FNMA Stops T-Bill Reverse Mortgages

On June 1, 2009, Fannie Mae Announced the elimination of their CMT HECM purchase. The constant maturity Treasury-indexed Home Equity Conversion Mortgage has experienced rising margins and decreased popularity over the past few years, and FNMA intends to streamline and standardize the variety of Reverse Mortgages, encouraging security in the market. They announced the change on June 1 2009, stating that they would discontinue the purchase of the CMT-indexed Home Equity Conversion Mortgage. The change will take effect September 1, 2009. Fannie Mae will continue to offer the purchase of monthly adjustable-rate LIBOR-index and fixed-rate HECMs and lenders may still obtain pricing and continue to commit CMT-indexes until August 31, 2009.

The indices currently available for adjustable-rate Home Equity Conversion Mortgages (HECM) and sold to Fannie Mae include the (LIBOR) index and the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year (CMT) index. HECMs indexed to the T-bill are available with monthly and annual interest rate adjustment options. LIBOR-indexes are available only with a monthly interest rate adjustment option. The LIBOR has been a popular alternative to the CMT for lenders because it is an international index rate instead of being a US index.

There is no specific deadline for delivering CMT-indexed reverse mortgages to Fannie Mae, so lenders may deliver CMT-indexes up to the expiration dates of their remaining outstanding commitments. Delivery fees for seasoned reverse mortgage loans will continue to be applied as before.

Interest rates as of June 15, 2009 had the net rate for the HECM LIBOR 325 at 3.57%, and the HECM CMT 325 at 3.74%. The total interest rate is calculated by adding the interest rate index plus a margin set by the lender. For example, a HECM CMT 300 refers to the reverse mortgage program that is using the CMT index and a margin of 300. If the CMT index is 2.10% then the total rate is 2.10% plus the 3.00% margin which equals an interest rate of 5.10%.

Based on Fannie Mae's recent pricing changes for reverse mortgages, lenders have had to raise margins to a point where the CMT-based loans practically became obsolete. With the use of reverse mortgage lending formulas, borrowers have been receiving greater proceeds with London Interbank Offered Rate (LIBOR) indexed loans lately, and more are also locking in low fixed rates.

Predictions indicated that the pricing on CMT products would further diminish, making the need for it insignificant in today’s marketplace. Since consumers were already receiving a similar principal limit and a lower margin, the elimination of the CMT is only a further step in the trend of lenders favoring LIBOR products.