The U.S. Department of Housing & Urban Development’s Home Equity Conversion Mortgage (HECM) program is designed to allow seniors to extract equity from their home without home sale, with the policy intent of facilitating aging in place and financial stability. Since inception in 1989, nearly 900,000 HECM loans have been originated to senior households, the majority of which have been originated in the last ten years.[1] Despite the potential for growth in the HECM market, very little is known about the characteristics of those who obtain reverse mortgages compared with the general population.

Our study helps address this deficiency through the analysis of a unique data set of 30,000 senior households who sought counseling for a reverse mortgage between 2006 and 2011, including demographic characteristics, credit report attributes and economic information not typically available in analysis of reverse mortgage borrowers. For this analysis, we combine data on counseled households in our dataset from 2010 and 2011 with equivalent data from the 2010 wave of the Health and Retirement Study (HRS). Once weighted, the result is a nationally representative set of data on seniors.

We use these data to model the household level factors related to a senior’s decision to obtain a reverse mortgage. We first estimate a reduced form probit model to identify the effects of demographic and economic factors, informed by prior theoretical expectations.  Next, we explore the added effect of counseling on a household’s decision whether to obtain a reverse mortgage.  HUD requires that reverse mortgage borrowers obtain independent counseling prior to application for a HECM. In our dataset, about 60 percent of counseled households obtained a HECM. To identify the impact of counseling, we employ a truncated bivariate probit model, separating the decision to seek counseling from the decision to obtain a HECM, conditioned on having received counseling. Finally, we exploit a policy change in October of 2010 that substantially altered the content of the counseling session from strictly providing information to offering advice, using a required “Financial Interview Tool” (FIT).  Our data span the period prior to and after the introduction of the FIT instrument and thus we test for its effects on the application rate for HECMs and on applicants’ characteristics.

Our study is the first household level analysis of reverse mortgage originations. Through 2013, there have been no credit or income related requirements for obtaining a HECM and thus relevant data are not collected by mortgage originators. With our unique dataset, we are able to test, for the first time, theoretical arguments in the literature about the influence of household level factors such as minority status, education, economic distress and health status on the take-up of HECMs. Also, our analysis helps inform important policy questions about the characteristics of senior households obtaining federally insured HECMs, and the potential effect of counseling on borrower decisions. Of particular interest is identification of the extent that counseling moderates the effect of household characteristics on take-up.