Reverse Mortgage Rates, Treasuries come to an end.
Michael Branson (CEO - ARMC) 6/9/09 9:39pm
On June 1, 2009, FNMA announced that they were going to discontinue the purchase of the CMT-indexed Home Equity Conversion Mortgage (HECM or “Heck-um”) According to FNMA Senior Vice President and single family risk officer Michael A. Quinn, “Fannie Mae’s decision to discontinue to purchase CMT-indexed HECM’s is intended to help standardize and simplify HECM product offerings, build liquidity for the product, and encourage a market shift toward securitization”. This move will become effective August 31, 2009.
The margins on the Treasury-based product have been rising significantly over the past year and slowly the LIBOR (London Interbank Offered Rate) has replaced the CMT as the product of choice by consumers. The margins for both indices have increased in the recent past, but the CMT margin has risen faster and higher offering HECM borrowers less money and higher rates.
The LIBOR index is a more marketable index which allows FNMA an opportunity to securitize and sell the product, while the less readily marketable CMT index did not. As these margins rise, the fixed rate reverse mortgage began to net borrowers more cash which really helps borrowers paying off existing mortgages so there has been a move recently toward the fixed rate product as well.
At one time, the monthly CMT was just about the only HECM loan being written. When the LIBOR index was introduced, the monthly CMT and the monthly LIBOR (at various margins) still represented more than 90% of the adjustable rate loans originated. Fannie Mae’s decision to eliminate the annual CMT-based treasury product seemed as though it would not affect many borrowers. In fact, very few borrowers on a percentage basis have chosen the annual CMT-based HECM over the other options since inception.
While reverse mortgage interest rates are low, both the fixed rate HECM option and the monthly adjustable programs would give the borrower more money for their use. Many borrowers would skim over the annual figures and dismiss the program immediately due to the greater amounts of cash the borrower could receive on the monthly adjustable program and at a lower starting interest rate or opt for more cash and the security of the fixed rate reverse mortgage.
The one area that was attractive to some borrowers on the annual adjustable HECM over the monthly option or the fixed rate reverse mortgage was the safeguards built into the interest rate risk, and it seemed that was only recently being questioned. For those borrowers who did not need the absolute largest amount they could get from their HECM, the annual adjustable program gave them access to the Reverse Mortgage Line of Credit option, but with interest rate caps of 2% per annum and 5% over the life of the loan (rather than the 10% life cap on the monthly adjustable loan).
The borrowers would start with a higher rate than the current monthly adjustable option but a lower rate than the fixed rate option, they did not have to take all the funds at the beginning of the loan and in the case of the two recent borrowers who called our company, who were convinced that rates were going to increase dramatically due to all the steps the government had taken over the last 6 months, they wanted the annual and lifetime caps. After August 31, 2009, borrowers who feel the same as these, will no longer have this option as the CMT-based one-year adjustable product will no longer be available.
The fixed rate reverse mortgage still remains an excellent alternative for borrowers who have a loan to pay off and need their cash in a lump sum to pay the existing lien or have other immediate needs for their cash.
The fixed rate reverse mortgage may not be right for all borrowers though as having the extra cash can affect needs-based programs such as Medicaid. The adjustable rate reverse still gives borrowers several options as to how they can receive their funds: as a lump sum; a payment for life; a payment for a given term; leave it in a line of credit to be accessed when needed; or a combination of the foregoing.
Borrowers need to consult their trusted financial advisors and family members as the reverse mortgage is a complicated financial transaction. There are no monthly payments, but a reverse mortgage is a loan that must be repaid when the last remaining borrower passes or stops living in the home as their full time residence. There are safeguards built into the program by HUD, but it is important that the borrower and the borrower’s family understand exactly what the safeguards do and do not protect against.
For most senior borrowers looking to obtain the HECM reverse mortgage, the elimination of the CMT-based product will hardly even be noticed. However, it is important that the borrowers and their families understand the needs of the borrower, and obtain the product that will fit those needs. It is a shame when I read about the “horrors” of reverse mortgages, because most of them never needed to happen.
Ask questions of your reverse mortgage specialist and be certain that you understand the information being presented to you. There is nothing wrong with taking your time and making sure this is the right loan for you or your family member.
by: Michael Branson (CEO All Reverse Mortgage Company)
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Links of Interest: Annoucement from FNMA (Fannie Mae) - AARP New Guide: Borrowing against your home. Download this consumer guide to reverse mortgages from the AARP Foundation Reverse Mortgage Education Project