Research Confirms HECM Reforms Have Reduced T&I Defaults

Research Confirms HECM Reforms Have Reduced T&I Defaults

An analysis of HECM data confirms that Financial Assessment and upfront draw restrictions are having the desired effect of reducing tax and insurance defaults. That’s according to a newly published research paper written by Ohio State University Associate Professor Stephanie Moulton and Federal Reserve Bank of Philadelphia Advisor and Research Fellow Lauren Lambie-Hanson.

Moulton and Lambie-Hanson analyzed HECM origination and performance data provided by the Department of Housing and Urban Development from December 2012 to May 2019.

“Our analysis of the HECM loan data finds a significant reduction in the proportion of HECM borrowers ever experiencing a T&I default of $1,000 or more within the first three years after originating their loan,” said Moulton and Lambie-Hanson. “Specifically, prior to the policy changes, the three-year default rate was 8.7 percent, dropping to 5.5 percent after the restricted draw policy change and to 2.2 percent after the financial assessment policy change. This is promising and is in line with industry reports of reduced rates of default.”

However, some of this reduction is offset by a corresponding increase in unscheduled lender payments of these expenses out of a borrower’s line of credit. This reliance on the line of credit may not be sustainable over the long term, said the authors, given that over 40 percent of HECM borrowers have exhausted their line of credit within 13 months of origination and nearly two-thirds have exhausted their line within 36 months.

Moulton discussed the T&I paper in greater detail, in addition to another that examined HMDA data, during NRMLA’s Virtual Annual Meeting