The Federal Housing Administration’s (FHA’s) Home Equity Conversion Mortgage (HECM) program offers homeowners ages 62 years and older the ability to borrow against their home equity through a government-insured reverse mortgage.
A reverse mortgage is a loan against the home, where the borrower receives an upfront or ongoing monthly payment; the loan is paid back when the borrower leaves or sells the home.
At an time when seniors are sitting on a mountain of housing wealth and have anxiety about their finances, this should be a well-used program. Instead, despite rising senior population, participation decreased between 2011 and 2018, from 73,112 to 33,000 mortgages.
New data points made available in the most recent Home Mortgage Disclosure Act (HMDA) release offer fresh insight into the HECM program, which should help FHA officials who administer the program understand how to increase its use.
Five findings about the use of reverse mortgages and race add up to one big point: different racial and ethnic groups use reverse mortgages differently, so any changes to the HECM program should minimize potential for disproportionate impact by race or ethnicity.
Finding 1: Reverse mortgages were the least popular method for extracting equity in 2018
Homeowners who want to extract equity have four options (listed in order of their popularity in 2018):
- Open-ended home equity line of credit (HELOC): A loan that allows the borrower to gradually draw money. HELOCs are paid back via monthly installments. In 2018, 1.12 million HELOCs were originated.
- Cash-out refinance mortgage: A refinance mortgage with a loan amount that is larger than the outstanding balance on the original loan. The difference between the two is the equity cashed out. About 1.09 million cash-out refinance mortgages were originated in 2018.
- Closed-end home equity loan or closed-end second: A fixed loan amount that the borrower pays back through monthly installments. In 2018, about 296,000 closed-end seconds were originated.
- Reverse mortgage loan: A loan which is paid back when the borrower leaves the home. Per HMDA, 33,000 reverse mortgages were originated in 2018. This represents only 1.3 percent of the combined 2.5 million loans homeowners took out to extract equity in 2018 across all four products.
Finding 2: White and black Americans make up a larger share of reverse mortgage lending than forward home equity lending
White and black Americans constitute a greater share of the 33,000 reverse mortgage loans than they do of cash-out refinances, HELOCs, and closed-end seconds. White borrowers took out 77.7 percent of all reverse mortgages in 2018, and black borrowers took out 7.2 percent, for a combined share of 84.9 percent.
By contrast, white and black borrowers took out 72.8 and 3.0 percent of HELOCs respectively for a combined share of 75.8 percent. Among closed-end seconds, white borrowers comprised 68.1 percent and black borrowers comprised 5.4 percent, for a 73.5 percent total. Lastly, whites and blacks accounted for 63.0 and 6.0 percent respectively of cash-out refinances, representing 69 percent of all cash-out refinance loans in 2018. These results are summarized in the table below.
Finding 3: Asian and Hispanic Americans generally make up a larger share of forward home equity lending than they do of reverse mortgages
In contrast to white and black borrowers, Asian and Hispanic borrowers generally constitute a bigger share of forward equity than of reverse mortgage lending.
Asian borrowers made up just 1.7 percent of reverse mortgages, compared with 5.7 percent of HELOCs, 3.2 percent of closed-end seconds, and 4.1 percent of cash-out refinances. Hispanic borrowers made up 5.8 percent of reverse mortgages, compared with 5.6 percent of HELOCs, 10.4 percent of closed-end seconds, and 9.3 percent of cash-out refinances.
Finding 4: Hispanic reverse mortgage borrowers have higher property values than their white counterparts
The median property value for Hispanic reverse mortgage borrowers was higher than their white counterparts in 2018: $365,000 versus $305,000, respectively. This is interesting because the median income for Hispanic borrowers in 2018 was slightly lower than that of white borrowers: $24,000 versus $27,000, respectively.
More importantly, the overall wealth gap between white and Hispanic Americans is also large. And we know the home is the single largest source of wealth for most Americans.
So what explains the higher property values of Hispanic reverse mortgage borrowers compared with white reverse mortgage borrowers? Location, location, location! About half (47.0 percent) of Hispanic reverse mortgage borrowers in 2018 were from California, a high-property value state, compared with only 22.8 percent of white borrowers.
Median property value was highest for Asian reverse mortgage borrowers and lowest for black reverse mortgage borrowers, at $595,000 and $255,000, respectively. Asian borrowers were also concentrated in California, with the state accounting for 55.2 percent of all Asian reverse mortgages in 2018 but just 22.8 percent of black borrowers.
Finding 5. Black homeowners tap reverse mortgages at much older ages than other races
Although 11–14 percent of white, Hispanic, and Asian reverse mortgage borrowers in 2018 were between ages 62 (the earliest age one can get a reverse mortgage) and 64, just 10 percent of black reverse mortgage borrowers were in this age group.
Likewise, 43–47 percent of white, Hispanic, and Asian reverse mortgage borrowers were between ages 65 and 74 in 2018, compared with 41 percent of black reverse mortgage borrowers. Finally, when they turn 74, black borrowers begin to tap into reverse mortgages at higher rates: 49 percent of black reverse mortgage borrowers in 2018 were older than 74, compared with just 42–43 percent of white, Hispanic, and Asian borrowers.
Black homeowners’ delayed use of reverse mortgages likely reflects a much slower pace of home equity accumulation relative to other racial and ethnic groups, as seen in data from the Federal Reserve’s 2016 Survey of Consumer Finances in the figure below.
In 1989, Black households had a median home equity of $56,000, increasing to $69,000 at the peak of the bubble and subsequently falling to $56,000 in 2016— essentially unchanged from 1989. In comparison, white and Hispanic households witnessed much larger increases in equity both during the housing boom in the early 2000s and in the most recent recovery.
What can we learn from these findings?
In response to losses on bubble-era HECM loans, the FHA has made several changes to tighten HECM eligibility requirements, such as reduced borrowing limits, enhanced appraisal requirements, and premium changes. While we don’t have historical HMDA data on reverse mortgages, these changes could have had a disproportionate impact by race/ethnicity.
The new HMDA data show substantial variation in reverse mortgage use, not just between white borrowers and other racial and ethnic groups but also between nonwhite groups. Whether driven by location, borrower equity, preference, or other reasons, these differences leave us with one important takeaway: future changes to the HECM program must consider any potential for disproportionate impact by race or ethnicity.