Reverse Mortgage Retrospective: How Recent Policy Changes Affected Government-Insured Reverse Mortgage Originations and Performance

This discussion paper analyzes the outcomes of recent policy reforms to the federally insured reverse mortgage program. Prior to these reforms, more than one out of 10 older adults with a Home Equity Conversion Mortgage (HECM) was reported to be in default on the loan for failure to pay property taxes or homeowner’s insurance payments. We study the effect of two major types of policy reforms: one that restricted the amount of funds available to a borrower, and the other that introduced underwriting requirements through a financial assessment for the first time in the program’s history. Our primary data set includes HECM loans originated between 2012 and 2015, with monthly loan performance through May 2019. We observe a significant reduction in the three-year rate of tax and insurance default before and after the policy reforms, from 8.7% to 2.2%. However, some of this reduction is offset by a corresponding increase in lender payment of these expenses out of a borrower’s line of credit. We also observe that about two-thirds of HECM borrowers are fully drawn on their line of credit within three years of origination, placing those with unscheduled draws at risk of future default. In addition to changes in default and draw behavior, policy reforms during this time period slowed the speed at which HECM borrowers could withdraw equity and reduced the total amount of equity that can be withdrawn by the borrower. We document these facts and discuss implications for policy.