A study commissioned by the U.S. Department of Housing and Urban Development (HUD) Office of Policy Development and Research (PD&R) in 2022 aimed to assess the state of the Home Equity Conversion Mortgage (HECM) program over a 20-year period.
The study, released late last year, examined three core elements of HECM program effectiveness between 2000 and 2020. It was conducted by analytics firm SP Group LLC and its subcontractor Econometrica Inc.
RMD already examined the study’s section on various HECM policy implementations during that time, but the report also included a detailed section on the program’s impact on borrowers during these two decades.
Borrowers tend to be younger, single seniors
As stated by actor Tom Selleck in a commercial for American Advisors Group (AAG) in 2019, the reverse mortgage program has served “over a million Americans.” The study’s section on borrower characteristics reinforces the figure, detailing that the Federal Housing Administration (FHA) endorsed 1.1 million HECM loans between Oct. 1, 1999, and Sept. 30, 2020.
By using HUD administrative data from these loans, the researchers compiled “some fundamental characteristics and trends of the HECM borrower population during this period,” including age-related data showing that those on the younger end of the qualifying spectrum made up the bulk of borrowers.
“[I]n general, the age distribution of the HECM portfolio is skewed toward the younger end of the senior age range, with 45 percent of HECM borrowers aged 62 to 70,” the report said. “Females (68 percent) tend to use the HECM program at more than twice the rate as males (32 percent), which is a much higher ratio of females to males than in the general senior population.”
Additionally, roughly 60% of HECM borrowers live alone in single-person households, with a similar share of borrowers being unmarried. This constitutes “a much higher percentage than the unmarried population in the general senior population,” the study notes, and the vast majority of borrowers are also white.
Race, ethnicity and financial status
The report goes on to state that 84% of HECM borrowers were white, 14% were Black and 2% were of another race. Whites comprised the largest portion of HECM borrowers during this 20-year period, ”consistent with their predominance in the general population during this time.”
The largest share of non-white reverse mortgage borrowers during the period were Black, while only about 6% of borrowers identified as Hispanic or Latino. That figure “is below the share represented in the general population of seniors,” the study reads. “Non-Hispanic and non-Latino borrowers vastly outnumbered Hispanic and Latino borrowers in all years the 20-year period of this study covers.”
Unsurprisingly, the report labels most HECM borrowers as “house rich and income poor.” It utilized U.S. Census Bureau data to estimate the median income for the senior population living in a one-person household at $30,000 in 2019 dollars. Researchers added the income of HECM borrowers annually to provide a point of comparison between actual borrowers and average figures.
“Although two-thirds of HECM borrowers had annual incomes below the $30,000 benchmark, most of the borrowers in the program had sufficient equity in their homes along with home values higher than average for the general senior population,” the report said.
Data indicated that 43% of HECM borrowers had homes valued at $300,000 or more in 2019 dollars, which helps to illustrate that the program helped to provide “extra income security to borrowers who are ‘house rich and income poor,’” the report said. “In addition, a high proportion of borrowers draw down large amounts of their HECM line of credit within the first month.”
Uses of proceeds
In 2011, HUD began asking borrowers how they planned to use their loan proceeds by adding a new section to the HECM loan application, so the data is incomplete for the full examination period.
Since 2011, roughly half of all borrowers chose only one reason, while the other half selected multiple reasons. Most of the borrowers who chose one reason (53%) selected “additional income” as their reason for obtaining the loan.
“This finding is in line with the HECM program goal of providing seniors the ability to turn their home equity into supplemental income,” the report said.
One-third of all borrowers since 2011 said they intended to use the proceeds to pay off an existing property lien, but the researchers argue there is not a lot of distinction between this reason and the “additional income” selection.
That’s because “extinguishing existing forward liens with HECM proceeds is a mandatory program requirement,” the study explained. “For those borrowers whose forward mortgage is extinguished and converted into a reverse mortgage, the HECM loan provides relief from forward mortgage payments, and the net equity proceeds provide a source of ‘additional income.’”
The third most common use of HECM proceeds was for “leisure activities,” the study said, with 11% of borrowers indicating this as their chief reason for obtaining the loan. Curiously, this response was largely concentrated within a specific time period.
“The bulk of responses indicating leisure as the primary reason were concentrated in the years 2016 and 2017,” the study said. “It is unclear if this response was due to a change in borrower preferences or an alteration in how the data were collected during those years.”
These years came shortly after revised non-borrowing spouse provisions went into effect for the HECM program but before it would feel the impacts of a reduction in principal limit factors and the implementation of a requirement that could lead to a second property appraisal.
As to borrowers, the ratio may be correct as to single men versus single women but then one has to consider joint borrowers. As to the composition of the joint borrowers, the number of men is most likely about equal to the number of women. Using that assumption, the percentage of women borrowers to men borrowers drops to 58% for women and rises for men to 42% through March 31, 2024.
As to the number of borrowers this loan has helped, the number is well over 1.8 million by March 31, 2024. Mr. Selleck (and his script writers) was a little late to HECM advertising. The number of borrowers reached one million sometime in the 4th quarter of calendar year 2011. HECM endorsements reached one million in the 4th quarter of calendar 2016.
Someone will have to explain how loan proceeds that have to be repaid to HECM mortgagees are actually income to anyone. Perhaps they meant cash inflow to borrowers and cash outflow to lenders (at least at the time of closing). As an industry originator used to say: “Every time our credit card limits goes up, my wife excitedly tells me how much more income we are making this year.” Not hardly.
The study says: “In addition, a high proportion of borrowers draw down large amounts of their HECM line of credit within the first month.” The explanation is easy. That phenomenon is not mysterious. It results from the mandatory payoff of existing liens on the property at closing. Only a relatively low percentage of HECMs close with no payoff of liens.
As the last item addressed in this comment, let us look at the assumption that HECM borrowers have low income. If the researchers are relying on the accuracy of HECM loan documents for this information especially for HECMs endorsed before 2015, they are relying on notoriously understated income information. Before financial assessment, income was poorly traced and reported. Even after financial assessment, at the point that the borrower meets the residual income test, further information is not generally rounded up. Yet few HECM borrowers make exorbitant amounts of income. Surely, HECM borrowers in the eyes of HUD are among the underserved in this country.