An uplifting new study has revealed the newest reverse mortgage updates have helped reduce default rates by an astounding 50% or more.
The study was conducted by the Center for Retirement Research at Boston College has concluded that the government backed, and recently revamped, HECM reverse mortgage guidelines are so effective that default rates have been halved.
According to the study, a number of changes that have occurred, starting in 2013 and onwards, have slashed default rates in this arena by at least 50%.
Unlike standard home loans, a reverse mortgage is only available to homeowners age 62 and older. Provided they keep the home as their primary residence, they do not have to pay the loans back until after they have died, when the loan is repaid from the sale of their home and estate.
In the past, these HECM programs had come under some scrutiny due to the default rates of homeowners. This led to the government enacting sweeping changes to protect the integrity of this program.
Now, the new reverse mortgage rules mandate that the borrower demonstrate that they can pay for home upkeep, property taxes and insurance. In some cases, they are able to even finance these payments into the home loan itself.
The study relied on data that compared old borrowers, new borrowers and those had defaulted on a grand scale. It concluded that newer policies are helping reduce default rates across the board.
Just 2% of older Americans who qualify currently have a reverse mortgage. But think tanks have projected that the demand for these HECM home loans has exponentially increased in the past five years.
"Reverse mortgages could become increasingly popular as more households reach retirement with insufficient income. However, a recent concern is a rising default rate among borrowers. HUD has responded by restricting initial withdrawals and introducing underwriting criteria. According to the analysis (presented in the study), the combined impact of both types of policy changes could reduce property tax and insurance default by as much as 50%," wrote the study's authors.
"However, the simulated impact of credit-based underwriting standards on HECM take-up is estimated to be small, particularly when such standards are accompanied by a required set-aside for tax and insurance payments rather than a hard cutoff. The combined impact of both types of policies could reduce take-up by 12%- primarily due to the restrictions on the initial withdrawal amount rather than the underwriting criteria. However, this impact on take-up is relatively small for a rather large reduction in estimated defaults," the study concluded. "