The economic forces that will shape HECM lending in 2024
Recent economic news has been a mixed bag.
First, the good news. The U.S. gross domestic product or GDP increased at a 3.3% annualized rate in the fourth quarter of 2023 fueled in most part by consumer holiday spending. Regardless, the GDP has exceeded economist’s expectations.
The bad news is that January’s inflation report shows consumer prices rose 3.1% from one year ago pushing the Dow Jones Industrial Average down over 700 points last Tuesday closing down 525 points by the end of the day’s trading. The inflation report undermined investor expectations that the Federal Reserve would cut interest rates several times this year as early as spring. Higher than anticipated inflation also led the 10-year Treasury yield bo jump 15 basis points last Monday. But when investor confidence is low, bond prices increase and yields fall, as there is more demand for this safe investment.
Consequently, HECM professionals have seen a modest erosion of gross loan proceeds in the first weeks in February as higher expected rates reduced HECM principal limit factors. This comes after 10-year Constant Maturity Treasury rate fell from its high of 4.98% in mid October to a low of 3.79% by the end of December.
Yet larger economic forces are likely to present headwinds to any significant drop in treasury rates. The San Francisco Federal Reserve Bank’s report entitled The Long-Run Fiscal Outlook in the United States sounds the alarm on the national debt and it’s long-term impact on interest rates.
“The U.S. federal debt is now roughly as large as the country’s annual GDP. A high and rising ratio of debt to GDP not only raises government borrowing costs but also risks pushing up long-run interest rates”, says the report.
In addition, investors buying treasuries are likely to demand higher returns as federal spending continues to surge. The greater the perceived risk the higher the rate. Also 10-year treasuries expose the investor to long-term risks, chief among them inflation as the return on the investment could be lessened or even erased by inflation.
The last time our national debt was nearly as large as our nation’s GDP was at the end of World War II as a result of defense spending. The debt-to-GDP ratio fell steadily from over 100% in 1945 to a low of 25% by 1975 thanks to economic growth that exceeded our interest paid on the national debt. Without a significant reduction in interest rates it’s likely that the U.S. debt will continue to grow pushing the debt ratio even higher, that and both parties in Congress who continue to push federal spending to record highs.
This doesn’t mean that treasury rates won’t retreat this year, however, there are considerable hurdles to any sizable reduction in the 10-year Treasury rates due to current market conditions. That said, we continue to see modest fluctuations in rates with future releases economic data.
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3 Comments
Why is there no comment about the impact of inflation and rising interest rates on the HECM loans originated between about April 1, 2020 and September 30, 2021? These loans were originated with 1 year CMT index of essentially 0%. If interest rates stay up, these loans could be in place for 40 or more years, given that qualified non-borrowing spouses could be under 62 and borrowers age 62 could live beyond 100. These adjustable rate loans typically had a 5% adjustment cap. This means that if the 1 year CMT goes above 5% in the next 40 years, lenders will be expected to fund future payments at a reduced or negative yield. Who will bear the losses? How long will lenders absorb the losses on these loans? Will FHA expect the borrowers to pay for the actions of congress with excessive MI rates? Who will claim to be surprised when these obvious losses caused by the spending of congress and the president show up? Where are the obvious losses being hidden for the time since September 30, 2021 when the 1 year CMT was above 5%? The next obvious question will be who is expected to bear the HECM losses when congress and the president cause home prices to crash as in 2008? It should be obvious that today’s excessive HECM MI rates reflect having borrowers pay for risks of what congress and the president will do far more than for losses that borrowers control.
Don,
Huh?
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Before looking at anything else, where do you get your problem with HECM MIP from? Today’s MIP structure is the same as when I began dealing with HECMs back in 2004 and to the best of my memory was no different going back to the first HECM endorsed in 1990. The first change in the HECM MIP structure came on 10/4/2010 (see Mortgagee Letter 2010-34) and after another change on 9/30/2013 (see Mortgagee Letter 2013-27), on 10/2/2017 as required by Mortgagee Letter 2017-12 the MIP structure reverted back to its structure that was applicable to HECMs in 2004 and has been the same for the last 6 plus years.
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Exactly how many HECMs were originated (not endorsed) during 4/1/2020 through 9/30/2021? If there is no reliable source for that exact data, how can you make any case about the HECMs in which (NOT qualified BUT) ENBSs (ELIGIBLE non-borrowing spouses) participated. Do you have that data? If you would provide that data with its source (not from yours or anyone else’s imagination or rationalizations but) based on cold hard reliable and verifiable facts we have a starting point for a solid discussion but I am afraid all you have given us is a rant.
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It seems you have assumed that 1) a large percentage of the HECMs originated in that time period are ones that ENBSs participated in and 2) a significant (if not substantial) number of those HECMs will last 40 years or more before termination. What is the source for that conclusion? Can you clearly provide reliable and verifiable data that shows what percentage of HECMs with ENBS participants have mortgage life expectancies of at least 40 years especially for the HECMs that originated in the 18 months you have selected? Can you provide us stats on how many of those ENBSs will become INELIGIBLE during that 40 year span because of a termination of the relationship with the borrower or other reasons?
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There are numerous other stats that must be generated and evaluated before your 40 year illustration becomes meaningfully relevant.
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Further you have failed to show on some reasonable basis what the total hit will be to the MMIF from the specific HECMs with ENBS participants that were originated starting on 4/1/2020 and ending on 9/30/2021 which are expected to terminate after being active for at least 40 years. Based on current MMIF data, I doubt if the specific HECMs you are referencing will have a noticeable impact on the MMIF 40 or more years down the road.
Shannon,
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The facts you point to and your concerns are very relevant to the future of this industry.
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Calendar year 2023 was the very worst calendar year for HECM endorsements in two full decades.
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As expected, originators and lenders were so caught up in the joy of HECM Refi production during the heydays of fiscal 2022, little (and more likely no real) effort was made to train originators on how to present this product to first time HECM borrowers. It seems that the euphoria over the success of fiscal 2022 HECM refi endorsements was so overwhelming that it spilled over into the recent NRMLA National Convention close to a year later. The atmosphere of that convention belied reflect the news that would be generated soon, i.e., in the wee hours of January 2, 2024 but it was quite predictable even if brutal.
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It seems the loss of AAG and RMF has created more opportunities for the remaining lenders but with this caveat, the HECM endorsement count for calendar year 2023 was little more than half of that same total for calendar year 2022. For the first six months of fiscal 2024, one fairly reliable prognosticator has predicted only 13,500 HECMs will be endorsed.
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It is hard to believe that so many in the industry tell us with straight faces that the growth of the industry is pent up in and dependent on referral sources. While we had referral sources in calendar 2008, that was not close to our life’s blood. We did not even have H4P except as provided for in the future in HERA of 2008. There were far less than 10,000 HECM Refis endorsed during calendar year 2008. Yet that calendar year had over 116,000 HECM endorsements.
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The overwhelming majority of HECM endorsements for calendar year 2008 (as in earlier years) came from Traditional HECMs (or Equity Takeout HECMs as some call them today) which can only be originated by what FHA refers to as first time HECM borrowers. The lack of growth from referral sources back then is reflected in the fact NRMLA terminated its Bridge Committee (dedicated to reaching out to those in the financial communities) at the start of fiscal 2007. Yet with falling annual HECM endorsements now, the cry to reach out to referral sources has never been louder. Yet with what seems like potentially harder times in front of us, why won’t the industry turn to its best source for HECM originations and train originators on how to market to and prospect for first time HECM borrowers?