The Center for Retirement Research at Boston College is predicting a drop in loan defaults by new reverse mortgage borrowers thanks to changes to home equity conversion mortgage (HECM) rules implemented in 2013 and 2015, according to an issue brief released in July.
The “vast majority” of borrowers are approved for reverse mortgages through the program administered by the Department of Housing and Urban Development, the brief found. The program protects borrowers from the risk that the lender won’t be able to provide funds and protects the lender from the risk that the borrower’s loan balance will exceed the property’s value when it’s sold.
The property could end up in foreclosure, the brief noted, if borrowers exhaust their HECM funds, which the lender may use to pay property taxes and insurance payments borrowers can’t make on their own.
“In the wake of the financial crisis, a rising default rate – which hit 10% in 2013 – coupled with a negative balance in HUD’s insurance fund generated concerns about the plight of troubled borrowers and the program’s solvency,” according to CRR.
HUD announced changes in 2013 to HECM rules, including limits on how much borrowers can withdraw initially, and an assessment of their ability to pay property taxes and homeowners insurance prior to approving the mortgage.
As of 2013, borrowers could only take 60% of the initial principal limit on their reverse mortgage in the first year. The new underwriting rules took effect in April 2015.
Those changes may well have a positive effect. CRR referred to a 2015 study published in the Journal of Urban Economics, and conducted by Stephanie Moulton, Donald Haurin and Wei Shi of Ohio State University, that found withdrawal limits and escrow requirements significantly reduced the probability of default. They also reduced the likelihood that consumers would take out a reverse mortgage at all.
The study analyzed confidential data from ClearPoint Credit Counseling, a nonprofit that provides financial counseling to consumers, on households that received debt counseling services between 2006 and 2011, including demographics, credit scores and other financial health metrics. Of the almost 28,000 households that received counseling, 58% took out a reverse mortgage. That information was compared to data from HUD on reverse mortgage originations, withdrawals, terminations and defaults.