How federally insured reverse mortgages affect the credit outcomes of older adults

• Author: Samuel Dodini,Stephanie Moulton,Maximilian D. Schmeiser,Donald Haurin
• DOI: http://doi.org/10.1111/joca.12331
• Published date: 01 December 2020
• Date: 01 December 2020

ARTICLE

How federally insured reverse mortgages affect

the credit outcomes of older adults

Stephanie Moulton

1

| Donald Haurin

2

| Samuel Dodini

3

|

Maximilian D. Schmeiser

4

1

John Glenn College of Public Affairs,

The Ohio State University,

Columbus, Ohio

2

Department of Economics, The Ohio

State University, Columbus, Ohio

3

Department of Policy Analysis and

Management, Cornell University, Ithaca,

New York

4

Data Science, Twitter Inc., Seattle,

Washington

Correspondence

Stephanie Moulton, John Glenn College

of Public Affairs, The Ohio State

University, Columbus, OH 43210.

Email: moulton.23@osu.edu

Funding information

John D. and Catherine T. MacArthur

Foundation, Grant/Award Number:

11-98631-000-USP; U.S. Department of

Housing and Urban Development, Grant/

Award Number: RP-12-OH-004; U.S.

Social Security Administration, Grant/

Award Number: UM16-12

Abstract

This study examines how the extraction of home equity

through the federally insured Home Equity Conversion

Mortgage (HECM) affects the credit outcomes of older

adults. We use data from the Federal Reserve Bank of

New York/Equifax Consumer Credit Panel, sup-

plemented with a unique credit panel data set of

reverse mortgage borrowers. Using matched sample

difference-in-differences with individual fixed effects,

we estimate credit outcomes for older adults who

borrowed through a HECM between 2008 and 2011,

relative to older homeowners not borrowing from

home equity. Our results indicate that the HECM is

associated with a short-term reduction in revolving

credit card debt, as well as a reduction in the probabil-

ity of bankruptcy. We find some evidence of heteroge-

neous treatment effects, where older adults with higher

levels of consumer debt prior to originating a HECM

experience larger subsequent declines in debt, increases

in credit score, and steeper reductions in bankruptcy

rates.

1|INTRODUCTION

The amount of financial debt held by older adults in the United States has grown significantly

over the past two decades (Kim et al., 2012 Lusardi et al., 2017, 2020 Mayer, 2017 Brown

et al., 2019). Nonhousing debt, including credit card and other installment loans, increased

Received: 19 September 2019 Revised: 24 July 2020 Accepted: 10 September 2020

DOI: 10.1111/joca.12331

Copyright 2020 by The American Council on Consumer Interests

1298 J Consum Aff. 2020;54:1298–1327.wileyonlinelibrary.com/journal/joca

more than 300% for adults age 62 and older from 1992 to 2016.

1

The proportion of older

homeowners with mortgage debt has more than doubled, from 20% in 1992 to more than 40%

in 2016.

2

There is evidence that older adults increasingly rely on debt for liquidity. Adults age

65 and older use credit cards for more than 30% of their consumer payments—the highest rate

of any age group (Fulford and Schuh, 2015). And, among older adults using a credit card, 45%

do not pay off their balances in full each month (Fulford and Schuh, 2015).

While debt allows households to smooth consumption, monthly payments associated with

debt can strain household budgets, particularly for financially vulnerable older adults with lim-

ited incomes (Dunn and Mirzaie, 2016 Haurin et al., 2019). For example, about 30% of

homeowners with a mortgage age 65 and older pay more than 50% of their income on housing

costs (JCHS, 2014). A growing proportion of older adults exhibits difficulty repaying their debts,

with bankruptcy rates from 1991 to 2016 increasing by more than 200% among adults age 65

and older, a higher rate of increase than any other age group (Greenhalgh-Stanley and

Rohlin, 2013 Thorne et al., 2018); as a result, the bankruptcy filing population is aging faster

than the population as a whole (Fisher, 2019). Further, research has documented a link

between cognitive decline and the cost of debt, with older consumers paying higher interest

rates and fees on their debts than middle aged consumers (Agarwal et al., 2009 Lusardi

et al., 2020). The heightened financial vulnerability of older adults places them at risk of paying

too much for credit or being victims of financial scams (Lee et al., 2011 Moschis et al., 2011).

An alternative form of debt available only to older adults over the age of 62 is the federally

insured reverse mortgage, the Home Equity Conversion Mortgage (HECM). HECMs allow

homeowners to extract home equity without repayment until the last borrower exits the home,

often upon death. As a government-insured program, HECMs are traditionally viewed as a

means to “supplement Social Security, meet unexpected medical expenses and make home

improvements”(U.S. Department of Housing and Urban Development, 2016). While HECM

borrowers do use liquidated home equity for these purposes, more than half report using the

proceeds from the reverse mortgage to payoff forward mortgages or other consumer debt (Moul-

ton et al., 2017). HECMs may thus serve as a substitute for other forms of consumer debt, reduc-

ing balances on credit cards other nonhousing debt and lowering the risk of financial hardship.

On the other hand, liquefying housing wealth through a HECM may lead to increased con-

sumption and thus no change in or an increase in consumer debt. The purpose of this paper is

to estimate the relationship between reverse mortgage debt and other forms of debt held by

older adults, as well as the effects of taking out a reverse mortgage on bankruptcy—an indicator

of severe financial hardship.

The proportion of older adults with HECMs grew substantially during the Great Recession,

with the number of HECMs originated per year increasing from 6,640 in 2000 to a peak of

114,692 in 2009 (Shan, 2011 Haurin et al., 2016). While part of this increase is likely due to

house price increases, the origination of new HECM loans remained relatively high even as

house prices fell through 2011—a period during which other types of mortgages and forms of

consumer credit were contracting (Moulton et al., 2015a). During this time period, HECMs did

not have credit or income-based underwriting requirements. Older adults who were unable to

afford a monthly payment on a traditional mortgage could liquefy their home equity through

a HECM.

Access to liquidity through borrowing is a fundamental component of consumer financial

well-being (Karlan and Zinman, 2009 CFPB, 2015; Fulford, 2015). For older adults with limited

incomes, borrowing on credit can provide a means for covering unexpected expenses such as

negative health shocks, yet the repayment of debt can be particularly burdensome (Kim

MOULTON ET AL.1299