Almost all Home Equity Conversion Mortgages (HECMs) originated today utilize the adjustable-rate mortgage (ARM) option. In stark contrast to traditional mortgage lending, the reverse mortgage business is dominated by ARMs, representing over 99% of Federal Housing Administration (FHA)-insured reverse mortgages originated today.
This is due, in part, because borrowers want to control how much they borrow and when they borrow from an open line-of-credit that is growing in their favor.
Fixed-rate HECMs are closed-end loans that only allow a single disbursement to the borrower at the time of loan funding. Consider that only 12 fixed-rate HECMs were originated nationwide in the first quarter of 2024. This represents only 0.19% of all HECM loan production.
How are HECM ARM rate changes calculated?
With each interest rate change, the new interest rate for an adjustable rate HECM is a combination of two numbers:
- Lender margin
- Index value
The HECM ARM’s lender margin will stay the same for the life of the loan. The index will change either monthly or annually. The resulting interest rate is then generally rounded to the nearest one-eighth of one percentage point (0.125%) as per Ginnie Mae requirements (Ginnie Mae MBS Guide Chapter 35 Section J).
What index value is used?
Currently, HECMs use the weekly average of the 1-year Constant Maturity Treasury (CMT) as the index that is added to the margin to calculate current note interest rates. Keep in mind that when rates change, we don’t use the current weekly average. Rather, we use the weekly average that was in effect exactly 30 days prior to the rate change date.
In essence, the rates lag 30 days behind the current market (HUD 4000.1 III.B.1.h.ii). This is done because HUD requires lenders/servicers to disclose to the borrowers in their servicing statement at least 25 days prior to a rate change the new note interest rate.
For example, with HECM loans with rate adjustments on June 1, the index value used to calculate the June interest rate would be based on the weekly average 1-year CMT in effect on May 2 (30 days before).
June 2024 update
Ultimately, we finished the first full week of June with a weekly average 10-year CMT of 4.35% after 15 basis point swings caused by jobs reporting. According to the June 5 ADP Employment report, job gains and pay growth declined in May.
While ADP’s perceived weakness in the labor market pushed rates lower midweek, Friday’s strong non-farm payrolls for May pushed them back up.
Graphics by Dan Hultquist. This column does not necessarily reflect the opinion of HousingWire’s Reverse Mortgage Daily and its owners.
To contact the author of this story: Dan Hultquist at [email protected]
To contact the editor responsible for this story: Chris Clow at [email protected]
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