Federal Reserve Chair Jerome Powell indicated last week that a cut in the federal funds rate at the September meeting of the Federal Open Market Committee (FOMC) is on the table, which would have the effect of driving mortgage rates lower.
Most observers and professionals agree that a rate cut would provide immediate benefits to the reverse mortgage industry, particularly for Home Equity Conversion Mortgages (HECMs). But the business is also headed into the potential for lower rates coming off of a major refinance boom from the pandemic-era low-rate environment, where HECM-to-HECM refinances exploded, reaching nearly half of industry volume in 2021 and 2022.
To get a better picture of the dynamics the industry might be keeping in mind as the FOMC meeting approaches, HousingWire’s Reverse Mortgage Daily (RMD) spoke with Reverse Market Insight (RMI) President John Lunde.
Editor’s note: This interview has been condensed for clarity and concision.
Chris Clow/RMD: Back when it looked like rates were going to start spiking a couple of years ago, you were vocal in advocating for the industry to reorient toward new customers.
Considering where rates could go and the ease with which so many reverse lenders jumped in with both feet on the refi opportunities at that time, how are you feeling about the prospects of another refi boom, considering all the work over the past couple of years to reorient toward new borrowers?
John Lunde: I don’t think there’s any boom in the offing for a really simple reason: we’ve only had high rates for the last two years, and they’ve only been higher than where they currently are for about a year and a half. So, how many loans have we originated in that time? Not that many, because the rates have been so high. A boom needs fuel to keep going, and there just aren’t enough loans to create an actual boom.
On the reverse side and the forward side, you have a similar dynamic. All the loans that were around two years ago — the ones that wanted to refinance — probably already did. So you’re really only talking about the loans in the last two years, and all that volume has been pretty depressed. I think you have an echo, but again, on the reverse side specifically, I don’t see a boom because there just aren’t enough loans.
Clow: So without that possibility of a refi boom, conceivably, what immediate impact do you expect a rate reduction could have?
Lunde: I still think it’ll be a really good thing for rates dropping, simply because it’ll attract new customers. It makes it a much easier prospect to show value to new customers. All that work reorienting towards new customers isn’t lost. I think it’s exactly where we should keep our focus. Treat any refi that happens as the “cream on the top.”
Lastly, I think the other thing to expect is that some of the forward guys are going to be more distracted than they have been because the forward side is going to be more viable. And of course, if that’s more viable, then that’s easier for them, because that’s what they know. That’s the business that a lot of them see themselves as being in.
Clow: Could that negatively impact this work we’ve seen from more forward lenders that have been more active in reverse in recent months?
Lunde: That’s the gray lining to the cloud: we’re going to have less attention span, I think, from the forward lenders and the real estate agents that we need for real growth. The last year and a half, two years, has been easy to get the attention of forward lenders, agents and everybody else in the housing and mortgage industry, because it’s been crickets in the typical business they were doing three or four years ago.
So we lose some of that, but obviously we benefit from the rates. Hopefully, the work that’s been done over the last two years creates more new customers and more volume through that method and channel.
Clow: Considering all of the consolidation and how the industry reacted to a major lender’s collapse and some of the others that got out of the game, do you think the business overall is more right-sized to handle the additional business, or is there potentially business left on the table because there aren’t as many players active in the space?
Lunde: I think about who the right additional distribution partners are, and it really is the existing big forward lenders. I think as the volume changes, each of the surviving reverse lenders does better. We could do the same number of loans we did three years ago, and everybody would be in a much better place because their share of that same pie has maybe grown.
But I think the reality is we’re still not really in an overly competitive situation. We’re much more in a product adoption curve, as opposed to a competitive bloodbath, where it’s a zero-sum game and all these loans are going to happen.
So maybe this is circling back to what you were actually asking: are we, as an industry, not going to do some loans because we don’t have as many companies involved? I think that’s always been our challenge. The whole history of the industry, we’re not doing hundreds of thousands or millions of loans a year because we’re not getting in front of 90-plus percent of the people who should be looking at this option.
I don’t think that’s as much of a danger from the consolidation question as it is just figuring out ways to get those other companies involved. Every mortgage lender should have this product. Then the question becomes, ‘is it an internal product? Are they brokering it out? How do they do that?’ That’s a different question. But I think we’re still trying to achieve the first question, which is the industry’s belief that every mortgage lender should have this product and offer it in a way that works, given the uniqueness of the customer and the product.
Clow: What do you think originators in particular should most keep in mind as the dynamics could change? There’s a little bit of a disconnect between the data and policy side and what people are feeling when it comes to the economy. There’s also a bunch of additional noise on economic policy due to the election season. How should reverse mortgage professionals try and just stay focused on what’s in front of them?
Lunde: It’s the same as when rates were going up. Keep in mind that we don’t control interest rates, and nobody else we know does either. Even the Fed has limited impact; it’s more of an indirect impact on the rates that matter most to us. So, you can’t really focus on the stuff that’s out of your control; otherwise, it just drives you crazy.
Just keep going. Focus on the business activities you can control that help you be more successful, no matter what those other macro factors do. I get that it’s disappointing and not as effective, but take the tailwind for what it is and push forward. Focus on what you can deal with and control.
Clow: RMI regularly covers the moves in reverse mortgage industry performance metrics. Do you think that a rate cut at this stage of the year could make a difference in the trajectory of what all of 2024 will look like, or is it too late for that to happen?
Lunde: Again, the rate cut matters. I guess the way I think about these things is that it’s all about expectations. So, what happens with the rates that matter to us, like the 10-year rate, is really just about whether the market gets what it expected or if it gets disappointed. It’s about how the market interprets all that.
But let’s say the 10-year drops 25 basis points. If the Fed moves things down 25 basis points and the 10-year drops by the same, what does that do for us? It moves us down two notches on the PLF curves. I certainly think that’s helpful.
But yeah, to the extent that a rate drop in mid-September affects the 10-year rate— how long does that take to filter through in terms of endorsements on the HECM side through the end of the calendar year? You’re really only impacting endorsements for maybe a month or two, just because of the timelines involved.
So, at this point, it’s much more about setting ourselves up for next year from an endorsements perspective, which is the number we publish and the most visible metric that everyone can easily see and track. It’s less about how we’re going to end this year and more about what we’re expecting for next year.
