Findings of a reverse mortgage study conducted by researchers at the Ohio State University have been published, recognizing that there are some solutions available that can help lead to fewer tax and insurance defaults among borrowers.
The study, funded in part through a grant under The MacArthur Foundation through partnership with The Department of Housing and Urban Development and CredAbility, sought to learn more about reverse mortgage borrowers and outcomes by following 30,000 reverse mortgage counseling clients who went through counseling between 2006 and 2011. Its results will be used to shape the forthcoming financial assessment that borrowers will undergo in the future of the Home Equity Conversion Mortgage program.
CredAbility has provided counseling data and access to counseling clients during the project and HUD has provided department data on HECM loans and borrowers. Of the 30,000 prospective borrowers who were counseled, 58 percent ended up taking out HECM loans.
Among the findings of the study: there are certain relationships between borrower characteristics and likelihood of default. But when considering those borrower restrictions being discussed by the financial assessment draft as it stands, not all of those restrictions are relevant, the research finds. Namely, borrowers who take more of their proceeds upfront are more likely to default, among other criteria.
“Our results suggest a statistically significant relationship between future default and certain credit report indicators, including credit score, prior delinquency on mortgage debt, the property tax burden, and prior tax liens,” the study authors, Stephanie Moulton of the John Glenn School of Public Affairs and Donald R. Haurin and Wei Shi from Ohio State’s department of economics, write. “Even after controlling for risk characteristics, the initial withdrawal percentage is an important factor predicting default.”
However, other restrictions are being considered as part of the financial assessment that the study found not to relate to default risk, namely the installment and revolving debt burdens.
The researchers aimed to examine the balance in placing restrictions on borrowers that will limit default risk, but that are not so stringent to discourage participation in the HECM program.
“While a simple limit on the initial withdrawal percentage substantially reduces default, it also substantially reduces participation in the program,” the study finds. “A greater reduction in the default rate with less effect on participation can be achieved by setting thresholds based on credit score or derogatory credit indicators.”
Specifically, a delinquent mortgage or prior tax lien was found to raise the probability of default by 15.4% and 21.5%, respectively, among other findings.
Found to reduce the likelihood of default was a borrower’s access to revolving credit.
The findings suggest setting a minimum FICO score or requiring households that have derogatory credit risk characteristics to set aside funds at the time of the loan origination designated as a Life Expectancy Set Aside, to be used toward future tax and insurance payments.
Noting that it is the first such research of its kind, the researchers stress the policy implications of the findings as well-timed to inform the development of underwriting criteria for reverse mortgage borrowers.
“Addressing the tax and insurance default problem without compromising the mission to serve the needs of senior homeowners is thus a significant issue for the policy viability of the HECM program,” they state in their conclusion. “While our analysis does not address broader implications related to the fiscal solvency of the program and the MMI fund, it does offer insights that can inform policy design—and market innovations—to address the viability of the HECM program over the longer term.”
Written by Elizabeth Ecker