By Marty Bell
“Despite the potential of HECMs as a source of income in retirement, there is little published research on the experiences of reverse mortgage borrowers and the subsequent impact of reverse mortgages on longer term well-being.”
So begins a study of reverse mortgage borrowers, entitled “Aging in Place: Analyzing the Use of Reverse Mortgages,” and conducted by Stephanie Moulton, Donald Haurin, Cazilia Loibl and J. Michael Collins of Ohio State University.
Historically, government programs do not get it completely right from the get-go and frequently require adjustments after implementation. The reputation of reverse mortgages has seemed to improve considerably with the implementation of changes to the program implemented by HUD over the past three years. If the press is your measure of reputation, NRMLA tracking shows an extremely low percentage of unfavorable reporting over the past three years.
This is encouraging. But reviewing the OSU report, which surveyed a cohort of those who borrowed or considered borrowing prior to 2011 and prior to any changes, as well as talking with borrowers all cross the country who took their loans prior to the changes, it is apparent that among those who have actually utilized the financial product, the outcomes have been overwhelmingly positive and the evaluation of the program has been strong.
According to statue, reverse mortgages are designed to improve the financial stability of seniors by providing a way to “supplement Social Security, meet unexpected medical expenses and make home improvements” (U.S. Department of Housing and Urban Development 2006). Outcomes, both data-supported and anecdotal, confirm that the HECM program has fulfilled its intent. It has improved the lives of utilizers.
Stephanie Moulton, a professor at OSU’s John Glenn School of Public Affairs, has been a national leader in accumulating and analyzing data relating to reverse mortgages. She is now five years into studies supported by HUD and the MacArthur Foundation.
The following are excerpts from the summary of this most recent study, the first to begin to evaluate outcomes. Moulton’s examination of outcomes will continue as she explains towards the end of this report:
Purpose of Reverse Mortgages
Older homeowners may not be willing to sell their homes to access their equity, and may be unwilling or unable to make additional payments that are required to borrow equity from their home using a traditional mortgage.
Reverse mortgages are designed to address this trade-off by allowing seniors to draw down equity without selling their home, and without a monthly mortgage payment.
Methodology of Study
This study combines administrative data from households who have been counseled for reverse mortgages, HUD loan data for households who borrowed HECM loans, and survey data collected on households three to nine years after receiving counseling for a reverse mortgage. The goal of the study is to provide a better understanding of the relationships between borrowing through a reverse mortgage and financial security, well-being and independence in older age.
The sample population includes seniors who had been counseled for a reverse mortgage by ClearPoint Credit Counseling Solutions from 2006 to 2011, including (1) those who decided not to take out a reverse mortgage; (2) those who took out a reverse mortgage and retained it as of the survey date; (3) and those who took out and then terminated their reverse mortgage as of the survey date. The survey asks people about their experiences with reverse mortgages, as well as general questions on household financial well-being, living conditions and personal health.
A total of 1,761 people agreed to take part in the Aging in Place survey. 68% of people who responded to the survey obtained and retained their reverse mortgage. About 6% obtained a reverse mortgage, but the loan was terminated by the time of the survey. About one quarter of Aging in Place survey participants decided against obtaining a reverse mortgage after completing counseling.
The average survey respondent was 70 years old at the time of counseling, one-third were women in single person households, and about 17% had a four-year college degree. The average monthly income was about $2,600 at the time of counseling, or about $31,000 annually. Importantly, the median amount of savings and assets besides home equity was only $2,000. Moreover, nearly half of respondents (45%) reported no assets at the time of counseling other than their home. The reverse mortgage represented a way to tap the only source of wealth these households owned.
Based on credit report information, the average credit score among survey participants was 698 at the time of counseling, a reasonably good level of credit quality. About two-thirds (68%) of survey respondents had a mortgage loan, with an average loan-to-value ratio of just under 30 percent. This left a significant portion of home equity available for a reverse mortgage. Among reverse mortgage borrowers in the survey, the average proportion of available reverse mortgage funds extracted at closing was 78 percent.
Key finding #1: Reverse mortgage borrowers are generally satisfied with the reverse mortgage
In general, most of those who were counseled and decided to take out a reverse mortgage were “satisfied” or “very satisfied” with their decision (83% of respondents). Even those who subsequently terminated their reverse mortgage expressed a high rate of satisfaction with their initial decision (78% were “satisfied” or “very satisfied”). By contrast, only 60% of respondents who decided against originating a reverse mortgage reported satisfaction with their decision.
Those who originated a reverse mortgage were asked to reflect on the extent to which they agreed with the statement, “Having a reverse mortgage improved the quality of my life.” The majority of respondents, 76% of active borrowers and 65% of terminated borrowers, agreed with the statement.
Key finding #2: Supplementing income and paying off mortgage debt are the top intended uses for reverse mortgage funds
The Aging in Place survey asked respondents about reasons for why they considered obtaining a reverse mortgage. The most common reasons are predictable, such as supplementing income (42%), but also for reasons that are perhaps less obvious, such as paying off a traditional mortgage (39%). Paying off a mortgage that requires a regular monthly payment allows people to free up income that can be used for other purposes. In fact, survey respondents who indicated they borrowed in order to pay off mortgage debt often reported that their motivation was to eliminate their monthly mortgage payment.
Other plans for reverse mortgage funds were to pay for home improvements (24%), to provide financial help for family members (19%), to postpone using other sources of retirement income (16%), and to pay for ongoing health or disability-related expenses (14%).
A key feature of the HECM reverse mortgage is that even if property values decline, the reverse mortgage line of credit retains and grows based on the initial home value. Savvy homeowners during the housing bubble could have used a reverse mortgage to hedge against house price risk. Only about 10% of survey respondents reported considering a reverse mortgage as a means to “lock in home equity as insurance against declining housing prices.” Likewise, very few respondents (6%) planned to use a reverse mortgage for a big purchase (such as a car or vacation) or to purchase a new property (5%). As it is currently being used, the reverse mortgage is mainly a way to manage basic ongoing finances.
Key finding #3: Most reverse mortgage borrowers are current on property taxes and rated the condition of their home as “good” or “very good”
An important goal of the broader Aging in Place study is to estimate the impact of reverse mortgages on longer-term financial stability and well-being. This will require longer-term tracking of borrowers to estimate the outcomes of households who obtained reverse mortgages using comparison households who did not. The current survey can only descriptively compare the responses of seniors who were counseled and obtained a reverse mortgage to those who were also counseled and who did not obtain a reverse mortgage.
The Aging in Place survey included questions related to several outcomes that are reasonable proxies for household financial security. For example, one question asks whether or not the household is currently delinquent on property taxes and/or homeowner’s insurance. While there is no monthly payment associated with a reverse mortgage, borrowers are required to maintain their property taxes and homeowner’s insurance payments, or they are considered to be in default on their mortgages. As of 2014, HUD reported that more than one in ten HECM borrowers had missed one or both of these payments, and thus were at risk of foreclosure. Most of the participants in this survey, however, reported being current on their property taxes. Respondents not obtaining a reverse mortgage were more than twice as likely to report being past due on property taxes: 5% of non-borrowers compared to 2% of active reverse mortgage borrowers. The average amount overdue was $1,449 among active borrowers and $4,221 among non-borrowers.
One basic indicator of general household overall well-being is the condition of a household’s living environment. Survey participants were asked about the current condition of their homes. Active borrowers rated the condition of their home highest: 85% reported their home to be “good” or “very good.” About 81% of terminated loan borrowers and 76% of non-borrowers rated the condition of their homes at the same levels
Key finding #4: Reverse mortgage borrowers have average financial literacy, are risk averse with regard to finances, and most have a written will
Survey participants were asked a series of questions to measure their financial knowledge, willingness to take financial risks and financial planning behaviors. With regard to financial literacy, Aging in Place survey respondents appear to be on par with the general population. For example, 69% of respondents correctly answered a compound interest question. In a general population survey of seniors, an average of 67% of respondents answered the same question correctly.
With regard to risk tolerance, survey respondents reported very low willingness to take risks with their financial investments. They scored an average of 2.6 on a risk-tolerance scale ranging from 1=”not at all willing to take financial risks” to 10=”very willing to take financial risks,” with no substantive differences between borrowers and non-borrowers. In fact, about half of all respondents selected “not at all willing to take risks.”
Finally, survey respondents were asked about their financial planning behaviors. At least half of survey participants reported having a written will, a living will and/or health care power of attorney. These estate planning tools were more frequently reported among reverse mortgage borrowers than non-borrowers. For instance, over 70% of borrowers had a written will compared to 60% of non-borrowers.
The results suggest reverse mortgages are a valued financial product. Respondents tend to have lower-incomes, have very low (or no) assets and they desire to use the equity locked up in their house to make ends meet. Borrowers do not show strong signs of distress or low financial capability or literacy, and generally have good credit.
Borrowers are generally satisfied with their decision to take out a reverse mortgage. The main reason people report seeking the loan is to either pay off an existing mortgage debt, which frees up income that used to be devoted to payments, or to directly provide a supplement to retirement and other income. People who sought a reverse mortgage but did not take out a loan report reducing their overall expenses, including essential expenses. A substantial proportion of seniors not taking out a reverse mortgage reports extracting equity through an alternative channel, primarily through refinancing a forward mortgage and extracting cash at closing. Overall, equity appears to be an important source of cash flow for seniors in our sample.
Most reverse mortgage borrowers in the survey report being current on property taxes—in fact, at a higher rate than non-borrowers in our sample. Thus, while default on property taxes and homeowner’s insurance is an important policy issue for the reverse mortgage program, it is not clear that reverse mortgage borrowers are at greater risk of default on these expenses than seniors without a reverse mortgage.
There is also some indication that borrowers of reverse mortgages have high overall well-being. For example, borrowers tend to more positively rate the condition of their home compared to non-borrowers. While this could be due to a direct effect of the reverse mortgage, it could also be that homeowners who opt into a reverse mortgages have homes in good condition prior to getting a loan. More detailed analysis is needed to disentangle these effects.
The survey results suggest that HECM borrowers are doing well on a variety of different indicators three to nine years after originating their loans. However, in order to estimate the impact of the HECM on these indicators, we need to have a comparison group of otherwise similar seniors who did not originate a HECM. Our next two studies will allow us to do this. First, we will be comparing the long-term credit outcomes for seniors who originated HECMs to otherwise similar seniors who extracted equity through another channel (HELOC, cash-out refinancing or second liens). Second, we will compare our survey respondents to a nationally representative sample of seniors using the Health and Retirement Study (HRS) data, allowing us to compare HECM borrowers to non-borrowers in the areas of finances, health, housing and general well-being. These analyses are currently in process, and should be complete by August 2016.