Evaluating the reverse mortgage product’s health and market reach relies heavily on home price appreciation. The Federal Housing Finance Agency’s (FHFA) house price index (HPI) can additionally illuminate existing or potential trends, especially when combined with interest rate fluctuations.
Earlier this summer, DBRS Morningstar presented the topic of how the HPI and its fluctuations in the last two years relate to the reverse mortgage sector.
Joe Morgenstern, the analyst, stressed that marketing should focus on high-value homes to align with reverse mortgage LTV restrictions, which tend to favor regions like the West Coast due to their typically low LTVs. Property appreciation is crucial for qualification.
Low-interest rates spurred a surge in Home Equity Conversion Mortgage (HECM) refinancing during the pandemic. This is significant because property appreciation must surpass the accrued balance from loan initiation to refinancing. HPI data from Q1 2021 to Q4 2022 indicated nationwide changes ranging from 11.7% to 44.6% over two years. However, certain states experienced declining appreciation levels in 2022.
Morgenstern noted HPI growth across the nation, but recent trends reveal changes. The East Coast remained positive, while Western states saw HPI declines.
The slowdown in home appreciation in western states could lead to reduced qualification rates in the short term, potentially shifting origination volume towards the East Coast. While endorsement data until July 2023 showed no significant difference between regions, western areas typically outperformed the East. Interest rates, including proprietary reverse mortgages, surged, with proprietary loans increasing from less than 6% to nearly 10% in 18 months. HECMs also rose to over 6%, mirroring trends in the forward mortgage market during the same period.
Morningstar also evaluated reverse mortgage loan performance through conditional prepayment rates (CPRs) for HECMs and proprietary loans.
Morgenstern noted that CPRs, sourced from New View Advisors, were a crucial metric. The drop in CPRs between July 2020 and February 2021 affected marketing efficiency, especially in regions with reduced origination activity in 2017. The pandemic’s low-rate environment initially made borrowers reluctant to refinance or move but quickly led to a shift in behavior as rates decreased.
This pattern remained fairly consistent until higher interest rates gained greater influence over the overall mortgage market in 2022.