A study commissioned by the U.S. Department of Housing and Urban Development (HUD) Office of Policy Development and Research (PD&R) in 2022 aimed to assess the state of the Home Equity Conversion Mortgage (HECM) program over a 20-year period.

The study, commissioned by the HUD PD&R and compiled by analytics firm SP Group LLC and its subcontractor Econometrica Inc., assessed three separate elements of the HECM program’s effectiveness from 2000 to 2020 — including borrower impacts, financial impacts and policy impacts.

Overview of findings

The report was released to the public in November 2023. In its executive summary, the report found that the HECM program grew “substantially” during the 2000s and reached its height of 114,000 originations in 2009. The subsequent housing market crash sharply reduced that number to an average of about 50,000 originations per year from the late 2010s through 2020.

Some of the report’s findings underscore certain longstanding perceptions of the HECM program in terms of borrower engagement, while recognizing efforts that lenders and the broader industry have made to increase availability to more types of borrowers.

“The program serves primarily low-income borrowers for whom the equity in their homes far outweighs their other assets, though the share of higher-income borrowers increased between 2009 and 2020,” the report stated. “While all HECM borrowers are aged 62 or older, the age profile of borrowers has trended younger over time.”

The report assessed 533,894 HECM loans originated and terminated during the 20-year study period. Researchers estimated that the Federal Housing Administration (FHA) incurred a net loss of approximately $10.4 billion from the program.

“The bulk of losses came from loans that originated between 2006 and 2010,” the report stated. “Various policies helped mitigate net losses to the program and unscheduled draws but not all policies worked as intended.”

PLF reductions

The specific HECM policy impact study aimed to assess “the effect of policy changes on the performance of the HECM program using quantitative and linear regression analyses of HUD data,” the report reads. Six specific policy changes were assessed, with the goal of determining the impact such policies introduced “to reduce risks and losses to the FHA program or, in some cases, to increase benefits to the borrower.”

The changes assessed in the study include reductions to principal limit factors (PLFs) and restrictions on first-year draws; the requirement “to perform underwriting to evaluate the ability to pay taxes, insurance, maintenance, and repairs;” the introduction of the life-expectancy set-aside (LESA); changes related to loans with non-borrowing spouses (NBS); and a requirement for a second property appraisal.

Using detailed mathematical models to determine the impact of PLF reductions, the report found that “the first and second PLF reductions [in 2009 and 2010, respectively] were associated with reduced demand for HECM loans, lower likelihood of an unscheduled draw, and lower net losses to the program,” according to the study.

The third PLF reduction in October 2013 was assessed in more granular detail and concluded that “the first and second reductions may have helped remove so many potentially marginal loans from the population that models could not detect any beneficial effects due to the third reduction and drawdown restriction,” the report said.

An analysis of the fourth reduction in October 2017 found that it had its intended effect.

“Despite the limited timeframe, these models detected that the fourth PLF reduction was associated with a reduced likelihood of an unscheduled draw and lower net losses to the program,” the study said.

Various policy impacts

For the look at the financial assessment, the study found that the models constructed by the researchers “detected that the introduction of the financial assessment, LESA, and underwriting requirement was associated with reduced likelihood of defaults, lower unscheduled draws, and lower net losses to loans made to Black borrowers — although a net loss reduction to the overall population could not be established.”

For non-borrowing spouses, the results were a bit more mixed.

“Although the duration model was unable to detect an effect of the change in the treatment of non-borrowing spouses on loan duration, the policy change is associated with an increase in the proportion of loans with a co-borrower by approximately 1 percent and with more than double the percentage of refinanced loans,” the study found.

While the increase of loans with a co-borrower could be considered positive, an inability to determine an impact on loan duration could be construed negatively, depending on the goal of loans originated with a NBS.

The assessment of the second appraisal requirement for some loans — a thorn in the sides of industry professionals in its early stages — was assessed positively, according to the results of the study.

It found that the implementation of the second appraisal was associated with reducing “net losses by approximately $1000 per loan ($991); duration by approximately three-quarters of a month for loans 6 months or less in duration;” and “appraised value by $7.85 per square foot, or 3.5 percent of the $223 per-square-foot average for homes.”