Why the Fed must weaken consumer borrowing & credit

Spending, housing affordability, and overall consumer demand are in the crosshairs of the Federal Reserve’s goal to reduce inflation. Borrowing and spending fuel the U.S. economic engine. As a result, critics argue that the actions of the Federal Reserve are having significant adverse effects on the average citizen’s access to credit and loans, thus stifling economic growth and opportunity. This hits particularly close to home for potential reverse mortgage borrowers.

In response to last week’s show on the Fed’s pause on rate hikes one of our viewers commented,

“The issue will be how much buying power does the senior have when utilizing the HECM in a volatile market as this. Regardless of the “pause” in interest rates we have already seen the impacts with lower than normal LTV tables. It use to be age minus 10 would give you the LTV percentage but today it’s more like age minus 30.”

While the Federal Reserve’s actions are aimed at maintaining price stability and preventing excessive inflation, the consequences are detrimental to the average American. Today

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fewer potential homebuyers can qualify for a mortgage at today’s high home prices and interest rates. This, the Fed hopes will drive down home prices and subsequently the average monthly mortgage or rent payment which are a key part of the core Consumer Price Index.

Revere mortgage professionals have seen a steady erosion of the principal limit factors for the federally-insured Home Equity Conversion Mortgage pushing many outside of having enough money in the loan to retire their existing mortgage’s required monthly payments.

For example, in March 2022 a 72-year-old homeowner with a home appraised at $450,000 would see an approximate expected rate of 5.25%. However, by May 2023 that expected rate would likely have jumped to approximately 7.0%. That means their original principal limit factor of .454 would have dropped to .381 at age 73. That means the total available loan proceeds before loan fees, insurance, and payoffs would have fallen from $204,000 to $171,000- thirty-three thousand fewer dollars or sixteen percent less than he could have qualified for assuming the home’s value is the same. In markets where home values have dropped the compounded impact is more severe.

Despite this unsettling analysis, many older homeowners are sitting on a mountain of home equity- just over twelve trillion dollars according to NRMLA’s Risk Span Reverse Mortgage Market Index. The real rub is how to find this cohort of potentially-eligible homeowners. What once worked to attract prospective borrowers may no longer work in today’s market. Retooling our marketing and sales efforts will likely require a new approach. Ad hoc feedback from reverse mortgage originators who are still consistently closing loans tells us that a variety of efforts combine to produce a steady flow of potential borrowers. Efforts such as Zoom webinars for area professionals, public workshops, and expanding referring partner recruitment among others were mentioned as worthy investments of one’s time and energy.

As this story unfolds, we will continue to monitor the Federal Reserve’s actions and their impact on borrowing in America. Stay tuned for more updates and look to abandon what is no longer working and embrace new ways to attract prospective borrowers.

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