Most interest rates have dropped to historic lows in recent years…but not all of them.
One that hasn’t is the rate on CHIP reverse mortgages.
On October 12, 2009, CHIP parent HomEquity Bank announced its receipt of bank status. Bank status helped it significantly cut rates down to 5.90% for a 5-year term in October 2009 (that compared to almost 9% a year earlier).
Today, CHIP’s 5-year rate is 5.95%, which at first glance seems unreasonable considering that interest rate benchmarks like the 5-year government yield have nosedived 1.46 percentage points since October 2009.
But, as is often the case, there’s more to the story.
Unlike regular mortgage lenders, CHIP cannot insure its mortgages and benefit from low-cost government-backed funding. Nor can it fund long-term mortgages with cheaper short-term debt like many other mortgage lenders.
Instead, CHIP “matches maturities” to control risk, meaning it tries to borrow for roughly the same amount of time as it lends money to its customers.
On 5-year reverse mortgages, HomEquity Bank raises its money primarily through 5-year GICs and medium-term notes (which are essentially AAA-rated bonds bought by institutional investors. Their yield is in the ballpark of a 5-year GIC).
Here’s why all of this matters. Back in fall 2009 when CHIP last lowered its rates significantly, 5-year GIC rates were in the 2.60% range +/-.
Today, more than two years later, GIC rates are about the same.
In other words, HOMEQ hasn’t seen much improvement in its interest spread over the last few years. In fact, its year-over-year mortgage spread percentage actually decreased in Q3 (see the chart below).
This goes a long way in explaining why most CHIP reverse mortgage rates haven’t improved for a while.
At the moment, 5-year reverse mortgage rates are almost double that of a traditional mortgage. Is that fair? You decide, but consider that HomEquity:
- Lends to almost anyone with a pulse who’s 55 and over and has a reasonably marketable property
- CHIP does almost no check of qualifications (i.e., no validation of credit, income or debt-servicing ability)
- Receives no payments for over a decade in many cases
- The average CHIP customer stays in their home 12 years after getting a reverse mortgage.
- In the meantime, HomEquity receives minimal repayments before discharge of the mortgage. Unlike a normal lender, that means it receives little money back with which it can re-invest and boost returns.
- When it does get paid back, the time value of money takes a toll (more so than a traditional lender because HomEquity gets paid back in even less valuable future dollars).
- Is the only game in town
- It’s got no direct national competitors and has earned monopoly pricing power.
With so many seniors expected to rely on reverse mortgages, we’d love to see CHIP rates come down. Then again, given the above, it’s fairly understandable why they haven’t.
Rob McLister, CMT