Academic journal article Cityscape

Reverse Mortgage Motivations and Outcomes: Insights from Survey Data

Academic journal article Cityscape

Reverse Mortgage Motivations and Outcomes: Insights from Survey Data

Article excerpt

Introduction

Equity in a home can serve as an important source of supplemental income in retirement. Indeed, home equity makes up a substantial portion of wealth for senior households. Approximately 79 percent of households age 65 or older owned a home as of the beginning of 2016 (U.S. Census Bureau, 2016) and equity in owner-occupied homes comprises a major source of wealth for most seniors (CFPB, 2012; Sinai and Souleles, 2008). As of 2013, the average senior in the United States had about $200,000 in net equity (Rosnick and Baker, 2014). Homeowners may not be willing to sell their homes to access the equity, however, and may be unwilling or unable to make additional payments that are required to borrow equity from their home using traditional mortgage products.

Reverse mortgages are designed to address this tradeoff by allowing seniors to draw down equity without selling their home and without incurring a monthly mortgage payment. The reverse mortgage loan and the accumulated interest is repaid when the individual dies, moves out of the home, sells the home, or is foreclosed upon due to unpaid property taxes and homeowner's insurance, which remain the obligation of the borrower. The most widely used reverse mortgage product is offered by the Federal Housing Administration's Home Equity Conversion Mortgage (HECM) program, first initiated in the Housing and Community Development Act of 1987.1

Since program inception through 2015, nearly 1 million HECMs have been originated, more than 80 percent since fiscal year (FY) 2006, with peak volume in FY 2009 (Haurin et al., 2016; NRMLA, 2016). Although only about 2 percent of seniors currently hold reverse mortgages, the demand for reverse mortgages has been projected to grow as the baby boomer generation enters retirement with low levels of assets outside the equity in their homes (Munnell and Sass, 2014; Nakajima and Telyukova, 2014; Sacks and Sacks, 2012; Salter, Pfeiffer, and Evensky, 2012). Projections of demand rely on assumptions about seniors' perceptions of reverse mortgages and anticipated uses of extracted equity. For example, to the extent that seniors use reverse mortgages to pay off forward mortgage debt, an increase in the proportion of seniors entering retirement with mortgage debt could lead to increased demand for reverse mortgages.2

A primary goal of this article is to inform assumptions that researchers and policymakers can use to model demand for and takeup of HECMs. Given the small size of the market, previous research on the characteristics of reverse mortgage borrowers and their motivations for seeking reverse mortgages is limited. Studies estimating potential demand generally rely on survey data of the senior population (Mayer and Simons, 1994: Nakajima and Telyukova, 2014). A few early descriptive studies examined the differences between seniors obtaining reverse mortgages and seniors in the general population (for example, Redfoot, Scholen, and Brown, 2007; Rodda, Herbert, and Lam, 2000).

Since the time of these studies, substantial policy changes have occurred to the HECM product and also changes have occurred in the macroeconomic environment. Our article updates and expands previous literature by describing the characteristics of more than 1,700 households that sought counseling for a reverse mortgage between 2006 and 2011; of those households, 74 percent obtained a reverse mortgage. Using survey data collected as part of the Aging in Place (AIP) study, we summarize self-reported motivations for seeking a reverse mortgage, including reasons for not getting a reverse mortgage, if applicable. Respondents also indicate the extent to which particular individuals influenced their decision, including their experiences with reverse mortgage professionals (for example, counselors and lenders).

We also consider how households that seek reverse mortgages compare with the general population of senior homeowners. We supplement the AIP data with data collected during the reverse mortgage counseling session, including household financial and demographic characteristics. …

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