How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households

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Abstract

This paper examines how the extraction of home equity, including but not limited to equity extracted through reverse mortgages, affects credit outcomes of senior households. We use data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel, supplemented with our unique credit panel dataset of reverse mortgage borrowers. We track credit outcomes for seniors who extracted equity through cash-out refinancing, home equity lines of credit or home equity loans between 2008 and 2011, and a random sample of nonextractors. We estimate differences-in-differences by extraction channel using individual, fixed-effects panel regression. We find that seniors extracting equity through reverse mortgages have greater reductions in consumer debt, and are less likely to become delinquent or foreclose three years post origination relative to other extractors and nonextractors. These effects are greater among households who experienced a credit shock within the two years prior to loan origination. To help isolate the effect of the extraction channel on credit outcomes, we re-estimate our models with a matched sample of consumers at the time of extraction. We find that otherwise similar HECM borrowers have larger reductions in credit card debt post-extraction than other equity borrowers and non-borrowers, with no significant difference in the rates of delinquency on non-housing debt post extraction. For HECM borrowers, we find that increased initial withdrawal and increased monthly cash flow contribute to the reduction in credit card debt.

Key Findings

  • Senior homeowners can extract home equity through different borrowing channels, and the channel through which they borrow equity is associated with different credit trajectories both before and after extraction.
  • Senior homeowners extracting equity through a home equity line of credit (HELOC) tend to have the strongest credit profiles of all types of borrowers prior to extraction that remain strong post extraction (e.g., high credit scores, low rates of delinquency). By contrast, senior homeowners extracting equity through a reverse mortgage had lower credit scores at the time of origination and were more likely to have had a credit shock prior to getting their loan than other borrowers and non-borrowers. The credit shock is observed as a drop in credit score of 25 or more points and an increase in credit card balances within the two years prior to loan origination.
  • While there is some decline in non-housing debt across all borrowing channels in the three years after extracting from home equity, the decline is the greatest among seniors extracting home equity through a reverse mortgage, and particularly for credit card debt.

Citation

Moulton, Stephanie, Donald Haurin, Samuel Dodini, and Maximilian D. Schmeiser. 2016. “How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households.” Ann Arbor, MI. University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2016-351. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp351.pdf

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Project

Paper ID

WP 2016-351

Publication Type

Working Paper

Publication Year

2016
pavement-enterprise