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.
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.
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