According to a recent HUD data release and a related report by New View Advisors, fewer borrowers are prepaying their reverse mortgages. (Prepayment refers to the decision to voluntarily repay a reverse mortgage prior it it becoming due, which is usually triggered only by the borrower’s death or change of primary residence). Based on a comparison of 2007 loans with 1999 loans, New View determined that mortgage prepayments have been falling.
Amazingly, this has taken place even as reverse mortgage rates have fallen. When conventional mortgage rates decline by more than 1-2%, it will usually spur a wave of refinancing. This is apparently not the case with reverse mortgages. The implication is that even though HUD has lowered the interest rate floor on reverse mortgages from 5.5% to 5%, it probably won’t effect existing borrowers.
This phenomenon speaks both to the nature of reverse mortgages and the mindset of reverse mortgage borrowers. Since reverse mortgage borrowers don’t make monthly payments, they are less inclined to appreciate the savings associated with lower interest rates. A reverse mortgage refinancing is in fact much more likely to be a cash-out refinancing, as the interest savings are given out to the borrower upfront in the form of a higher loan maximum.
For confirmation of this, one need look no further than the 1999 borrowers in the New View study. As home prices rose, these borrowers became increasingly more likely to prepay (i.e. refinance), because doing so would immediately put more cash in their pockets. Of course, many of those mortgages are now underwater, but this should concern neither borrowers nor lenders, thanks to the mandatory FHA insurance. After the collapse of the housing bubble, the FHA has understandably made it less desirable for reverse mortgage borrowers to refinance, by maintaining an interest rate floor and by lowering loan limits.
New View also made some interest observations about how loan repayment varies with age, “with prepayment rates rising from 3.5% for 62 year olds, 6.9% for 77 year olds, and 26.1% for borrowers 90 and older.” This correlation has remained intact even as overall prepayments have fallen. On the one hand, it makes sense that older borrowers would be more inclined to prepay their reverse mortgages, perhaps having exhausted the benefits and wanting to prepay themselves rather than allowing their heirs to sort it out. On the other hand, the benefit of refinancing would be greater for youngish borrowers since the interest savings accrue over a longer period of time.
In short, if/when home prices start to appreciate, the data suggests that we could see a wave of prepayments. Until then – regardless of how far interest rates fall – borrowers probably won’t move.
Fore more information about refinancing a reverse mortgage, please read an earlier post on the subject.