With a potentially new interest rate environment on the horizon, how will reverse mortgage lenders change?

Federal Reserve Chairman Jerome Powell pointed to a cut in the Federal Funds Rate last week at the Fed’s September meeting Federal Open Market Committee (FOMC) is on the table, which would result in mortgage rates falling.

Most observers and professionals agree that a rate cut would bring immediate benefits to the reverse mortgage industry, especially Home Equity Conversion Mortgages (HECMs). But the company is also moving toward the potential of lower interest rates due to a major refinancing boom driven by pandemic-era low interest rates, where HECM-to-HECM refinancings exploded, accounting for nearly half of industry volume in 2021 and 2022 achieved.

To get a better sense of the dynamics the industry may be considering 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 brevity.

Chris Clow/RMD: A few years ago, when it looked like interest rates were going to rise, you advocated for the industry to refocus on new customers.

Considering where rates could go and the ease with which so many reverse lenders jumped into the refinancing opportunity at the time, what do you think about the prospects of another refi boom given all the work that has been done in recent years? has been done to refocus on new borrowers?

John Lunde: I don’t think there’s any major growth ahead, for a very simple reason: we’ve only had high interest rates for the last two years, and they’ve only been higher than where they are now for about a year , and a half. How many loans have been taken out in that time? Not so much, because rates have been so high. A tree needs fuel to keep going, and there simply aren’t enough loans to create an actual tree.

You have a similar dynamic at the rear and at the front. All the loans from about two years ago – the loans that wanted to refinance – were probably already doing that. So you’re really only talking about the loans from the last two years, and all that volume has been pretty low. I think you have an echo, but again, specifically on the other side, I don’t see a boom because there’s just not enough loans.

Clow: What immediate impact do you expect a rate cut could have without the possibility of a refi boom?

Lunde: I still think it’s a very good thing if rates go down, simply because it will attract new customers. It makes it much easier for prospects to demonstrate value to new customers. All that refocusing on new customers is not wasted. I think this is exactly what we should keep our focus on. Treat any refi that occurs as the ‘cream on top’.

Finally, I think the other thing you can expect is that some of the forward guys will be more distracted than before because the forward side will be more viable. And if that is more feasible, then of course it is easier for them, because they know that. That’s the business many of them see themselves in.

Clow: Could that have a negative impact on this work that we’ve seen from more progressive lenders who have been more active in reverse in recent months?

Lunde: That’s the gray edge of the cloud: We’re going to have, I think, less attention span of the term lenders and the real estate agents that we need for real growth. Over the last year and a half, two years, it’s been easy to get the attention of lenders, brokers and everyone else in the housing and mortgage industry because they were crickets in the typical business they were doing three or four years ago.

So we lose some of that, but of course we benefit from the rates. Hopefully the work done over the last two years will result in more new customers and more volume through that method and channel.

Clow: Do you think, considering all the consolidation and how the industry responded to the collapse of a major lender and some others that have gone out of the game, do you think overall the company is the right size to handle the additional activities to handle, or is there a possibility of things being left on the table because there aren’t that many players active in the space?

Lunde: I think about who the right additional distribution partners are, and that’s really the existing major lenders. I think as the volume changes, each of the remaining reverse lenders will do better. We could make the same number of loans as we did three years ago, and everyone would be in a much better position because their share of that same pie might have grown.

But I think the reality is that we’re still not really in an overly competitive situation. We’re much more on a product adoption curve, as opposed to a competitive carnage, where it’s a zero-sum game and all this borrowing is going to happen.

So maybe this comes back to what you were actually asking: are we as an industry not going to make loans because there aren’t that many companies involved? I think that has always been our challenge. In the entire history of the industry, we don’t make hundreds of thousands or millions of loans per year because we don’t reach more than 90 percent of the people who should be looking at this option.

I don’t think that’s that much of a threat when it comes to consolidation, because it’s just about figuring out ways to get those other companies involved. Every mortgage provider should have this product. Then the question arises: is it an internal product? Do they mediate in this? How do they do that?’ That’s another question. But I think we’re still trying to answer 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 initiators should especially take into account, since the dynamics can change? There is a bit of a gap between the data and policy side and what people feel when it comes to the economy. There is also a lot of extra noise about economic policy due to the election season. How should reverse mortgage professionals try to stay focused on what lies ahead?

Lunde: It’s the same as when rates went up. Please note that we have no control over interest rates, and neither does anyone else we know. 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 things you have no control over; otherwise it will just drive you crazy.

Just keep going. Focus on the business activities that you can control and that will help you become more successful, regardless of what those other macro factors are doing. I understand it’s disappointing and not that effective, but take the tailwind for what it is and move forward. Focus on what you can address and control.

Clow: RMI regularly covers developments in reverse mortgage industry performance metrics. Do you think a rate cut at this stage of the year can make a difference in the trajectory of what the whole of 2024 will look like, or is it too late for that?

Lunde: Again, the interest rate cut is important. I guess the way I think about these things is that it’s all about expectations. So what happens to the interest rates that matter to us, such as the 10-year rate, is really just about whether the market gets what it expected or whether it is disappointed. It’s about how the market interprets it all.

But let’s say the 10-year yield falls by 25 basis points. If the Fed moves things down 25 basis points and the 10-year yield falls by the same, what does that do for us? It takes us two steps lower on the PLF curves. I definitely think that’s helpful.

But yeah, to the extent that a mid-September rate cut impacts 10-year yields – how long does it take for that to trickle down in terms of support on the HECM side through the end of the calendar year? You really only have control over recommendations for a month or two, just because of the timelines involved.

So right now it’s much more about preparing for next year from a recommendations 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 expect for next year.