Negative Interest Rates?! It’s not what most think
Negative interest rates? You heard that correctly. No, you don’t have to turn up your volume. In fact negative interest rates in the U.S. are here. (CNBC article). While you most likely will not see this economic anomaly mentioned on your local or national evening news, financial outlets have assiduously reported on central banks around the globe who are now pulling out all the stops in the effort to stimulate the economy. The European Central Bank, Sweden, and Germany currently are in negative interest rate territory and the U.S. may follow.
Does this mean the banks will pay you to borrow money? Not quite.
Negative interest rates penalize banks for hoarding cash reserves instead of lending to consumers and businesses and earning interest income. It’s an unusual economic tool and a rare one at that. So closer to home- how will this impact our industry and older homeowners?
Savers and older retirees stand to feel the immediate impacts being unable to count on interest earnings to offset inflation. That could conceivably increase demand for alternative sources of cashflow such as a reverse mortgage. Last Monday the 1-year US Constant Maturity Treasury rate was just .10% or one-tenth of one-percent! The 1-month LIBOR index was a mere .157% and the SOFR (Secured Overnight Financing Rate) was just .09%. Let’s assume the base index for the federally-insured reverse mortgage fell below zero percent. What impacts would existing borrowers see? First, their principal limit or line of credit growth rate would slow significantly- but not altogether thanks to the lender’s margin in the loan. Something to keep in mind when touting the benefits of future borrowing power with financial pros and homeowners.Next, future home equity will be consumed at a much slower rate as the loan’s balance grows much more slowly than it would in a normal interest rate environment. Lastly, with the average lender margin hovering around two-percent new HECM borrowers will benefit by being in the lowest interest rate tier of the HECM’s principal limit factor tables bumping up the present three-percent interest rate floor. While the word ‘unprecedented’ has become increasingly popular in the wake of the COVID-19 pandemic, the truth is negative interest rates have been employed on a few occasions.
And speaking of rates, Ginne Mae- the issuer of HECM Mortgage Backed Securities has provided a reprieve of sorts. In September our industry found itself somewhat caught off guard when Ginnie announced that any HECM mortgage-backed securities tied to the LIBOR index would not be accepted for any HMBS received on or after January 1st, 2021. That news came as a surprise as NRMLA was in active discussions Ginnie Mae, HUD and others on what replacement index would be used for future HECM loans. The good news is the deadline has been extended to March 1st. As RMD reported, “Ginnie Mae did contact the [reverse mortgage] industry, the members of which provided us with additional feedback relating to the volume of applications received by the initial publication date,” a Ginnie Mae spokesperson said.
The move away from the LIBOR was expected, the sudden deadline for HMBS was not
Last Monday Ginnie Mae, the government bond-insurer, declared the agency will no longer accept any mortgage-backed securities or MBSs attached to the LIBOR index. The policy effective date for HECM loans is January 1st, while traditional mortgage-backed securities restrictions go into effect January 21, 2021.
Our industry’s adoption of the LIBOR index began with d issued October 12, 2007. It permitted FHA to insure HECM loans using either a 1-year LIBOR index for annually adjustable loans and the 10-year swap rate for monthly-adjustable HECMs. By 2008 most lenders had switched to the new index.
During the transition to a new index trouble was brewing for the LIBOR. Between 2003 and 2013 global regulators advised financial institutions to move away from the index. The troubled LIBOR faced even more scrutiny in 2012 when Barclay’s Bank entered into several criminal settlements which revealed fraud and rate manipulation by colluding banks. The legitimacy of a benchmark lending and financial institutions used across the globe was officially tainted.
Back to last week. While Ginnie Mae’s move away from the LIBOR index was anticipated the announcement of a fast-approaching deadline caught many by surprise as the transition to a new interest rate index had not yet been finalized for the Home Equity Conversion Mortgage.
In July 2017 Reverse Mortgage Daily reported on industry plans to work to implement a replacement index before changes take place. In May 2019 Michael Drayne, SVP of the Office of the President of Ginnie Mae discussed the impending index change at the NRMLA Eastern Regional Meeting in New York saying, “The amount of time we have to figure everything out is less reassuring the more you look at how complicated this problem is.” Drayne headed the effort to work with lenders who issue securities in both the traditional and reverse markets. During Reverse Mortgage Daily’s July 2020 Summer Virtual Meeting New View Advisors Michael McCully said our industry stakeholders were working to take “active steps to prepare for the sunset” of the index. He added, “Our principal concern is that we want our industry to adopt the same widely recognized liquid, mainstream global index or set of indices that the rest of the mortgage industry [will use]. We want to be lockstep with the rest of the financial markets, and do not want to end up having a different index than the rest of the financial markets and financial world uses. That’s our overriding objective.”
According to a recent column in TheMReport traditional mortgage lenders moved away from the LIBOR more quickly than their reverse mortgage counterparts. Bonnie Sinnock writes this in the American Bankers Asset Securitization Report. “Due to historically low fixed rates and plans to phase out Libor, traditional ARM securitization at Ginnie has declined notably in the past year. It was $12 million in August, down from $68 million during the same month the previous year. In comparison, newly securitized reverse mortgages continue to run at a rate of $500 million to $600 million per month on average, according to capital markets consultancy New View Advisors.”
What transpired between the ongoing discussions between Ginnie Mae, HUD, the Federal Reserve’s Alternative Reference Rates Committee, and our industry stakeholders leading to a sudden deadline remains to be seen. The good news is our industry has a long established history in using the CMT (Constant Maturity Treasury) rate. In addition, the HECM’s adjustable rate note states if an index is unavailable one can be prescribed by the Secretary of HUD. To date no official rate index has been announced by HUD. In its August 4th letter to the Consumer Financial Protection Bureau NRMLA appealed to use an index that is ultimately adopted by HUD which has similar historical rate fluctuations as the former LIBOR index.
Record-low LIBOR rates and competitive margins erase most of 2017 PLF reductions
Dan Hultquist of Finance of America Reverse returns for another exclusive interview; this time discussing how a record low-interest-rate environment do erase most of the impact of the October 2017 PLF reduction and much more.
