As we discussed in Part 1 of Modernizing the Property Valuation Process, the housing market has experienced dramatic changes that have presented many challenges for appraisers. Although the market has...
With rising interest rates, surging inflation, and a potential recession on the horizon, your borrowers are likely uneasy about the current economic landscape. The best way your financial institution can support them is by ensuring they are armed with information on how to best prepare for an economic downturn.
What do reverse mortgages have to do with anything?
As you probably know, a reverse mortgage is a home loan designed to support borrowers who are 62 and older. In this type of home loan, the homeowner (or homeowners, if it is owned jointly) surrenders equity in their home in exchange for the monthly mortgage payment. Unlike traditional mortgages, which decrease as you pay down the loan, reverse mortgages rise over time as interest on the loan accumulates. This option can provide older borrowers with a supplemental retirement income option.
Since the Fed raised interest rates in an effort to reduce inflation, borrowers have been wondering if they may have missed the boat on benefiting from a reverse mortgage. Of course, each borrower has to make this decision for themselves, but with inflation hovering between 8.5-9% and interest rates continuing to rise, it’s a good idea to discuss reverse mortgages with your borrowers as an option to fight inflation.
Historically High Property Values
The housing market is red-hot, and while it is beginning to cool from the record highs we saw earlier this year, property values are still at historic highs. Since a borrower’s property value is one of the primary factors used to determine how much money they will receive with a reverse mortgage loan, this is a favorable condition.
However, because of recent interest rate hikes and more planned for the near future, property values could soon begin to decline. While rates have already increased somewhat, they are still near the lowest rate for the HUD HECM line of credit program. In other words, rates have not significantly impacted borrowers’ ability to take out this type of loan—yet.
Future Rate Hikes Could Lead to Higher Line of Credit Growth Rates
Future interest rate hikes like the ones planned for later this year could be good news for borrowers with reverse mortgages. The growth rate for the line of credit associated with a reverse mortgage factor in the MIP renewal rate and the current interest rate. This is then applied to the borrower’s unused line of credit.
So, if interest rates increase further and your borrowers have a large line available they have not yet borrowed, the rate increase actually helps their available line of credit grow at a greater rate on the unused portion of the line.
For example, let’s say the Fed raises interest rates to 5% and your borrowers haven’t taken the funds yet, they are not accruing interest but their line of available credit to you is growing at 5.5% (5% plus ½% MIP accrual on the unused line).
If interest rates fall later, your borrowers keep the additional funds available in their line of credit. If they never use the funds, they will never accrue interest on them, but if your borrowers end up needing this money to cover expenses, it is available.
Differences Between a Traditional Line of Credit and HECM Line of Credit
With a traditional Home Equity Line of Credit (HELOC), borrowers have secured access to the line of credit for as long as there are funds in their line.
With a reverse mortgage, the borrower keeps up the terms of the program. Unlike the HELOC, that means they do not have to worry about the line of credit being frozen, as happened to many borrowers during the 2008 housing crisis.
[pull out quote] Your borrowers’ line of credit cannot be frozen with a reverse mortgage.
As long as they adhere to the loan terms, reside in the home, are current on their property taxes, carry insurance, pay property charges on time, and maintain the home, your borrowers will always have access to these funds.
Talking to Your Borrowers About Reverse Mortgage Options
Reverse mortgages may not be the best situation for everyone since each borrower’s situation is unique. That said, if this type of home loan best suits your borrowers’ needs, now is a good time to talk to them about it.
If history is any indication, home values will decrease as interest rates continue to rise. Higher rates mean borrowers would receive less money for future reverse mortgage loans. With more rate hikes predicted for the rest of the year, now may be the best time for your borrowers to take advantage of this loan type.
At SWBC Lending Solutions, we are advocates for living in place and have designed policies around reverse mortgages to help ensure our client’s borrowers have a positive experience. Visit our website to learn more.
Chuck Mureddu has more than 30 years of combined mortgage lending experience, including appraisal management, institutional risk, loss mitigation, and whole loan exit and securitization strategies. As the Chief Valuation Officer for SWBC Lending Solutions, Chuck is responsible for all valuation policy and process, quality assurance, and regulatory compliance.