Reverse

Spotlight: Risk Factors: A Data-Driven Approach to Reducing Default

Written by Lauren Daniels, as originally published in The Reverse Review.

Associate Professor Stephanie Moulton of the John Glenn School of Public Affairs at The Ohio State University wants to know why seniors make the financial decisions they do. Moulton is three years into a first of its kind multiphase study of thousands of seniors with the goal of understanding what over the cycle of a reverse mortgage. One of the first subjects the findings address is a serious concern for the industry as a whole: default.

Moulton spoke to The Reverse Review about her findings, how a common number may be the best line of defense in lowering default rates and what issues she will tackle next.

The Reverse Review: Before we get into the specifics of the study, tell me what piqued your interest in reverse mortgages. What inspired you to study the product?

Stephanie Moulton: Prior to going back to graduate school in the early 2000s, I worked for a nonprofit community housing organization. One of my favorite parts of the job was working with seniors who were considering reverse mortgages. I was one of the first certified reverse mortgage counselors. More than 10 years later, as a professor and researcher, I am excited to be able to engage in a different type of work that benefits this important population of seniors.

TRR: Tell me about the specifics of the study.

SM: This study is the first of its kind. Back in 2012, there was a headline-making report that showed about 9.4 percent of reverse mortgage borrowers were in tactical default. We wanted to see what indicators might predict a borrower’s risk. The goal is a meaningful look at the long-term well-being and outcomes of seniors who receive reverse mortgage counseling. We’re following a pool of more than 30,000 seniors who received reverse mortgages between 2006 and 2011, before the current changes in withdrawal limits and the like went into effect. We wanted to not only look at how to predict who is most likely to default, but also at how we thought removing that segment of the population will affect projected loan volume. The concern is once restrictions are in place, there are people who will no longer qualify for a reverse mortgage. Seniors who may otherwise need the help of a reverse mortgage may be driven out of the program.

TRR: What results have you uncovered so far?

SM: Credit score is a pretty good indicator of borrower risk. At first we were hesitant—credit score is such an important part of the forward mortgage market and we weren’t sure it was the right measure for the population of older Americans. The findings show setting a threshold of 500 or lower (and 500 is a very low score), reduced default by 12 percent, and if you raise the threshold to 580, which is still pretty low, it reduces default by nearly 40 percent. Furthermore, the impact of the number of people removed from eligibility is low—not nearly the 20 percent of reverse mortgage seekers who are disqualified by the withdrawal limits.

That’s not to say that all seniors with previous credit issues should be denied access to reverse mortgages, but seniors with a history of delinquencies are more likely to struggle to pay their property tax and insurance. I think that if you fall below some certain credit score or if you have a history of missing property tax and insurance payments, lenders should advise and maybe even require borrowers to set aside funds to cover those costs. The goal of a reverse mortgage is to make sure seniors are able to maintain their home.

TRR: Any surprising findings?

SM: Income was not associated with increased default risk. Once you take into account credit score, income isn’t significant anymore.

TRR: What do you think the industry can learn from the data you’ve collected?

SM: I think some of the descriptive statistics are actually the most interesting. The data allows us to provide a better picture of the credit profiles and demographics of seniors who seek reverse mortgages, and then to explore how characteristics at the time of origination are associated with long-term outcomes like property tax and insurance default. For example, a very small proportion of reverse mortgage borrowers have very low credit scores. The average score was 693 [editor’s note: the national average is 723]. Targeting some additional interventions to those with low credit scores, like tax and insurance set-asides, could have a substantial impact on reducing default.

TRR: Are you hoping the results will influence HUD policy when it comes to the program?

SM: HUD’s Office of Policy Development and Research has been a strong supporter of our work, providing us with a grant that has allowed us to expand our analysis, and providing ongoing expertise and technical support with the HECM loan data. We have been able to share our findings with HUD staff, and hope that the information is helpful as they make policy decisions. We understand that research is only one part of important policy decisions, but we are optimistic that our analysis will be useful as part of the decision-making process.

I hope that this kind of research can help bring more confidence and understanding to the market. Seniors are going to need a way to access their home equity, particularly the baby boomers. If we can help shed some light on this and inform how the product is used, it may spark innovation.

TRR: Are there changes you’d like to see made to the HECM program?

SM: As a researcher, I defer to the experts in the industry and at HUD regarding specific programmatic changes. But generally, I think changes that can help enhance the long-term viability of the product are important.

TRR: What are your plans for the study moving forward? Are there other aspects of the program you’re examining?

SM: We have ongoing surveys in the field right now; in one we are segmenting our 30,000 respondents into three different groups: people who received the reverse mortgage, people who decided not to get a reverse mortgage, and individuals who got a reverse mortgage and terminated it while they are still living. We want to know what happened after they made their decisions and where they are now. We also have a lot more questions we want answers to: What motivated respondents to seek a reverse mortgage? What have they used the money for? All of this information will be coming out in the next three or four years.

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