Home Equity Conversion Mortgages: The Secondary Market Investor Experience
41 Pages Posted: 20 Oct 2017
Date Written: September 29, 2017
Abstract
We analyze Fannie Mae’s experience with the Home Equity Conversion Mortgage product. From 1993-2010, Fannie Mae acquired 492,465 of these loans, representing 75% of the total market. During this period, prior to recent program changes, credit screening was not an element in the underwriting process. Using loan and borrower characteristics, we model the probability of adverse terminations; and given adverse termination, loss severity. We then show how the addition of credit information affects our models. Finally, we use credit data to provide a counterfactual assessment of the extent to which better screening might have affected portfolio performance. We find that imposing a minimum borrower credit score of 620 would have prevented 22.7% of loans with credit information from being originated and, simultaneously, would have reduced adverse terminations by 31% and subsequent losses by nearly $250 million, or 32%.
Keywords: Reverse Mortgage, Seniors, Life-Cycle Consumption Smoothing
JEL Classification: J14, G21, R21, D15
Suggested Citation: Suggested Citation