Excerpts from “Fed’s New Approach to Inflation Could Benefit Reverse Mortgage"

By Chris Clow | Reverse Mortgage Daiily  August 27, 2020

The Federal Reserve will be instituting a major shift in its posture toward achieving economic stability, maximum employment and manageable inflation according to a Thursday announcement by Chairman Jerome Powell. This signals an approach that could mean the Fed will no longer raise interest rates in its efforts to keep the unemployment rate low, and will allow inflation to run higher during periods of growth according to the New York Times.

“Our revised statement emphasizes that maximum employment is a broad-based and inclusive goal,” Powell said at the Kansas City Fed’s annual Jackson Hole symposium. He adds that “this change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

Signaling a change from the central bank’s previous posture — in which it would raise interest rates to coincide with lower levels of unemployment in an effort to avoid high levels of inflation — the Fed’s policies will now be determined by what it describes as “shortfalls” from maximum employment rather than “deviations,” telegraphing that the Fed will not raise rates in concert with lower levels of unemployment, the Times describes.

Possible effects on reverse mortgage volume

All told, analysts believe that this change in posture from the central bank will lead to lower interest rates for longer periods of time, which will reduce the costs of traditional forward mortgages and business loans. It will also likely have an impact on the reverse mortgage.

The Fed appears to be targeting higher inflation. This could be targeted if the Fed wants higher interest rates as a way to maintain control for adjusting rates to balance the economic cycle, he says.

“If they’re successful, I’d expect a somewhat higher interest rate level and inflation rate level to increase home price appreciation similar to the asset inflation we’ve seen in the past two decades, but also higher interest rates making it harder for HECM to offer maximum PLFs on the current tables,” he says. “That would continue the reverse market becoming more interest rate-sensitive in alignment with the forward market, which is part of maturing as an industry at this point.”

“This would be because home price appreciation creates more equity for most homeowners, particularly ones paying down fixed rate forward mortgages so they end up with lower Loan To Value when age eligible for reverse,” Lunde says.

“This is great news  “Low rates gives the Reverse Mortgage Industry the flexibility to creatively structure loans and help the highest number of customers possible. When rates are high, it restricts our loan structure and prohibits us from working with some customers who we could have helped in a lower rate environment.”

The new posture should also help to exemplify the importance of utilizing home equity in retirement..

“While inflation running hotter than normal can increase cost of living expenses for seniors in an already challenging landscape, the lower interest rates will allow us to help more seniors by maximizing their home’s monetary benefit”.

“Chairman Powell has indicated in the past that moderately higher inflation — higher than the target range — would be acceptable. So, in that respect, not much has changed because we still expect interest rates to be low for a while even if inflation rises.  “It’s important to note that in the last recession the Fed cut the target Funds rate to zero in 2008 – and kept it there for a full seven years. 

Some customers may also start to see instances where a proprietary product may make more sense for them, Scarpati adds, especially if home values continue to rise.

Keep the ‘eye on the ball,’ Fed incentive

One lender, however, thinks that the news about the Fed’s new outlook should not get in the way of the primary reason that the reverse mortgage product category exists.

There are other potential advantages that the Fed may be keeping in mind in regards to interest rates.

“There are other incentives for the Fed to keep long-term interest rates near zero. For example, our national debt now exceeds our national GDP,” adds Scarpati. “In mortgage terms, that means our debt to income ratio is now 100%. Low interest rates have made managing debt easier and opens the door for another stimulus with less 

 Note: If you do not have a Reverse Mortgage on your Principal Residence in Florida,  ask me about it. I have a Reverse on my Condo. 786-262-6486  

Visit: http://HappySeniorHomeOwners.com