dampening of demand in the space.
“Like all mortgage origination, forward and reverse, higher interest rates adversely impact volume,” said Michael McCully, Partner at New View Advisors.
“In the US market, agency volume is highly correlated to the 10-year CMT [Constant Maturity Treasury] index because that is what is used to calculate the Expected Rate – the interest rate used to determine borrower proceeds,” McCully added.
Higher interest rates may be the main driver of slower activity in the reverse mortgage market, but they are not the only one.
“Baby boomer homeowners have more debt than their previous, depression-era homeowner counterparts. That has meant that the number of transactions ‘short to close’ in the reverse mortgage space has been rising in recent years,” said McCully.
Additionally, American seniors have other options if they want to access cash from their home. The HELOC (Home Equity Line of Credit) loan is one of these and activity in this area has an impact – albeit, in the younger cohort as opposed to the older one.
“There are many more HELOCs originated than HECMs so yes, HELOCs take away volume from reverse. They’re easier to close, and with much smaller upfront closing costs. However, HELOCs have a monthly payment, the LOC can be withdrawn should home values fall, and older borrowers often do not qualify for HELOCs, based on age and income,” said McCully.
Another demand dampener is the fee structure in the reverse mortgage market. American seniors taking out a government guaranteed HECM reverse mortgage are charged 2% of the home value at closing for the initial Mortgage Insurance Premium – and then 0.5% annually thereafter. The Federal Housing Administration raises the Maximum Claim Amount each year, so the average upfront MIP payment has been increasing. Add to that rising rates and falling proceeds, upfront MIP as a percentage of available proceeds has never been higher.
It is something that the reverse mortgage industry would like to see changed, and is trying to change, but no progress has been made – yet.
“The industry has submitted proposals to FHA recommending changing the HECM to make it more of a “pay as you go” product, i.e.: less upfront MIP, and more ongoing MIP. While FHA has made several meaningful program changes to improve liquidity and ease of assignment since the RMF bankruptcy, their resources are limited and there is no timeline for a lower upfront MIP product,” said McCully.
It is not all bad, of course. Two recent, albeit very different, examples of support for the primary market came when Premier Plus Lending announced recently that it is expanding into the senior-focused home equity market with a new division, Retirement Mortgage Solutions, which will include reverse mortgages and other home equity-based lending instruments. And in the District of Columbia, DC Housing Finance Agency has resurrected its Reverse Mortgage Insurance & Tax Payment Program, which is designed to help reverse mortgage owners who have received a legal notice that they are in default due to failure to pay property taxes or insurance premiums, or are facing difficulty in paying past due balances.
But undoubtedly, the greatest impact on the market comes in the form of the prevailing interest rate regime. Something that might appear counter-intuitive in the financial markets occurred recently, as the 50 basis points reduction in the US federal funds rate was accompanied by a corresponding rise in the 10-year yield. While market commentators suggest that this was little more than make-up for markets pricing in too much easing before the Fed meeting, it still means that American seniors that are waiting for rates to fall before entering into a reverse mortgage transaction will need to wait a little longer for financial normalcy to resume and yields on the 10-year to fall.
The good news is that they might not have to wait too long. According to the CME FedWatch, 100% of interest rates traders are pricing in another reduction at the Fed’s next meeting, scheduled for 7th November, and almost 20% of interest rates traders are pricing in a 100 basis points reduction from current levels at the Fed’s 18th December meeting.
In order for the US reverse mortgage market to ‘reverse’ its recent run of slowing issuance, more rate decreases can’t come soon enough.
“Again, volume is mostly about the 10-year treasury rate,” said McCully. “In order for reverse mortgages to increase their attractiveness to American seniors, the rate will need to come down. The industry does need other changes – for example, changing the up-front formula for the MIP charge – but those changes will not have the same kind of immediate impact on origination that a significant fall in the 10-year treasury rate will have.”
