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Reverse mortgages have the potential to become more popular as more households with insufficient income reach retirement, according to a study done by the Center for Retirement Research at Boston College.
Despite the possibility for increased popularity of reverse mortgages, or HECMs (Home Equity Conversion Mortgages), concerns have risen over an increased default rate for borrowers.
To respond to the concerns, the report states that HUD, starting in 2013, began restricting initial withdrawals as well as introducing criteria for underwriting. With these policy changes, property taxes as well as insurance default could potentially reduce by 50 percent.
The report states one of the concerns about implementing underwriting criteria is that it could significantly reduce the take-up of loans, therefore possibly conflicting with the program’s public mission to balance the goals of high take-up rates as well as low default rates.
However, the simulated impact of credit-based underwriting standards on these loans’ take-up is estimated to be minimal, especially when such standards are paired with a required set-aside for tax and insurance payments instead of a hard cutoff.
The report states that the collective impact of both policies could reduce take-up by 12 percent attributed to the restrictions on the initial withdrawal amount instead of the underwriting criteria. Yet, this impact on take-up is relatively minuscule for a larger reduction in estimated defaults.
In order to assess the effects of the new rules, the report used a “unique” data-set linking borrower characteristics to their loan activity and the results showed that the new rules could reduce default rates by up to 50 percent while having only a small impact on take-up.
Additionally, the study relied on data that compared a variety of borrowers on a large scale. The data found concluded that newer policies are helping reduce default rates across the board.
Though, only 2 percent of older Americans who qualify currently hold a reverse mortgage, it has been projected that demand for these home loans in the past five years has exponentially increased.
