Association for Public Policy Analysis & Management

Home equity comprises a substantial share of the wealth of senior households.  Homeowners ages 62 and older have an additional option to access home equity: a federally insured reverse mortgage or Home Equity Conversion Mortgage (HECM).  While HECMs can be a relatively high cost way of extracting home equity, they have several advantages including limited underwriting, no monthly payments, and the ability to permanently lock-in existing house price gains (Moulton et al. 2014; Haurin et al. forthcoming). Following the financial crisis, the origination of HECMs spiked from 5 percent of all types of home equity extractions by seniors in 2006 to 12 percent in 2009 (Moulton et al. 2015). 

This analysis examines how equity extraction, including but not limited to equity extracted through reverse mortgages, affected the financial well-being of seniors both during and after the Great Recession.  Using a panel dataset of credit records as well as survey data on household wealth and consumption, we compare the financial well-being of seniors who extracted home equity using reverse mortgages to those who extracted home equity using other mortgage products and those who did not extract any home equity for the period 2006 through 2014.  We combine data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP) with the authors’ unique credit panel dataset of HECM borrowers. 

To estimate the impact of equity extraction on changes in credit profiles for senior homeowners, we use coarsened exact matching (CEM) to match seniors extracting equity through a HECM in the HECM dataset to otherwise similar seniors in the CCP dataset with a forward equity extraction at the same point in time (HELOC, cash-out refinancing, or closed-end second lien). We treat the baseline period (for matching) in the HECM and CCP sample (time t) as the quarter immediately prior to the equity extraction. The resulting dataset includes nearly 75,000 observations, of whom more than 11,000 extracted equity through a HECM.

Our findings indicate that about one-fourth of seniors extracting equity through a HECM experience a credit shock in the year prior to extraction, as indicated by a drop in credit score of 30 or more points from the prior year. After originating a HECM, the credit profile of HECM borrowers begins to recover steadily for the three subsequent years observed in the sample.  Extracting equity through a HECM may enable senior households to recover more quickly from an adverse shock than otherwise similar senior households experiencing a shock who do not extract equity or who extract through forward mortgage channels that require a monthly payment.  These findings have important policy implications. The federally insured HECM program has undergone significant reforms in recent years to improve outcomes for borrowers and shore up the mutual mortgage insurance fund backing the program. We use our results to simulate the impact these reforms may have on the take-up of HECMs among seniors with credit shocks, had these policy changes been in place during our observation period.