A new report published by the Federal Reserve Board looks at the reverse mortgage industry and examines loan level data (from 1989-2007) to provide insight into the growth of the program. Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market is the first paper to perform such analyses using actual loan-level reverse mortgage data says the Federal Reverse.
The reports author, Hui Shan writes that today’s reverse mortgage borrowers are younger than earlier borrowers at the time of origination. Included in the report is a graph showing the age of recent borrowers which, “suggests that there may be homeowners younger than age 62 who would want to purchase reverse mortgages if allowed.”
Data used in the report also found that borrowers who take the line of credit payment plan, single male borrowers, and borrowers with higher housing values exit their homes sooner than other reverse mortgage borrowers.
One of the most common complaints about reverse mortgages are the upfront fees involved and how many believe that these loans are a bad deal for elderly homeowners. Shan explains that the upfront costs are necessary because “because there is little risk-pooling in the HECM program, insurance premiums have to be high for HUD to break even.”
As a result, HUD may have to change the fundamental structure of the HECM program in order to cut the costs significantly.
Later in the report Shan writes about the misconception that the tenure payment plan for a reverse mortgage is equivalent to an annuity. “For immediate life annuities, insurance against outliving one’s assets is provided by pooling mortality risks across a group of people,” says Shan. However, the tenure plan of a HECM, involves little risk pooling.
For example, if a borrower dies shortly after the HECM loan is originated, they pay back only the loan balance which is presumably small. HUD does not inherit the borrowers entire housing equity to pay another borrower who lives to be over 100 years old.
Thus, the longevity insurance aspect of a tenure HECM loan is very limited. In addition, the data showed that only 10% of HECM borrowers choose the tenure payment plan or the modified tenure payment plan, which suggests that the annuity aspect of reverse mortgages is irrelevant to most borrowers.