In a commissioned study, U.S. Department of Housing and Urban Development The (HUD) Office of Policy Development and Research (PD&R) aimed to assess the state of the Home Equity Conversion Mortgage (HECM) program in 2022 over a 20-year period.
The study, released late last year, looked at three core elements of the effectiveness of HECM programs from 2000 to 2020. The study was conducted by the analytics firm. SP Group LLC and its subcontractors Econometrica Inc.
RMD already explored a section on the implementation of various HECM policies over that period, but the report also included a detailed section on the impact the program has had on borrowers over the last 20 years.
Borrowers tend to be young, single, and elderly.
As actor Tom Selleck said in a commercial: American Advisor Group In 2019, reverse mortgage programs served “more than one million Americans.” The study’s section on borrower characteristics backs up this figure: Federal Housing Administration (FHA) approved 1.1 million HECM loans between October 1, 1999 and September 30, 2020.
Using HUD-administered data on these loans, the researchers compiled “several basic characteristics and trends of the HECM borrower population over this period,” including age-related data showing that younger generations in the eligibility range made up the majority of borrowers.
“[I]In general, the age distribution of HECM portfolios skews toward the younger end of the senior age range, with 45 percent of HECM borrowers between the ages of 62 and 70,” the report states. “Women (68%) are more than twice as likely to use the HECM program as men (32%), representing a much higher ratio of women to men than the general senior population.”
Additionally, about 60 percent of HECM borrowers live in single-person households, with a similar percentage being unmarried borrowers, “a much higher percentage than the unmarried population in the general senior population,” and the majority of borrowers are white.
Race, ethnicity, and economic status
The report goes on to say that 84 percent of HECM borrowers were white, 14 percent were black, and 2 percent were of other races. Whites made up the largest percentage of HECM borrowers over the last 20 years, “consistent with the predominance of whites in the general population during this period.”
Among non-white reverse mortgage borrowers during this period, the majority were black, with only about 6 percent identifying as Hispanic or Latino, a figure “lower than their share of the general elderly population,” the study states. “Non-Hispanic and non-Latino borrowers significantly outnumbered Hispanic and Latino borrowers in every year of the 20-year period covered by the study.”
Not surprisingly, the report categorizes the majority of HECM borrowers as “housing rich, income low.” U.S. Census Bureau From this data, they estimated the average income of a senior living alone to be $30,000 in 2019 dollars. The researchers added the annual income of HECM borrowers to provide a comparison point for actual borrowers and the average figure.
“Although two-thirds of HECM borrowers had annual incomes below the $30,000 threshold, most borrowers in the program had significant home equity and home values that were higher than average for the general senior population,” the report said.
The data shows that 43 percent of HECM borrowers owned homes valued at more than $300,000 in 2019, demonstrating the program’s contribution to providing “additional income security” to “home-rich, but income-poor” borrowers, the report said. “Furthermore, many borrowers attempt to withdraw large amounts from their HECM line of credit within the first month.”
Use of Proceeds
In 2011, HUD added a new section to the HECM loan application that began asking borrowers about how they planned to use the loan funds, so data for the entire review period is incomplete.
Since 2011, roughly half of borrowers have chosen only one reason, while the other half have chosen multiple reasons. Most borrowers who chose one reason (53%) chose “additional income” as their reason for obtaining a loan.
“This finding is consistent with the HECM program’s goal of providing seniors the ability to convert their home equity into supplemental income,” the report said.
A third of all post-2011 borrowers said they intended to use the loan proceeds to pay off an existing property lien, but the researchers argue there is no significant difference between this reason and the “additional income” choice.
The reason is that “extinguishing existing forward liens with HECM proceeds is a mandatory requirement of the program,” the study explains. “For borrowers whose forward mortgages are extinguished and converted into reverse mortgages, the HECM loan reduces forward mortgage payments and the net proceeds serve as a source of ‘additional income.'”
According to the survey, the third most common use of HECM proceeds was “leisure activities,” with 11% of borrowers citing this as their primary reason for obtaining the loan. Interestingly, this response was mostly concentrated within a specific time period.
“The majority of responses citing leisure as the primary reason were concentrated in 2016 and 2017,” the survey said. “It is unclear whether this response is due to changes in renter preferences or changes in data collection methodology during that period.”
These years were immediately after the revised non-borrowing spouse provisions in the HECM program went into effect and prior to the impact of the reduction in the principal limiting factor and the implementation of requirements that could result in a second property appraisal.
