Association for Public Policy Analysis & Management

The amount of financial debt held by seniors in the U.S. has grown substantially over the past decade, both in dollar terms and as a proportion of seniors carrying debt into retirement. Prior research links higher levels of debt to increased psychological stress and decreased physical health (e.g. Dunn & Mirzaie 2016). For seniors, these effects may be exacerbated by fixed incomes and the inability to offset higher monthly debt obligations through increased labor supply.

Our study focuses on a unique alternative to traditional types of debt available only to seniors in the U.S.-- the federally insured Home Equity Conversion Mortgage (HECM). The HECM allows seniors to consume from the equity in their homes without monthly payment obligations. Obtaining a HECM may affect a senior’s level of debt stress in multiple ways. First, any existing mortgage payment is eliminated, likely reducing stress. Second, HECMs converts illiquid home equity into a liquid asset and these funds can be used to pay down credit card and installment debts, again likely reducing debt stress. Third, HECMs require a nontrivial origination fee and the loan balance rises due to compounding interest and mortgage insurance payments, the latter required by FHA. This debt likely causes stress; however, it is not theoretically clear whether this stress is similar to that for similarly sized standard mortgages because HECM debt is due only at the termination of the contract, which may be after the senior’s death. We are the first to test whether reverse mortgage debt causes stress similar to that of standard mortgages.

We study unique survey data collected in 2014-15 from 1,050 seniors who were counseled regarding obtaining a HECM in 2010-11: 70 percent originated a HECM. The survey data is linked to demographic data collected at the time counseling as well as longitudinal HECM loan and credit data, allowing us to track the debt profiles of households over time. Using 2SLS, we estimate the impact of HECM debt on the perceived debt stress of seniors in three to four years later. We compare estimates for HECM debt to the amount of stress associated with non-HECM mortgage debt and other types of consumer debt. Instruments include lagged values of debt and asset levels and the location of HECM originating bank branches.

Preliminary results indicate that HECM debt causes stress at the same per dollar rate as that of standard mortgages and thus the delay in repayment appears to have no effect on seniors’ response to that debt. Consumer debt causes the greatest stress per dollar, while having unused credit reduces stress. Greater income, financial assets, and house value reduce debt stress. To the extent that seniors used HECM proceeds to pay down consumer credit balances, debt stress should be reduced, an important outcome of the FHA HECM program.

References:

Dunn, Lucia & Ida Mirzaie. 2016. “Consumer Debt Stress, Changes in Household Debt, and the Great Recession,” Economic Inquiry, 54(1): 201-214.