NCSECU Product, Revisited
We’ve had a lot of new people sign up for ReverseIQ since our first post last October, so thanks to everyone for your interest and support. We also noticed a recent press release from NCSECU regarding their non-HECM reverse mortgage volume and think it makes sense to re-post an analysis from our inaugural issue since the news is spurring lots of questions about the product. For those of you that saw this last year, kudos for being one of the original readers!
Please note that the current NCSECU 60 Month CD rate that we’re using as a proxy for their cost of funds has since declined from 4.00% to 3.00% as of this morning, so they have a slightly better profit margin if everything goes perfectly. In our view, however, that doesn’t change the fundamental problem that there is very little margin to absorb any losses from a few foreclosures in their portfolio given the capped simple interest on the product.
NCSECU Product Priced For Perfection
You may have seen the recent press release from North Carolina State Employees Credit Union (NCSECU) for their new simple interest, low fee reverse mortgage. As a borrower, it’s hard to find anything not to like about it if you can qualify: a low, simple and fixed interest rate; low upfront fees; no monthly service fees; and even higher payouts than HECM. As a lender, you’ll have a tough hill to climb in competing with this product offering a HECM. So how many of your potential clients are eligible for membership in SECU and more importantly, how viable is this product as a competitive threat to your business?
The first good news is that eligibility for NCSECU (and thereby their RM product) is essentially limited to state employees and their families. For anyone not doing business in North Carolina you’re probably not affected at all, and even those in the state will likely see limited impact due to this membership eligibility limitation.
To the more fundamental point, our initial analysis of the product shows that it is inherently unsustainable, even with the lower cost structure and non-profit status typical of credit unions. The 62 year old borrower illustrated in the NCSECU product guide receives $670 per month on a $200,000 home. If the borrower finances the closing costs and lives out a 21 year life expectancy, he will have received $173,010 in total draws. Using those numbers, home prices must appreciate at a compound annual growth rate (not simple) of 1.7% per year just for NCSECU to earn a yield equivalent to its current CD rates on offer, assuming a 7% closing cost to sell the home.
While that home price appreciation figure is very reasonable, the credit union is assuming all the home price risk while capping their offsetting return uncomfortably close to their current CD yield. In our humble opinion, that seems to be cutting it extremely close given the other inherent risks in these loans. Essentially, the credit union is creating a very low ceiling on its net return while at the same time assuming substantial interest rate risk (fixed rate with tenure payments), home price risk and duration risk. This last item may not seem like a big issue at first glance, but the idea that a credit union is lending long term at fixed rates using short term deposits as collateral is exactly what got the S&L industry in trouble a few decades back.
Looking at the table above, imagine what would happen if interest rates rose 2.5% from the historically low current levels – suddenly every single loan written at current rates is losing money in any home price appreciation environment. It is not unreasonable to think that this situation would prompt the one hidden risk to the borrower: the risk that a lender might not perform because they cannot fund their monthly payment obligation to the borrower. A HECM would be backstopped by the HUD guarantee, but the credit union product provides no such protection.
It’s a great deal for borrowers who qualify (with one hidden risk), but at the expense of NCSECU’s broader membership and anyone else that might invest in this product. Among potential investors, even the state pension fund has a fiduciary responsibility to manage assets for the benefit of its beneficiaries, and it’s extremely difficult to imagine this product meeting that test.
