Product Announcement HECM 150
We are experiencing extraordinary times in the capital markets when, despite the Federal Reserve’s best efforts to provide liquidity to the money market by reducing both the Discount Rate and the Fed Funds Rate, the key short-term LIBOR rates keep rising. The unprecedented scope of the market dislocation in the money markets has far reaching implications especially in the reverse mortgage space.
Why is LIBOR important? LIBOR, the London Inter-bank Offering Rate, is an important global benchmark rate for everything from large global corporate loans to US mortgages to corporate deals. It is calculated daily based on the interest rates at which banks offer to lend unsecured funds to other banks in the London Inter-bank market. More importantly LIBOR is used in determining the price of variable-rate government and corporate loans and widely used financial derivatives, including interest rate futures, interest rate swaps and Eurodollars. In other words, the LIBOR is the index for all of the secondary liquidity measures.
What is the impact on the HECM? Despite the Fed’s efforts the spread between LIBOR and the CMT, Constant Maturity Treasury, continues to widen above 100bps. Historically the spread between the CMT and LIBOR has been 40bps. This creates a negative carry as the cost to fund a HECM is tied to LIBOR, while the index for the HECM is tied to CMT. If you add 100bps margin to the CMT, the spread for the HECM 100, you are still earning less than LIBOR meaning it is costing you more to fund the HECM than you earn on the HECM. This creates the negative carry. This spread between CMT and LIBOR has caused a significant reduction in the value of the HECM 100 in the secondary market. As a result the trades in the secondary market for the HECM 100 are steeply discounted creating a loss on every HECM 100 sold. We have seen secondary market support for the HECM 100 completely erode, and the market has stopped buying the HECM 100. Our competitors have recently moved to discontinue the HECM 100 and originate the HECM 150.
To find out more about the HECM 150, contact a Reverse Mortgage Loan Officer. They can answer any question and provide a “How to do a Reverse Mortgage”.
