Reverse Mortgage Demographics and Collateral Performance

Abstract

Home Equity Conversion Mortgage (HECM) data seem to confirm two concerns about these federally insured loans offered to older US homeowners. First, originations are rare, consistent with a familiar disinterest in extracting home equity through sale among older owners, even those with low wealth. Second, moral hazard and adverse selection appear to operate on HECM's implicit home price insurance. Demographics mitigate both concerns. Consistent with greater demand among those with low wealth, HECM loans are more common, more responsive to price appreciation, and more intensively used in neighborhoods where large fractions of homeowners are black and Hispanic, and where incomes and property values are below metropolitan averages. The correlation between minority share of homeowners and late-2000s home price busts explains most observed selection into HECM on price appreciation within metropolitan areas. Selection on price movements and demographics explains away roughly half of poor collateral performance in HECM loans that has been attributed elsewhere to strategic undermaintenance.

Keywords: Mortgages, Housing Demand, Social Security and Pensions, Portfolio Choice, Insurance

JEL Classification: G21, R21, H55, G11, G22