Rising rates and the impact on reverse mortgage proceeds

Sounding like some alien character in a science fiction story, LIBOR is actually a critical financial factor in determining how much money a senior can receive in a reverse mortgage transaction, especially when borrowers may or may not qualify depending on how the index moves.

LIBOR, an acronym for London Interbank Offered Rate, is a “daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market),” according to Wikipedia.

It’s good news for reverse mortgagors when the 10-year LIBOR index drops – used to calculate the expected rate – but not so good when it rises, driving down principal limit factors – and the aforementioned proceeds. Cliff Auerswald, All Reverse Mortgage Company, is concerned about seeing the “swap rate” affecting the LIBOR go up “pretty consistently over the last two months,” he says, driving down significantly the amount of money reverse mortgage recipients could obtain.

Auerswald cites one example where a client would have qualified for $286,194 in proceeds on a property valued at $455,000, but waited just long enough to sustain a loss when the LIBOR rose. As a result, the client could only qualify for $243,000. “I think it’s going to affect the viability of the [reverse mortgage] program for many borrowers,” he worries, acknowledging that this rate rise “has happened before – a couple of years ago.”

He notes that the new HECM Saver product, which has a separate and much lower, initial mortgage insurance premium (MIP) option, “uses both the same initial and expected LIBOR rates as the Standard.” One big deterrence, though, is that since the Saver is new to secondary markets, it has been priced at about a .25 percent to .50 percent higher margin, which will produce even lower principal limit factors.

As interest rates continue to climb and values have not made a comeback, borrowers will be left with less money. Auerswald’s concern is that in addition to more borrowers finding themselves short-to-close a reverse mortgage transaction, as rates rise, instead of the HECM Saver product becoming more and more popular as HUD hopes, the even higher margins on the already lower principal limit factors may make the product even less desirable, he says.

Written by Neil Morse

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