Recent housing industry reports have noted large increases in the number of refinancing of Home Equity Conversion Mortgage (HECM) loans. HECM loans are “reverse mortgages” insured by the Federal Housing Administration (FHA) and available to homeowners aged at least 62-years old. HECM loans allow older homeowners to access the equity of their homes to allow them to age in place, pay medical bills, etc. In this blog, SP Group explores the trends in HECM refinancing compared to FHA-insured forward loans.
The U.S. Department of Housing and Urban Development (HUD) releases a monthly report detailing the basic characteristics of new FHA-insured HECM loans and FHA-insured forward loans. We compared the volume of refinancing over the past three years for HECMs and forwards. We found that while the monthly volume of HECM endorsements increased significantly between July 2019 and July 2021, the proportion of refinancing grew more than ten-fold during this three year period. In July 2021, refinancing accounted for almost half of all HECM endorsements compared to only 5 percent of all HECM endorsements in July 2019. Refinancing volume was also up for forward loans but the rate of increase between 2019 and 2021 was moderate, i.e. from 25 percent to 38 percent. Figure 1 illustrates the loan endorsement activity for both HECM and forward loans during the past three years.
One of the primary factors contributing to the upsurge in refinancing volume is record low interest rates. We found that both HECM and forward originations benefited from the drop in mortgage rates over this three year period, but HECM borrowers received interest rates at almost a hundred basis points lower than the borrowers of forward loans by 2021. In Figure 2 we compare the average interest rates of traditional and refinanced loans for both HECMs and forward loans, based on information published in HUD’s monthly reports.
Another factor contributing to the increase in refinancing is the upsurge in home values. When prices are rising, refinancing allows HECM borrowers to access the additional funds that would otherwise not be available to the older borrowers. Figure 3 illustrates the annualized Case-Shiller Index from 2018 to 2021. There is a notable slope increase between 2019 and 2020 that becomes more prominent between 2020 and 2021. This aligns with analysis and articles that housing market observers have made this past year regarding the substantial increase in home prices.
With home prices appreciating in value and mortgage rates at record lows, it is not too surprising to see the uptick in HECM refinancing, particularly in the Pacific Northwest region where refinancing accounted for more than half of all endorsements.
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