We wrote recently about a HUD-published study that looked at the “survival rates” of Home Equity Conversion Mortgages (HECM). The study’s authors sought to provide factual data about HECM loan pay offs that would be useful to investment bankers and others interested in development of an efficient secondary market for reverse mortgages.

Our earlier comments focused on data reported for all age groups of HECM borrowers and we found particularly noteworthy the fact that more than half of HECM loans are paid off (i.e. do not “survive”) beyond year six of the loan. This is noteworthy because financial advisor’s typically counsel that a 5-7 year HECM loan term generally is needed to amortize the high upfront costs and make the reverse mortgage a reasonably efficient borrowing tool.

The authors also studied HECM loan survival rates for three distinct age groups:

“younger borrowers (defined as those ages 64 to 66 at closing), typical borrowers (defined as those ages 74 to 76 at closing), and older borrowers (defined as those ages 84 to 86 at closing).”

The following graphs are based on data from the HUD-published study and show HECM loan termination rates for three categories (single female, single male, and couples) further broken out by age groups:

Observations:

• Most surprising is the fact that among all categories (female, male, couples) there is little difference in the observed termination rates between younger borrowers (64-66) and typical borrowers (74-76).
• Older borrowers (84-66) pay off their loans much faster than younger or typical borrowers due to higher mortality rates. The study notes “(t)his faster payoff results in the 10-year loan survival rate for older borrowers being observed at only 10 percent.”
• As expected, older borrowers (84-86) pay off their loans much faster than younger or typical borrowers due to higher mortality rates. The study notes “(t)his faster payoff results in the 10-year loan survival rate for older borrowers being observed at only 10 percent.”
• Only couples in the young borrower (64-66) group have better than a 50% HECM loan survival rate beyond year six. For all other groups, more than half of the HECM loans have been repaid by this point. For single males in the older age group (84-86), less than 1/5 of the loans survive into a seventh year.

Once again, the information provides a useful reality check for homeowners considering a reverse mortgage. The data show that a large share of HECM loans are paid off in relatively short periods - likely shorter than borrowers anticipated when the loans were taken out. The high upfront costs associated with HECM reverse mortgages can mean extremely high overall borrowing costs when loans are outstanding for shorter periods of time.

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A Few More Related Articles of Interest:

Glossary

HECM 100 vs HECM +100

California Reverse Mortgage

Reverse Annuity Mortgage - Tapping Into Your Equity

Reverse Mortgages Learn The Facts First!