Predicting Rates as Science

The Expanding Universe

The Expanding Universe

Mortgage and Reverse Mortgage rates clearly fluctuate all the time. Several articles today, however, focus on predicting rates and financial performance as a “science.”  An article on mathematical models of mortgage rates was in the science section of the NYTimes, along with another much longer article on Quants, comparing stock market performance predictions to quantum physics and string-theory.

Putting predicting rates in the same hard science category as Einstein’s unifying theory seems slightly ridiculous. Although both are theoretical, the recent stock market crash has proven that its impossible to predict the behavior of the markets with a high degree of certainty. The bursting of the housing bubble came as a surprise, much like the bursting of the .com bubble but with much much more damaging consequences. 

Yes, many people foresaw that the markets were overextended, but they did not know when, how, or how dramatically they would fail. Thus the models (especially the long-term models) were generally unable to prevent people from losing a large amount of money last year. While that does not make them worthless, it does prevent models from being seen as an accurate predictive measure.

Greater than 50% accuracy may be enough for a model to perform well on Wall Street, but a much higher degree of certainty is necessary for a theory to gain any support in the scientific world. Models prediciting mortgage rates and stock market performance may be scientific in nature and are certainly highly mathematical. However, they should not carry the same weight and are not in the same category as the science behind developing a new cancer drug or determining Einstein’s constant for the expansion of the universe.

Eventually the mortgage rates and the stock market will dramatically rebound.  If the models actually met a scientific standard we’d know when that’s going to happen; sadly, we don’t.

 

Conspicuous Spending or Jump Starting the Economy?

Haute Couture Casual Pants Set for Kids 

Haute Couture for Kids

And now for a change of pace. My hometown paper, the NY Times, just published a great human interest piece on the changing patterns of consumption in America. I really recommend the piece, as some of the anecdotes provide interesting food for thought.

A few examples:

Sasha and Malia wore J.Crew to their father’s Inauguration instead of designer apparel. The Times chalks this up to Obama’s push for fiscal responsibility. While I did not find anything particularly remarkable about the choice to wear J.Crew (which isn’t that cheap), I had trouble thinking of alternatives (Calvin Klein suits?).

Some economists believe that increased consumer spending is the only way to jolt America out of the recession. Of course, this is the opposite of the behavior that is currently being witnessed. Is there something that can be done to spur more spending, or is the change cultural and/or ethical and therefore on a deeper level than policy?

Is consumer spending an ethical issue? At what point is it considered an excess to spend money? I’m curious as to your thoughts.

NY Times: Even Well-off Consumers Aim to Be Less Conspicuous

Until next time.

 
 

More Depressing Housing News

Zillow released their 2008 Real Estate Market Report that showed $3.3 trillion in lost property values last year.  The declines in property values are directly causing the slowdown in reverse mortgage.  Reverse mortgage activity has been flat or down slightly for the last six months.  When you consider that reverse mortgage activity was doubling in size every two years up until the middle of 2007, the flattening amounts to a massive slowdown.

The Zillow report showed that the hardest hit market was Modesto, California — unsurprising, that.  Nationally, roughly one out of six homeowners owes more on their mortgage than their home is worth.

Seniors have not been as hard-hit by the declines, however, because they were not as likely to speculate on development properties or purchase homes in “bubble” communities.  As a result, their home values have not declined as much.  More importantly, most seniors have built up high equity levels and as a result are not as at risk of going “underwater”.

 

“HECM for purchase” is in the wild

The HECM for purchase program (the ability to use a reverse mortgage to purchase a property) was announced by HUD months ago and it became a reality with Financial Freedom’s announcement that it has begun accepting purchase files from its wholesale partners.

Few brokers have gone through the training as of this writing but over the next month, expect the other major wholesale lenders to announce purchase programs and expect a wave of advertising from local brokers around March.

Some observers hope this program will help put a floor under property values by giving more people the option to buy a home.  

That’s unlikely to be the case since the only homeowners who can use the HECM for purchase program are existing homeowners with equity.  They will by and large use their funds to downsize to a smaller home rather than buy a second or larger home.

 

Financial Freedom (IndyMac subsidiary) acquired

The FDIC, which took over IndyMac Bank last year, announced that a consortium of investors led by IMB Management Holdings has agreed to acquire IndyMac for $13.9 billion.

This is good news for Financial Freedom, a subsidiary of IndyMac.  Financial Freedom is one of the best assets in IndyMac’s portfolio since it is profitable and rumored to be worth $500 to $950 million.  

It’s also good news for the thousands of borrowers, employees, and wholesale lenders who have built up relationships with Financial Freedom over the last decade.

 

FHA Outlook for HECM Volume Is Out Of Touch With Reality

According to the FHA’s Outlook report, HUD expects 210,000 reverse mortgages to be issued between October 2008 and September 2009 (FY 2009).  That represents a roughly 90% increase in reverse mortgages versus FY 2008.

That would be well and good if it weren’t for the fact that recent data suggests the opposite of HUD’s projections.  

Let’s take a look at monthly volumes.  To reach the projection of 210,000 reverse mortgages, the industry would have to average 17,500 reverse mortgages per month.  In October and November, the final tallies were 10,121 and 7,771, respectively.  That means it took the industry 2 months to produce what HUD projected would happen in 1 month.

Combined with projected further declines in property values, I think most industry participants will be happy if 2009 turns out to just be even with 2008, let alone a 90% increase.

Can anyone shed light on why HUD has such a rosy view for 2009?

The original report is here: Outlook Report

 

Reverse Mortgage Lenders Are Switching To Call Center Models

Financial Freedom largely pioneered the reverse mortgage lending market with their nationwide network of “Reverse Mortgage Specialists.”  They currently have around 400 field-based specialists but the number was once higher.  Their model was akin to State Farm’s – an agent in every town.

It seems that model is giving way to the Geico model.  Financial Freedom has been quietly building up a large call center in Irvine to handle the bulk of their sales.  The reasons are ultimately economic but stem from the fact that Financial Freedom wasn’t able to effectively manage its field-based loan officers to get them to follow pipeline management and lead followup procedures.

Financial Freedom isn’t the only company moving to the higher volume, lower-cost call center model.  Generation Mortgage and Quicken Loans (aka One Reverse) have moved in the call-center direction in the last year and other large players such as World Alliance (Senior Lending Network) have had this model for years.

 

Fixed-Rate Reverse Mortgage Surpasses Variable Rate

This week something unprecedented happened: the fixed-rate HECM reverse mortgage provided more cash available to borrowers than the variable rate programs.

According to this reverse mortgage calculator, a 70-year old homeowner with a $200,000 home would be able to draw $124,151 from a fixed-rate HECM (at 5.56%) versus $123,503 with the lowest margin variable rate (HECM 175 at 2.44%).

This odd outcome where a higher rate provides more than a lower rate is due to two features of the FHA HECM formula:

  1. When the rate gets down to 5.5%, a lower rate does not increase the available lending limit percentage (there is a floor)
  2. A higher interest rate reduces the servicing fee set-aside so even though all the programs are providing the same principle limit, the available principle limit is higher with the fixed rate.
 

Death of the Fannie Mae Homekeeper Reverse Mortgage

The Fannie Mae Homekeeper is a very old type of non-FHA reverse mortgage that never really caught on because of the low percentage of equity that it made available and because of its high interest rate.  The only customers who benefited from it were those above the age of 80 with a home value between $300,000 and $450,000.   

The final nail in the Homekeeper’s coffin came when the FHA increased the limits on the HECM reverse mortgage to $417,000.  The Homekeeper is now fully obsolete.

Lenders have begun to discontinue the program including the large wholesale lender JB Nutter who announced it is discontinuing the program effective December 22, 2008.