MortgageReverse

Yale Study Probes Reverse Mortgage Motivations, Racial Disparities

A new paper from a Yale University researcher takes a deep look at the reasons why some older Americans elect to take out reverse mortgages — and how racial and socioeconomic factors can play into their decision making.

The study, which appears in the journal The Gerontologist, consists largely of interviews with current or prospective reverse mortgage borrowers scattered throughout New England. Lead author Danya Keene, an assistant professor at the Yale School of Public Health, and her team grouped the results into categories based on respondents’ reasons for pursuing a Home Equity Conversion Mortgage.

For instance, single white homeowner Simone elected to take out a reverse mortgage to pay for travel and delay the use of other retirement savings products.

“She reasoned, later in the interview, that these other investments were appreciating faster than her home,” the researchers wrote. “By drawing on her home’s equity while living in it, she could ‘let her other financial investments stay and grow.’”

Needs-based borrowers included Tony, a widowed white homeowner who used a reverse mortgage to pay off his existing mortgage after the death of his wife. Even though he quickly spent the $55,000 he received from the loan on a vacation and monthly expenses, Tony told researchers that he was satisfied with his decision to take out a HECM.

“All I had to do was pay the insurance on the place, and the taxes, and that was it. You know, it was that simple,” he said. “It took a hell of a burden off your shoulders.”

But things weren’t so smooth for Beverly, a black homeowner who turned to a HECM after she was unable to sell her home — which she attributed to the “negative reputation” of her low-income neighborhood. She began to regret her decision after her health issues began to make living in a two-story house impractical.

“I wasn’t happy with myself after I did it, you know, but I did it,” she told the researchers. “The interest just keep going up, up, up. In that way, you’ll never be able to claim your home back because you already signed it over, and you’re not paying them anything; it’s theirs.”

In addition, the team found mixed feelings from 68-year-old married homeowner Rebecca, who is black, and 67-year-old single homeowner Walter, who is white. Both took out reverse mortgages to cover unexpected health costs, and ended up viewing the products as the best option in an overall bad situation.

“[Rebecca] explained that traditional home equity loans were not an option because the monthly loan payments would be unaffordable. The reverse mortgage offered Rebecca a potential escape from an untenable situation, but she considered it only a last resort,” the researchers wrote.

Walter was more blunt.

“I wouldn’t recommend the reverse mortgage as a first choice to anybody, ‘cause the upfront fees are enormous and I have to pay stinking mortgage insurance, which is really a huge cost of that loan,” he said. “I had no other option. Get out or do this.”

Next steps

Keene and the team admit that the sample size — 39 homeowners from the New Haven, Conn. area and five more from the Boston metro area —  was small and not necessarily representative; in fact, they noted that the “predatory reputation of reverse mortgages” may have turned some potential participants off from the team’s outreach.

But the researchers argue that the qualitative results of the study can provide guidance for future inquiries into the intersection of race and reverse mortgages. For instance, black respondents frequently cited troubles with selling their homes or securing other forms of credit as reasons why they turned to a HECM.

“These racially structured constraints and opportunities may similarly contribute to the need for reverse mortgages as foreclosure prevention tools among black homeowners,” the researchers wrote.

They also reached a conclusion that seemed to strike at the heart of a common perception in the reverse mortgage industry: Increasing borrower education may not always lead to better outcomes.

“The inequality we observe is not likely to be resolved through improvements in education about reverse mortgage loans,” the team wrote. “The majority of participants in our study were well-informed about the terms of the loans they considered or secured. Some took out the loans, despite the known trade-offs, because they had no other options.”

Written by Alex Spanko

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