The impacts of home price appreciation, rate increases on reverse mortgages

A report from DBRS Morningstar examines how high rates of appreciation and spiking interest rates have impacted – and still could impact – the reverse mortgage industry

Home price appreciation is a critical metric when gauging the health and penetration rate of the reverse mortgage product, and the Federal Housing Finance Agency (FHFA)’s house price index (HPI) can also help highlight current or potential trends in the space, particularly when coupled with movements in interest rates.

The HPI and its changes over the past two years in relation to the reverse mortgage industry was a topic of a presentation by DBRS Morningstar earlier this summer.

Home price appreciation

“Marketing efforts focused on high home values and larger balances will always shift the volume distributions to higher valued areas like the West Coast since reverse mortgages in general have such low LTVs compared to other products,” said analyst Joe Morgenstern during the presentation. “It’s crucial for the qualifying property to show a significant level of appreciation to be able to actually fit within that LTV restriction.”

As low interest rates fueled a boom in Home Equity Conversion Mortgage (HECM)-to-HECM refinancing activity during the pandemic years, such a reality was even more important, since the appreciation must overcome the accrual on the balance from the time a loan started to the time it is refinanced, he said.

Illustrated increases in the HPI between Q1 of 2021 and Q4 of 2022 show a two-year change nationwide of between 11.7% and 44.6%, but trends in specific states more recently – over the course of 2022 in isolation – also show that some of the states with the biggest appreciation levels began to retract notably last year.

“We could see that the HPI has come up quite a bit throughout the entire country, however, isolating the last six months of this period reveals shifted vectors,” Morgenstern said. “The East Coast remains in a positive light, but western states are starting to see their HPIs retracting quite a bit.”

Volume impacts

The potential impact on the reverse mortgage business from such movement is that the western states with slowing appreciation could translate into lower qualification rates in the near-term, Morgenstern said. This could shift origination volume further toward the East Coast during that time, he said.

As of the end of July 2023, HECM endorsements in eastern parts of the country have not notably outpaced originations in western states based on regional HECM endorsement data compiled by Reverse Market Insight (RMI).

Outside of an endorsement spike in March that was largely attributed to the impending merger of American Advisors Group and Finance of America Reverse by analysts, volume in western regions continues to routinely overtake totals attributed to eastern regions.

Interest rates have also seen notable movement from mid-2020 to early 2023, particularly for proprietary reverse mortgages.

“[Proprietary loans] have shown a massive increase in rates, from less than 6% on average to nearly 10% in about 18 months, which is pretty dramatic, in my opinion,” Morgenstern said.

HECMs themselves also showed a notable spike to over 6% during the same period, keeping roughly in line with the trends observed in the forward mortgage business during the same time.

Conditional prepayment rates

Morningstar also assessed reverse mortgage loan performance by looking at conditional prepayment rates (CPRs) of HECMs and proprietary loans.

“One of the first metrics that we look at when we’re discussing this are the conditional prepayment rates, and this data was provided by New View Advisors,” Morgenstern said. “It covers the bulk proprietary and HECM markets, but it does not break it down into the sub sector. For those in the industry in retail, the dropping of CPRs from July 2020 through February 2021 may have come as a shock, as many of your marketing efforts probably became less efficient.” 

This was more visible in areas where CPRs dropped, which largely correlated to reduced origination activity in 2017. Things changed with the onset of the pandemic’s low-rate environment.

“For a short while, borrowers were reluctant to refinance or move from their homes, but this quickly shifted as rates started dropping, of course,” he said.

This trend remained relatively steady until higher interest rates began a more dominant hold on the mortgage market broadly in 2022.

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