Credit Shocks More Likely to Jumpstart Reverse Mortgage Buying Decisions

Reverse mortgage borrowers are more likely to have experienced a credit shock during the time leading up to their decision to get a Home Equity Conversion Mortgage (HECM) than compared to borrowers using other types of home equity extraction methods, according to recent findings from Ohio State University.

The research, conducted by OSU in collaboration with the Department of Housing and Urban Development, MacArthur Foundation, Social Security Administration and the Federal Reserve Board, aims to highlight the impact of reverse mortgages on longer-term credit outcomes.

“We’re tracking reverse mortgage borrowers and we’re comparing them to senior borrowers in the forward [mortgage] market that extract equity through other channels, as well as non-extracting seniors,” said Stephanie Moulton, associate professor at OSU’s John Glenn College of Public Affairs.


Moulton, who is the principal investigator on this multi-phase analysis of the financial decision making of seniors considering reverse mortgages, presented her recent findings at the annual National Reverse Mortgage Lenders Association conference in Chicago last month.

“The research question is really trying to understand what happens to people who get a reverse mortgage after they extract equity,” Moulton said during a panel discussion on new reverse mortgage research.

This means examining how the credit outcomes of reverse mortgage borrowers changed, relative to senior homeowners who are extracting through other channels, including home equity loans, home equity lines of credit (HELOCs) and cash-out refinances. Researchers also compared these results to seniors who are unwilling or unable to borrow against their home equity.

Researchers relied on data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel, which is a 5% random sample of all credit profiles in the U.S. This allowed them to classify whether or not somebody in the credit sample extracted home equity through a HELOC, second lien closed-end mortgage or a cash-out refinance between 2008-2011.

Since this data excluded reverse mortgages, the researchers merged in a separate panel data set using HUD HECM data to show reverse mortgage borrowers that extracted equity during the same four-year period. Researchers then drew a random sample of seniors in the population who don’t extract equity during that time period.

What they found was seniors extracting equity through HECMs are more likely to undergo a credit shock within two years prior to extraction—30% compared to 15% of the general population.

“I think that is really important to keep in mind,” Moulton said. “As we look at the credit outcomes of people who get reverse mortgages, we need to remember that they may have come [into the HECM program] more credit-constrained.”

At the time of equity extraction, about 25% of reverse mortgage borrowers had delinquencies of being 60 days past due in the previous 12 months on their credit file. This compares to about 2% of HELOC borrowers, 12% of home equity loan borrowers, 9% of cash-out refi borrowers and roughly 12% of non-extractors.screen-shot-2016-12-08-at-4-10-50-pm

When looking at credit score data, the average credit score for reverse mortgage borrowers was also lower compared to these other equity extraction channels. At the time of extraction, the average credit score for HECM borrowers was 695, compared to roughly 780 for HELOC borrowers and roughly 750 for all other extractors, non-extractors included.

But although HECM borrowers had a lower credit score at the time of extraction compared to their counterparts, their credit score improved three years into their reverse mortgage to an average reading of 704—almost as high (707) as it was two years prior to tapping into their home equity via a reverse mortgage.

This drop in credit score during the year prior to getting a reverse mortgage makes sense, Moulton said.

“These are households who have had some sort of shock that motivated them to extract equity,” she said. “It could have been the death of a spouse, a medical event, loss of income or assets, and this is being reflected in their credit profile. They had a shock and then it recovers after extraction.”

Similar patterns of recovery were observed when looking at credit card debt held by the various home equity extractors.

In the year prior to extraction, HECM borrowers’ credit card debt increases from about $6,000—roughly in range with other extractors—up to nearly $7,400. So while HECM borrowers have an increase in credit card debt in the year prior to extraction, this debt drops down to about $3,600 and then stays low for three years post-extraction.

“With other extraction channels, you might get a little bit of a drop because they might use some of the equity to pay off the credit card balance, but you do not see that same dramatic increase and then decrease [as with HECM borrowers],” Moulton said.screen-shot-2016-12-08-at-2-32-09-pm

The OSU research fits in with all of the other work Moulton and her team has done on the take-up of reverse mortgages. Recently, the researchers presented a survey of longer-term outcomes of reverse mortgage borrowers.

Per this latest research, the biggest takeaways are that reverse mortgage borrowers vary significantly from other extractors in terms of the financial factors that impact their decisions to tap into their home equity.

“If somebody is having a crisis, they may turn to other forms of liquidity first and credit cards may be one of the things they turn to, to help resolve that crisis,” Moulton said. “But generally, we think credit card debt tends to be higher cost than mortgage debt.”

Written by Jason Oliva

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  • Don’t these findings support the idea that creating and maintaining the current financial hurdles to qualify for a HECM create a draconian barrier to getting HECMs? Dr. Moulton has suggested at least one less stringent method creating a far more potentially effective means to sift out consumers with a high propensity to default on property charges that she believes will result in less loss of endorsements.

    Try to explain the increase in case number assignments for June and July, 2016 in comparison to last year in light of the downward trend in endorsements for October and November 2016 when compared to endorsements for the same two months last year. Many have expressed their wisdom telling us that financial assessment is not draconian and that would be proven by not only the growth in endorsements but also a higher pull through rate. Where do we find either one? Five, ten, fifteen years from now?

    There is one adjective that fits our current HECM financial assessment and that is draconian (even unnecessarily draconian).

    Two events started serious efforts by FHA approved mortgagees to create HECM financial assessment. The first was the surprising announcement by OMB that it had amended the slightly negative credit subsidy for HECMs in the HUD budget for fiscal 2010 to show a positive $798 million credit subsidy. Within months the second piece of startling news came out telling us that property charge defaults within the active HECM portfolio base were reaching unacceptable levels.

    FHA did nothing wrong in creating the financial assessment we have today. The problem came from the inability of HECM approved mortgagees remaining after the departure of MetLife Bank to come together to present a reasonable approach financial assessment that HUD could adopt, at the same clamoring at HUD to give us one. This lack of cooperation and collaboration among mortgagees was most recently demonstrated in the ramp up to and sudden termination of the Extreme Summit.

    The question is not whether the HECM program will survive but rather how much longer will the industry go without sustainable recovery. Also the question must be asked as to how will HUD and Congress resolve HECM volatility seen in the MMI Fund and how will they resolve the problems regarding HMBS issuance? As the saying goes: “We live in interesting times.”

  • No, really? Most of us originators have known this for a long time. Many of my borrowers have come to me because they have been going through some kind of financial shock. Unfortunately, they do not normally come to me FIRST. Yet the financial assessments currently in place weed out a substantial portion of borrowers who do not have close to perfect credit histories. Good for the lenders and FHA, not so great for the borrowers. This needs work. I hope someone takes a look at this study and re-thinks how things are being done.

    • Agreed. My biggest beef is that collections & charge offs from over two years ago should not need an extenuating circumstance. I feel like we were led to believe the last two years is what matters when that’s not the case at all. What percentage of reverse mortgage borrowers have clean credit? We are primarily dealing with those using the product as a last resort, and as Laura says, they aren’t coming to us before encountering their first financial bumps in the road.

      I was just listening to the HUD update recording from the 2016 NRMLA conference last night and heard Mr. Caulfield (from HUD) talking about monitoring the pull through rates from case number to endorsement. What he is missing is that we are turning down customers left and right prior to them ever becoming a case number. Historically, we would have pulled case numbers on anyone willing to go through the process. If we did that currently, the pull through rates would be horrendous and red flags would be going up.

      People also talk about the industry being down 15% since FA was adopted. What if the industry would have been up 10% due to a hot real estate market without FA? It’s not as easy to measure the effect of FA when you don’t know if we would otherwise be increasing the number of HECMs closed in a year. Bottom line, it needs to be simplified and not left open to so much underwriter interpretation. I’m tired of having to take every loan to a second (or third) lender to get it closed.

      • Matt,

        Your comment is passionate and we agree on many points and where it lacks facts tries to generate its own stats.

        First we have no idea where endorsements would have been for fiscal 2016 without financial assessment. Were endorsements going to drop 25% last fiscal year instead of 15% if financial assessment not been implemented? What we do know is that endorsements fell 15% from fiscal 2015 to fiscal 2016 with no other rational basis for the drop than the implementation of financial assessment in April 2015.

        The pull through rate is already miserable and has plateaued in the low 60% on an annualized and modified basis since the end of fiscal 2012. During fiscal 2007 it was 97.5% and fell to about 80% in fiscal 2008. It generally continued going down until fiscal 2012. In fact the pull rate rate went from 59.5% in fiscal 2015 to 63.8% last fiscal year. So if anything the pull through rate went up but that was expected.

        The reason for the expected rise in the pull through rate was that many lenders were offering to look at preliminary apps before going to counseling so that consumers were not taking counseling with any illusions of closure when there was little way of getting out of underwriting.

        Thus your conclusion that fewer preliminary applicants are getting to the case number assignment stage seems at face value to be absolutely correct and that this point of measurement would provide meaningful information also appears true. The problem is as you point out no can measure that number. Even if we had that information the question becomes how many consumers are so unnerved by the idea of any financial assessment, they never enter the preliminary app process.

        I have no problem with your comment except to when you try to make things look (even realistically) worse than what they are. Things as reported are plenty bad enough.

    • Laura,

      Financial assessment in our industry is needed.

      What is not needed is the draconian type we have. Dr. Moulton has suggested a type which will drop the quantity of data we now collect and will also allow for more consumers to qualify without increasing (and perhaps decreasing) the current default rate for new HECM borrowers who ultimately stop paying property charges.

      Dr. Moulton would emphasize the use of credit scores. This would reduce labor both at the originator, processor, and underwriter levels.

      The question becomes will the lenders take this suggestion to HUD and plead for its adoption? So far the answer is a resounding no.

      • I agree that financial assessment is needed, but as I stated originally, it needs work. Your comment that what we currently have is draconian is a pretty accurate description in my opinion. What I do not understand is why won’t the lenders make use of a credit score driven system?

      • Laura,

        We are so close to agreeing but lenders must be in compliance with HUD requirements found in financial assessment or the alleged HECM will ultimately be endanger of not qualifying for reimbursement. Lenders cannot go to any system not adopted by HUD.

        Yet we need change. It is exactly this type of inertia on the part of lenders which has led to ridiculous losses we are seeing in the MMI Fund. It was clear that HUD was legally but questionably window dressing the ending balance of the HECM portion of the MMI Fund by transferring moneys from other MMI Fund programs. Even the US Treasury transfer would have been served transferred into some type of reserve account not associated with any MMI Fund program.

      • I understand the lenders have to comply with HUD requirements. I guess it only makes sense to me that both HUD and the lenders could come up with a solution which is better than what we have currently. A credit score driven system seems to work well in the forward market. Perhaps some considerations could be made for our borrowers’ age and income levels….then maybe the whole thing could be simplified for everyone.

        Too much to ask?

      • Laura,

        Thanks for clarifying. If only the lenders would push for this change. Right now, fear rules the industry more than anything else.

        Some come out and tell us that they are optimists and then go back into hiding. The only optimists I find are those who write these articles and those in other reverse mortgage publications.

        Back to the lenders, with endorsements so low, no one will take the initiative (especially after the Extreme Summit) because of the fear that things could get WORSE. Yet we need CHANGE to correct what is wrong with financial assessment. Dr. Moulton seems to think that there is a way of obtaining financial assessment with less loss in business. So who is fronting that position with HUD?

        Too much we find the industry and its representative, NRMLA, far too reactionary when at times both need to be proactive. The future can be bright IF the industry and NRMLA together make a concerted effort to push it that way.

        Am I blaming the lenders or NRMLA? The truth is no one is perfect but that does not mean we should quit trying to get it right. It is time to pick up the research of OSU and ask HUD if they will adopt it.

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