Reverse mortgage experts see some trends emerging amid economic uncertainty and high interest rates.
High interest rates impact reverse mortgages differently than forward mortgages. Instead of raising the monthly payment and reducing what a buyer can qualify for, higher rates in a reverse mortgage lower the principal limit factor (PLF), meaning borrowers can access a smaller share of their home’s appraised value and receive less cash upfront.
At the same time, higher rates cause loan balances to increase faster over time, which can reduce the remaining equity for the borrower or their heirs. For adjustable-rate lines of credit, higher rates also make the unused credit line grow faster, although the accelerated balance growth can still deplete overall equity more quickly.
“What we’re seeing is more affluent borrowers taking advantage of the growing line of credit in the higher-rate environment,” said Shain Urwin, national manager of reverse mortgages at C2 Financial.
Meanwhile, for needs-based borrowers, interest rates have less of a psychological impact because their financial conditions dictate an immediate need for resources. Many of these borrowers are cash-poor but have substantial equity in their homes.
“The interest rate isn’t really an impact to them,” Urwin said. “They might live in a state like California and have a ton of equity, but they’re not able to survive on the rising cost of inflation.”
During the COVID-19 pandemic, when rates hovered around 3%, Urwin said he could secure a 62-year-old borrower a Home Equity Conversion Mortgage (HECM) with the equivalent of a roughly 50% loan-to-value (LTV) ratio. Today, with rates closer to 6%, that figure has dropped to about 30%, he said.
Reverse demographics
Loren Riddick, national director of reverse lending at NEXA Mortgage, said he has “never been busier” as seniors increasingly recognize the trillions of dollars in untapped home equity available to them.
“When people are using this as a financial planning tool, they actually want the interest rates to go high, because the [line of credit] growth rate is always a half-percent greater than whatever the interest rate is,” Riddick said. “Currently, the growth rate is around 7% on the unused line of credit.”
Riddick sees a clear industry shift toward wealthier, more educated clients utilizing reverse mortgages for financial planning rather than out of pure necessity. At a personal level, he said his business is now comprised of roughly 70% non-needs-based borrowers, compared to an even 50/50 split for NEXA overall.
According to Riddick, the traditional HECM remains the dominant product, accounting for 60% to 70% of the market. Proprietary products make up the remaining 30% to 40%, filling critical gaps where HECMs fall short.
Furthermore, roughly one in five reverse mortgages are currently used for home purchases, he said. But Riddick would like to see that ratio rise, a shift that would help free up housing inventory for younger families. He has also been vocal against industry “bottom-feeders” who aggressively solicit borrowers to refinance just months after originating a reverse mortgage.
Proprietary products
Despite the challenges, the high-rate environment is accelerating innovation. “Rates are less impactful in reverse than they are in forward — not that they don’t matter,” said Kim Smith, senior vice president of wholesale lending at SmartFi Home Loans.
According to Smith, proprietary products offer a distinct advantage in the current context.
“Our Choice proprietary reverse mortgage program, in this current rate environment, can really offer higher loan amounts than the traditional HECM program. Rates are fueling the growth of proprietary reverse mortgages,” Smith said. “I don’t know that reverse has a demand issue; I think we have a distribution and education gap.”
Urwin also said that the expanding availability of proprietary reverse mortgage products is helping to push rates down in that segment.
“Investors are bringing in more products and they’re getting the rates lower than they were. They’re giving more options to select how much cash you want to take upfront and lines of credit,” Urwin said.
“With proprietary loans, a typical borrower is getting about 10% more LTV in many cases than they can get on a HECM.”
