Reverse Mortgage Default Research Nets Some Surprises

The preliminary findings of a new reverse mortgage research initiative—the first of its kind—are revealing several surprising characteristics of reverse mortgage borrowers in general, and those who are likely to default on their loans, more specifically.

The research, conducted by a team at The Ohio State University under funding from the Macarthur Foundation in partnership with the Department of Housing and Urban Development, sought to analyze CredAbility counseling data for 30,000 individuals who went through reverse mortgage counseling between 2006 and 2011.

HUD plans to use the findings toward development of a reverse mortgage financial assessment the agency tells RMD will be released this fall.

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Initial findings of the research show that limitations on the initial withdrawal of the loan may reduce the likelihood of future default by more than 20%, supporting the recent program change that restricts access to upfront funds for any borrowers who consider a fixed rate loan. Further, the research notes access to the program will be restricted by that same limitation by a similar proportion—largely a trend already realized by the lending community.

Similarly, a credit limit was found to be effective in reducing defaults, with a 580 FICO limit projected to reduce defaults by 37%, but only reduce volume by about 14%.

Contrary to popular belief that the additional financial assessment overlays will “rule out” a substantial proportion of borrowers who can utilize reverse mortgages under the current rules, the Ohio State findings include point to a smaller number of borrowers than anticipated who are likely to be denied by certain criteria such as a credit overlay.

“We were surprised more individuals were not below the low credit threshold,” says researcher Stephanie Moulton, PhD, a professor at the John Glenn School of Public Affairs at Ohio State. “We were worried any kind of a credit score threshold would crowd out a lot of people.”

According to the data collected by CredAbality and analyzed by the researchers, the average credit score for those who went through counseling and subsequently took out a HECM was 693—just slightly lower than the average senior credit score, and higher than the average credit score of those counseled of 678.

Though actual overlays were not tested during the research, the effects were simulated based on the profiles of those borrowers in the data set who received HECMs between 2006 and 2011.

“The credit limit impact is actually pretty low on volume and big on default rate reductions,” Moulton says. “It’s important as an industry to think about default, but also access. If the credit limit is not as detrimental as we thought, that’s an important takeaway compared to certain other criteria.”

Additionally, income at origination was not a significant factor predicting default, after controlling for credit characteristics.

“It’s more about people who have missed debt payments,” Moulton says. “No one has found resounding effects from income all by itself.”

The industry has been working with HUD on the implementation of a financial assessment for several years, with MetLife having implemented its own financial assessment in 2011, which it later revoked, prior to exiting from the reverse mortgage business.

HUD has said the financial assessment is likely to mirror strongly guidance that has been developed by the National Reverse Mortgage Lenders Association.

The final rule is forthcoming from HUD.

Written by Elizabeth Ecker

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  • Although this data may be interesting, has there ever been a study on the exact cause of these foreclosures? All I have ever seen or heard is that as an industry, is the 10% foreclosure rate. What I have never seen is how that is broken down? How many are because they have not paid their taxes and exactly how long haven’t they been paying them? What is the percentage of borrowers that are still living in their homes that are in default vs loans that are in default after the last borrower has either passed away or had to move from the home?
    It may just be me, but I have not seen this data which seems to be the driving force behind Financial Assessment? If I have missed this can someone please point me to this information?

  • I have not seen a default breakdown either and would be interested in reviewing one, if such data even exists. For those of us that have been in the industry for a while and actually track borrower data, the results of this study come as no surprise. There were so many chicken littles crying about the financial assessment, I was no among them. There are too many sheeple in this industry and not enough leaders. The anemic state of the majority of industry players astounds me, the lack of innovation and vision is down right embarrassing. The industry needs new, fresh, disruptive players and I believe they will come.

  • “Similarly, a credit limit was found to be effective in reducing defaults, with a 580 FICO limit projected to reduce defaults by 37%, but only reduce volume by about 14%”.

    “Contrary to popular belief that the additional financial assessment overlays will “rule out” a substantial proportion of borrowers who can utilize reverse mortgages”.

    With the current volume another 14% reduction is substantial.to me!

  • >>the average credit score for those who went through counseling and subsequently took out a HECM was 693

    How’d they determine what the FICO scores were? The credit reports for my clients have never included FICO scores.

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