QUALITATIVE RESEARCH OF REVERSE MORTGAGES: FOLLOWED BY QUANTITATIVE ANALYSIS OF VIRGINIA’S HECM MARKET

A THESIS

Presented to

The Faculty of the Department of Economics and Business

The Colorado College

In Partial Fulfillment of the Requirements for the Degree

Bachelor of Arts

By

Will Grossman

May 2017

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QUALITATIVE RESEARCH OF REVERSE MORTGAGES: FOLLOWED BY QUANTITATIVE ANALYSIS OF VIRGINIA’S HECM REVERSE MORTGAGE MARKET

Will Grossman

May 2017

Economics, Business Track

Abstract

Home Equity Release Products, commonly referred to as reverse mortgages, allow people 62 and older to sell equity or future appreciation in a home they own in return for liquid currency. The consumer of the product enters a contract that allows them to reside in the home and not pay back the until the primary borrower dies, moves out, or sells their home. The attraction of this special type of mortgage is that it allows people to smooth income at an older age. This is very important considering it increases financial safety to our aging population. After reading this thesis, I hope you have a better understanding of the reverse mortgage products offered in the United States, and understand why they are important in this day and age. After reading this you should also have an understanding of the regression models and can see how different independent variables can affect the length of a reverse mortgage contract. We live in a country where the population is aging and people are living longer, thus understanding how these reverse mortgage products work will increase financial safety to our elderly, taking burden off of younger generations.

KEYWORDS: (HOME EQUITY RELEASE, MORTGAGE, REVERSE MORTGAGE, SHARED APPRECIATION, AGING POPULATION, ASSISTED LIVING, HECM, RISK)

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ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS

Will Grossman

Signature

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Acknowledgement

I would like to take a moment to thank the people who have helped me throughout this thesis. My advisor, Ester Redmount, helped organize my thoughts into a thesis I could write, and has been very honest and helpful in her approach to advising me. Without her help I would not have been able to write this thesis, thus I am very grateful for the time she has spent advising me. I would also like to thank Kevin Rask, as he helped to remind me that the data does not necessarily have the dependent variable I am looking for, but rather I can draw empirical and quantitative conclusions by using duration as a proxy to substitute for the dependent variable I wanted, but was not available. Aside from Ester and Kevin I would like to thank everyone listed in my sources cited at the end of my thesis. My work has been made possible by these people and sources, and without their help and informative articles I would not have been able to understand the reverse mortgage market like I do now.

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TABLE OF CONTENTS

I. INTRODUCTION……………………………………………….. 7

II. AGING AMERICA ……………………………………...... 12

a. Cost Burden………………………………………………...... 14

III. LITERATURE REVIEW………………………………………... 16

IV. Barriers to Entry………………………………………………...... 25

V. PRODUCTS…………………………………………………...... 26

a. Lifetime Mortgage…………………………………………...... 26 b. Reverse Mortgage……………………………………………... 27 c. Home Reversion……………………………………………...... 28 d. Shared Appreciation Mortgage..……………………………..... 30 e. Drawdown Mortgage……..………………………………….... 30

VI. Product Risks……………………………………………………... 30 a. Risks to Lifetime Mortgage……...... ……………………...... 30 b. Risks to Reverse Mortgage………………………………...... 33 c. Risks to Home Reversion …………………………………..... 34 d. Risks to Shared Appreciation ………………………………... 35 e. Risks to drawdown mortgage ……………………………...... 35

VII. Other Risks……………………………………………………...... 35 a. Aging Risk…………………………………………………..... 35 b. Borrower Risk……………………………………………….... 36 c. Lender Risk…………………………………………………… 37

VIII. Loan Payment………….…………………………………………. 37

IX. Data……………………………………………………………….. 38

X. HECM……………………………………………………………... 40

5 XI. Model………………………………………………………...... 41

XII. Data Analysis and Stata tables…………………………………..... 42

a. Co-Borrower vs. No Co-Borrower…………………………..... 42 b. Gender……………………………………………………….... 44 c. Continued Analysis……………………………………………. 46 d. Model Part II, Explanatory Variables…………………………. 46

XIII. Conclusion………………………………………………………… 48

XIV. References………………………………………………………….. 50

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Introduction

As we get older we run the risk of having unforeseen expenses arise. As a whole, our population is aging, which means people are living longer and that medical expenses are more likely happen. There are many side effects to an aging population including aging the labor force, putting a burden on the people taking care of the aging family members as well as taxpayers who become more responsible for them, as well as diminishing pensions. (ILO, 2009) All in all, our aging population has left many elderlies in unstable financial states. For this thesis, I will be investigating how reverse mortgage products can counteract the financial effects of an aging population, one of which being they can offer the elderly an income-smoothing product that will allow them to maintain their quality of life while at the same time allowing them to continue to contribute to our consumption-driven economy.

The goal of this thesis is to qualitatively research the reverse mortgage market in order to get a better understanding of what the products are and what risks accompany the benefits they provide. Once the qualitative research is finished, I will be analyzing a subset of the reverse mortgage market to identify what might cause a contract to terminate early,, which burdens the consumer of the product and benefits the seller. For the quantitative analysis, my subset will be FHA HECM contracts in Virginia that have been terminated. That stands for the Home Equity Conversion Mortgage that is insured by a U.S Federal Housing Administration approved lender. (U.S. Department of Urban

Development and Housing, 2017) In doing so I hope to gain an understanding of the affect the independent variables I am analyzing have on my dependent variable. The

7 dependent variable being the duration of the contract. When reading the data analysis section, it is imperative to note that contract duration is a proxy for what I am looking for.

Duration serves as a proxy, meaning that I will be analyzing what IVs affect the duration; a short contract being more harmful to the consumer, and a longer one being for the most part (to an extent) better for the consumer. The proxy variable of duration, called

Contract Length, comes from subtracting the mortgage start date from the termination date. Shortness of contract is how I am measuring the harmful affect the independent variables are having, which I why I am using duration as the proxy.

A consequence of an aging population is that pensions aren’t taking people through their retirement. This results from our ability to extend life past what was predicted when the pensions were made. Extending life is a good thing, but has made taxpayers more burdened and has put many elderlies out of their homes as they have had to rearrange assets to pay for unexpected costs that arise over time.

We need to feed our consumption driven economy to keep growing out GDP by spending a lot of the money we make, and a result of this is people who have been spending money according to what expected costs would be in their future. Like aforementioned these costs have gone up as improved quality and accessibility of healthcare occurs.

We trust in the markets and in our pensions, but when we live longer than expected, or pensions don’t pay out, people get hurt. (Henley, 2008) It is not always external forces however that leave people lacking financial safety. Many people spend too much money paying off houses they cannot afford and eventually find themselves in positions where finances have to be rearranged if they want to remain in their homes. The

8 result of these irresponsible financial decisions and not planning for possible future health implications is that people and families buy things with money that should be going into savings. When are not able to pay for their own expenses, they more often than not become a burden to the tax payer.

In response to this crisis, a market has been developed that allows people who are eligible to exchange some of their illiquid home value for liquid currency, letting them maintain their quality of life by not having to move out. This market is the reverse mortgage market. It is a byproduct of the lifetime mortgage market, which allowed people to sell their homes but still remains in the homes as long as they could cover the cost of maintenance. These contracts usually ended with the borrower dying, or having to move into assisted living.

Products have been made that offer people and families a chance to part with some of the equity or future appreciation in their home. Some private lenders offer products that encompasses both of those.

Unlike a normal mortgage this is not just a loan that has to be repaid by installments, but rather, for the most part, is a income smoothing product that allows the consumer to repay the loan upon sale of their home. (Moneysupermarket.com, 2016)

They offer the consumer a lump sum, installment of payments, or line of credit in exchange for equity in their home. Unfortunately, these products can be used irresponsibly, and often the consumer of the product might not understand the possibility of the loan financially burdening them.

9 The benefactors of these products are mostly people who no longer have monthly incomes and are not in a position to finance a forward mortgage that requires monthly installments to be repaid to the lender, secured on the home.

The lenders in our U.S. reverse mortgage market have developed many different types of home equity release products that can be helpful to different people in different situations. Unfortunately, the same products that can help different people often end up in the hands of someone who might have benefitted from doing something, like simply selling their home and moving.

For instance, if a contract is breached, the lender, for the most part, takes control of the home and will do whatever they can with it to assure they get their profits or at least break even. Understanding the pros and cons of the reverse mortgage market and products at a consumer level is ultimately what will lead consumers to purchase to right product for their situation, or to not buy it at all and downsize; eliminating the risk of the lender profiting on the back of someone in more financial trouble than they were before buying the product. The risk is that if a person dies or needs to move to assisted living, the contract is breached and the lender can foreclose the home.

In response to this risk different products have been developed. With innovative products being offered and diversity of payment plans, many people have found themselves grateful for the opportunity to enter one of these home equity partnerships.

However, many people like aforementioned have also felt the effect the products leaving them worse off than they had been. Simply put, while these products provide income smoothing for some, they can financially burden others and leave them up to their necks in debt.

10 I decided to write this thesis to explore and understand the reverse mortgage market and how the different available home equity release products can help or hurt different people. I hope to identify the positive and negative aspects the products can have on the borrowers as well as the lenders and to find some correlation and causation within the Virginia HECM data that might help to identify what kind of people might be better or worse suited for the HECM reverse mortgage product in Virginia. I will examine the equity release market and products in order to identify which products are best for different types of consumers. This will help to evaluate why some people have found success with their equity release contracts and why others have found themselves in more debt or more financial trouble than they were in before entering a reverse mortgage.

To wrap up the introduction, people living longer equates to them having more health problems which yields unexpected healthcare costs per person being higher than it use to be, which results in increased financial burden for everyone, but especially the elderly who have already spent a lot or all of their savings. After reading this thesis and my analysis of the products, you should better understand how equity release products can provide income smoothing and increase financial security, as well as understand the consequences and the risks that accompany these products.

It is true that these products can help smooth income and can provide the elderly with money that can contribute to our consumption-driven economy and to their quality of life, but it is also true that if handled poorly, a person could be much worse off after terminating one of these product contracts than they were before entering it. If people have more money, our economy will continue to thrive. But if people are being

11 financially hurt by the lenders, then more money will be taken out of the elderly consumer pockets, which will our economy by the means of them not spending money, as well as taxpayers having to carry the weight of the burden leaving them with less money to spend. If the information is understood, and the right products are used by the right people who have the right understanding of the monetary benefits and risks, then these products will serve to smooth income and help our elderly and our economy. If the information is not understood and people treat the compounding interest irresponsibly, or if people do not understand the effects of terminating a contract early or late can have on the loan value, then these products can ultimately hurt the elderly and burden the taxpayers.

Aging America

Like briefly aforementioned, America’s population is aging and an aging population can have negative economic side effects like we have seen happen to China after they ended their infamous one-child policy. China’s younger population are having to take care of an aging population that now equates to a big percent of their total demography. In order not have this equivalent burden effect my generation in the United

States we need our elderly demography to help themselves. Reverse mortgage products if used correctly will allow them to do so.

Improvements to health care allow people to live longer and healthier lives, but there are financial issues that accompany this. Pensions that were made according to life expectancies are running out partially due to unforeseen rises in life expectancy, and some of the elderly who are living longer than expected have found themselves left with

12 big assets but no currency. For this reason, in order to properly identify the risks and benefits of equity release products, it is imperative to include some analysis on America's aging population. This will provide a preliminary empirical understanding how much we are aging, an important thing to understand before continuing to read the rest of this thesis.

A government census analysis titled An Aging Nation: The Older Population in

The United States and a separate fact sheet from the Population Reference Bureau have provided enough quantitative information needed to understand our aging demography and how it will look in the future. There was a 2-year gap between these reports (2014,

2016) thus readers of the following analysis should expect a minor discrepancy between the charts.

The Population Reference Bureau predicts that by 2060 Americans aged 65 and older are projected to rise from 48 million to 96 million. The bureau goes on to quantify that into a rise from 15% to 24% of our populous. (Mather, 2016) This means that we are aging faster than we are growing. A rise in age will naturally put a big burden on the younger generation simply by how much tax burden they will have. The Government

Census analyses has taken these figures (according to the previous year’s data) and graphed them seen here: (Ortman, Velkoff, Hogan, 2016) (Mather, 2016)

Figure 1:

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(Mather, 2016)

This graph visually show that elderly people will make up more of our total population and that the number is growing. If these predictions are wrong like predictions have been in the past, the growth rate could be more exponential the graph expresses.

This leads to the natural conclusion that equity products like reverse mortgages and home reversions will become more attractive because the products are only offered to people who meet age criteria, and as we see in the graph above that age group will grow faster than the population is growing as time passes.

Similarly if the millennial generation ages exponentially more than what is expected, we might find ourselves contributing to our consumption-driven economy at a rate higher than we can afford simply by not knowing how long we might actually live. If

It is partially this phenomenon that has forced people to sell off equity in their home in order to smooth income and keep the quality of life the same. In response to this phenomenon that our elders are experiencing, there is growing demand for equity release products. These products offer beneficial opportunities for the lender and the borrower, most often depending on what happens to the primary loaner. (Mather, 2016) (Ortman,

Velkoff, Hogan, 2014)

Cost Burden

A study done at The Harvard University Kennedy School that was sponsored by

the AARP examined the cost burden of renters to owners with a mortgage and then

14 owners without a mortgage. This is an important aspect to consider when deciding whether or not to sell and downsize, or take on a reverse mortgage. (President and Fellow

of Harvard College, 2014)

Figure 2:

(President and Fellow of Harvard College, 2014)

The middle and right-hand graph show the disparity of cost burden between owners with a mortgage and owners without one. It is important to consider that people who own their homes might have better jobs and more money and that the graph above explain does not explain this.

However, this data does suggest that it would have less cost burden for someone to sell their current home and downsize. You will also notice that owners with mortgages have the ‘severely burdened’ column exponentially growing as they get older more so than their amount of ‘moderately burdened’ grows. An Important aspect of these graphs to note is that people 80 and older are going to see a rise in being ‘severely burdened’ just by aging. Unfortunately, we can only assume this trend will continue for us especially if living to 100+ becomes a norm of the future.

15 We all share the American dream of wanting a big house and a nice family, and unfortunately, a byproduct of this is that many Americans do not want to sell their house

and downsize, which is sad because the graphs above that come from very credible

sources empirically suggest that as we get older, we will be more cost burdened. It is imperative that people understand this and make financial changes in their lives to adjust

accordingly in order to minimize the ‘severe burden' we will feel if we do not. People need to understand that it is okay to give up some quality of life as they reach an elderly

age so that further down the elderly road quality of life will better. (Mather, 2016)

(Ortman, Velkoff, Hogan, 2014) (President and Fellow of Harvard College, 2014)

Literature Review

As I was thinking about what to write my thesis about I came across an article posted by the Wall Street Journal which provoked my interest in the reverse mortgage market. The article I read was titled TRADING THE FUTURE. This article focuses on a woman who engaged in a home equity release product contract known as a Shared

Appreciation Agreement. Tergesen, the author, in the same article defines this product as when

A homeowner agrees to give up part of a home's future appreciation in exchange for cash -- typically 10% to 15% of the property's current value.” (Tergesen, 2008)

This caught my interest because of the esoteric nature of the product. Using available information and data about the real estate market trend would make it hard to

16 predict the future appreciation, especially when many reverse mortgage products including this one take many years to reach termination.

The lender in this type of product has to make a bet, using available information to predict how a particular home will appreciate 15+ years in the future on the assumption that the money they lend someone will be less than the appreciation value the home will experience so that deal can be profitable once the contract is terminated.

(Tergesen, 2008) (Investopedia, 2017) This product is different than other reverse mortgage products in that the lender does not have to give up any of the home's equity, but can use part of the appreciation the house will experience to lessen the interest rate and loan value that has to be repaid. (Tergesen, 2008) (Investopedia, 2017)

Gladys Tully whom the article focuses on received $106,000 which equated to

13% of her home's value. She was given this in exchange for half of the appreciation her house experiences between signing the contract and the time of sale/termination of the contract. (Tergesen, 2008).

Susan Wachter, a real estate professor at the University of Pennsylvania Wharton school of Business was interviewed for the article. She expressed that following a housing crisis like we saw, it makes a lot of monetary sense for companies to be investing into real estate appreciation right now. They lend money and are paid back plus interest once the prices rebound. It is similar to how we are told to buy stocks after a crisis when everyone is selling and the stock value doesn't actually equate to what the stock is worth.

When written this, it sounds as though goliath lenders are making money on people who have been put in a financial position that forces them to liquidate assets, or, like aforementioned, sometimes sell future appreciation value. (Tergesen, 2008) (Wachter,

17 2008) However, no one makes someone enter a reverse mortgages or home equity release product, thus whatever happens to the consumer happened at their own risk.

The SAM (Shared Appreciation Mortgage) compared to other products usually puts more risk on the lender and usually contains contractual clauses that lessen the lender's risk in the case of depreciation. It is a very interesting way to turn future value in a home into liquid money without losing partial or total ownership of home itself. This product is time sensitive year to year have has different results depending on the real estate market of the home, but it undeniably can add some income smoothing and financial safety to the right person.

Home equity release products and reverse mortgage products are byproduct of the lifetime mortgage, a product that allowed people to sell their homes, but remain in the house until a contract terminating clause is broken. These clauses are usually the death of the primary borrower, or the need for assisted living, forcing someone to move out of their home. (Telegraph Financial Services, 2017) (Aviva, 2017) (Willis Tower Watson

Wire, 2016)

The U.S. Department of Housing and Urban Development (HUD) defines the reverse mortgage as

“A special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.”. (US Department of Urban Housing and Development, 2017)

Unlike a normal or forward mortgages this isn’t a loan that is secured on the home, rather it is a generally fair exchange of home equity for liquid money. When someone agrees to a reverse mortgage product contract, the utilities, taxes and other

18 house maintenance related costs are paid by the borrower. (Consumer Financial

Protection Bureau, 2017) (U.S. Department of Urban Development and Housing, 2017)

(Joosten, 2015) (Clements, 2015) (Release-my-equity, 2017)

This aspect of the agreement benefits the lender. The lender basically then owns part of the home but is not responsible for the cost of maintaining their portion of the home. If something happens and it costs more to keep the house up to contract condition than the loan is worth, then basically the borrower has more debt than they began with and owns less of their home they could have, had they sold it and found a more affordable living. (Rosenblatt, 2012).

The loan and the premium on the loan are only to be paid back once the borrower has sold the house, the primary (and potential co-borrower if the primary holder dies first) move out or dies. This can again benefit both sides of the contract depending on how long the primary loaner lives for. One scenario I read about that in some contracts borrowers ended up living in the house longer than expected, which cost them more than expected to maintain the house as well as made compounding interest much higher.

(Rosenblatt, 2012). Depending on the situation, this can mean they pay more for maintenance than the loan was worth, or more on compounding interest than the home is worth. Paying the maintenance on whatever share the lenders owned takes away from the income smoothing aspect of the product and makes the product more appealing to the lenders.

So why not take a conventional loan? The answer is that most of the people who are using reverse mortgages are people who have spent or mismanaged their money,

19 often from becoming subject to unforeseen expenses. The most common unforeseen expense I read about during my research is medical bills.

Even with this information, why does the consumer not get a loan using the house as equity? And the most common reason for this is that monthly income has shrunk or is nonexistent for most people purchases of home equity release products. The products are usually offered to people 62+ years, an age at which many people have left the workforce.

The reverse mortgage products allow people lacking finances to get the money they need without a conventional mortgage that is paid back by regular installments of money to the lender.

This is a fitting time to mention that people who take on a conventional mortgage using the expected income to pay for sometimes find themselves in a terrible position if they lose their jobs. This is what left so many people homeless following our housing bubble. Irresponsible lenders and rating agencies were falsely rating CDOs full of sub- prime mortgages. When the mortgages which were not AAA+ rated in reality fell through, the dividend market on the products, which had become bigger than the products was even worth, failed. Because of the fraud that took place, many people owed more money to lenders than their house was worth after the bubble burst, and the borrowers were unable to pay back an amount worth more than what their house sold for. This resulted in extreme foreclosure rates. This was a factor in why the home equity release or reverse mortgage products caught my attention. (CC Investment class, 2016)

Like aforementioned the reverse mortgage or home equity release products allow income-lacking elderly to smooth their income while letting them maintain the same

20 quality of life, by selling part of an asset they are heavily invested into. It allows them to turn illiquid assets into liquid cash which they often need to maintain the home they have been living in. However unfortunately many of these contracts end up hurting the consumers of them.

Although still not very large, the rise in home equity products has resulted in better financial security for elderlies and has given many people a chance to use their homes as a means of paying for expenses, while not actually having sell or move out.

Don’t forget however that many elderly have lost their homes and basically given a lot of their net worth to the reverse mortgage lender when health issues arise that force them out of their home; which breaches the contract. In these cases, inheritance is often greatly diminished, and the product ends up being a very bad investment.

Being able to draw money out of their home value to spend on may seem like a consumer beneficial product, but in reality the lenders are offering lower values on the homes than what the market dictates to lower the lender risk, and all the while the consumers are paying a premium on the loan that undervalues the home's worth.

(Tergesen, 2008) (Consumer Financial Protection Bureau, 2017) (Clements, 2015)

There was almost abusive nature in the way people were offered mortgage contracts before the housing bubble collapsed. When our government and every financial goliath told consumers that the housing market was extremely safe, they put people in positions to buy houses they otherwise might not have. Some of these people sold equity in their home or homes or took forward mortgages and spent money that should have been saved on other things due to the inherent trust that the market was stable and safe.

Unfortunately, all the while it turned out AIG and other rating agencies had been making

21 quid pro quo deals that temporarily benefitted them and the investment banks that ultimately left thousands of people with houses worth less than the they had on the houses. Like aforementioned this lead to extreme foreclosure rates. (CC Investment class, 2016)

This seems very abusive on the lenders part, however, this is not always the case.

Lenders used the information they had to sell products that made sense according to that information and the market. Unfortunately, many consumers did not consider the full risk, being the loan might eventually be worth more than the home itself if ultra- depreciation occurs, like it did in 07'/08. In response to this, an important aspect of reverse mortgage products that is common today is the NNEG or no negative equity guarantee. The NNEG guarantees the borrower will not be subject to pay more than what the house is worth. (Joosten, 2015) (Aviva, 2017)

These products, which will all be explained in the next section, allow people to remain in their homes in a time where in the past selling the home to pay for expenses would have been the traditional thing to do. A hypothetical might help to understand this.

Let’s say someone is given $250,000 for 30% of a home worth a million dollars, and the housing market crashes reducing that house down to let’s say $500,000. Now the borrower will have to pay $250,000 plus the premium, and only own 70% ($350,000) of the home upon sale of the house to do so. One can imagine that if you add the premium and the cost of house maintenance, that a reverse mortgage doesn’t sound very attractive anymore. Even with a NNEG (no negative equity guarantee) the borrower could still end up with no money, because no money is technical not a negative amount covered by the guarantee. (Rawlinson, 2006)

22 While I made up those numbers, you can imagine how this problem happens.

People find themselves in positions of having more debt at the end of a contract than they had before. For this reason, it is always important to consider selling the home. This does force someone to find somewhere more affordable to live, however, it gives them a fair value on their home and allows them to begin to financially plan their future. It eliminates the risk of going into debt trying to repay a loan. (President and Fellows of Harvard

College, 2014)

Going off that last though, there are many dangers to reverse mortgages and there are a lot of things to consider before agreeing to one. According to an article titled

Reverse Mortgages: The Rewards and Risks by Forbes, there are many aspects of these agreements that may not make themselves well known during the sale of the product.

(Clements, 2015) According to the article which was written recently, interest is generally compounding and is higher than it would be for a normal mortgage. This makes sense because there are no monthly installments that have to be paid back each month but is something that could become a huge financial burden over time. (Clements, 2015)

Figure three below shows how compounding interest can make a loan payment much bigger than the loan was at origination.

Figure 3:

23 (Figure retrieved from inputting numbers into the amortization calculator on amoritization-calc.com)

The firgure shows how the compounding interest can be much costlier than expected over the lifetime of the loan. (Clements, 2015) (Amortization schedule calculator, 2017). In terms of the example I used, we can see how a $300,000 turned into $596,280 at the time is would be paid back.

Like aforementioned, after the loan matures, the borrower might find himself owing more money that he expected. In some non NNEG instances, the borrowers have found themselves owing more more than the actual value of the asset they sold partial equity in. There are more ways to end up in this situation than home equity release product consumers might realize. (Clements, 2015) (Rawlinson, 2006)

For instance, let's say the borrowers beats the odds and lives in their home for 35 years when the lender was supposed to break even if they moved out before 20 years. It seems like the borrower got a good deal here, right? Not necessarily. The extra 15 years they spent in the house has added 15 years' worth of compounding interest to their original loan, making the payback amount potentially worth much more than was ever expected or discussed. Similarly, the borrower would have then paid 15 years of bills towards maintaining the house, diminishing his money that should be used to pay back the loan at contract termination.

Finding oneself in debt after financing a home leaves people wishing they had downsized their house rather than selling off equity for a loan with a premium on it. An important thing to consider when thinking about this is that often the process begins with a lender undervaluing a home. I fear many people are not accounting for different lender-

24 friendly aspects of their contracts, and will ultimately owe more than they knew was possible. Like aforementioned, if you consider the effects of compounding interest and maintaining a percent of the home they don’t own, the pay-back can foreseeably become unpayable.

When this happens the lenders foreclose the home and sell in order to minimize their losses, often leaving the homeowner homeless and in debt. This concept has been the driving force behind this thesis. If consumers of these products are made more aware of extreme risks that accompany these income smoothing products, then the products themselves would be better at doing what they should be, which is giving loans for equity that allow our elderly to liquefy illiquid homes in order to help minimize the negative effects of our aging population.

When the product turns on a consumer and becomes a huge financial burden, then the product did inherently the opposite of what it was meant to do. Foreclosing homes and leaving our elderly with less money than they would have had if they had sold their home and moved puts a big burden on taxpayers rapidly diminishes quality of life once the home is foreclosed and sold. (Tergesen, 2008) (Clements, 2015) Similarly in doing so spending power is diminished for the product consumer and the tax payers and family members who become more responsible for an aging population.

Barriers to Entry

Reverse Mortgages offer a person a chance to liquidate part of an illiquid home so the consumer of the product might gain some financial security. These products have been developed for the purpose of stimulating a new market and increasing financial security to the elderly who are eligible to take on a reverse mortgage. Because the

25 products have been made to help income smoothing of our elderly, most products require the consumer to be at least 62 years of age. (U.S. Department of Urban Development and

Housing) Some private lenders offer the products to 55+. The younger the consumer is allowed to be directly translated to higher compounding interest over time that will exponentially grow out of control. The age barrier allows the product a better chance at not financially burdening the consumer.

Products

As mentioned in the literature review, a Reverse Mortgage is a contract between a lender and a borrower in which the borrower is given an amount of money for equity, future appreciation, or a combination of those two in their home. (See the Loan Payment section for types of payment). These products allow the consumers to experience income smoothing while remaining in their homes, providing the elderly and opportunity to liquidate an asset to cover expenses, and not give up their quality of life. (Seefeldt, 2017)

Lifetime Mortgages: A lifetime mortgage is a loan given to a homeowner by the government that is secured by the borrower's home. A person must be 55+ and own a home to be eligible for lifetime mortgage; at which point the borrower is given a loan, the size of which depends on age, health criteria, and value of the home. (Telegraph

Financial Services, 2017) Repayment of the loan depends on the contract but normally is secured on the home, and paid back later. This type of reverse mortgage allows a borrower to retain (depending on the contract) up to 100% of their home, allows them to

26 remain in the home until death or the need for assisted living, and usually is repaid when the home is sold and the borrower has the money.

Regardless of the plan, there will be interest added to the loan, where usually all of the interest is compounding. The Telegraph who offer financial services describe the different types of lifetime mortgages in an article titled The Different Types of Equity

Release Products, which are all similar, just different in how the lenders give money to the borrowers. (Telegraph Financial Services, 2017) The most common byproduct of the lifetime mortgage the reverse mortgage, however, there are others that have become more and more common. (Telegraph Financial Services, 2017) (Aviva, 2017)

Reverse Mortgage: A reverse mortgage is similar lifetime mortgage, and allows someone 62+ to exchange some of their built up home equity in exchange for a loan that is to be repaid upon sale of the home. (U.S. Department of Urban Development and

Housing, 2017) It is different from the lifetime mortgage in that a person has to give up at least partial equity in their home. (Release-my-equity, 2017) Like aforementioned in the introduction the government does actually insure one type of FHA lender approved reverse mortgage called an HECM or a Home Equity Conversion Mortgage. (U.S.

Department of Housing and Urban Development,2017) The U.S. Department of Housing and Urban Development makes this data readily available; I later use their Virginia data as a subset for my analysis, given that their data set is hundreds of thousands of HECM loans. There are non-government non-FHA HECM reverse mortgages, but not as many people use these. (Consumerfinance.gov, 2017) If someone is eligible for an HECM loan, it is the loan they should take because there are government secured safeguards that help

27 to minimize the borrower's risk. (U.S. Department of Urban Development and Housing,

2017)

Unlike taking a forward or normal mortgage, a reverse mortgage allows someone, or a couple, to trade equity in their home for a loan that is to be repaid at termination. The lender offers a loan to the borrower that is to be repaid when the borrower moves out or dies because at that time the lender is able to take control of the home and sell it.

(Consumerfinance.gov, 2017) (Reverse Mortgage Insight, 2010)

In a grad school thesis written about home equity product analysis for the

Netherlands, the author A.J.H. Joosten talks about one of the benefits that accompany some reverse mortgages in the Netherlands, which are available in FHA HECM loans, being the no negative equity guarantee (NNEG). Joosten writes that “this implies that the risk that the value of the loan plus the interest plus additional costs exceeds the total value of the house is covered by the lender or another institution.” (Joosten, 2015) This is one of the safeguards that makes the FHA HECM reverse mortgage attractive.

Simply put a borrower will not be put in a position where they owe more than the house is worth. This would happen in a situation where a home value goes down and the borrower is left with a loan debt that has exceeded what the home is worth. This is not guaranteed in some non-FHA insured HECM reverse mortgage but does offer less risk when it is offered. (U.S. Department of Urban Development and Housing, 2017)

(Joosten, 2015) (Rawlinson, 2006)

Finally, the borrower in a reverse mortgage must keep the house from going under but is not responsible for paying back the loan until the time of sale. (Consumer Financial

28 Protection Bureau, 2017) (U.S. Department of Urban Development and Housing, 2017)

(Clements, 2015) (Release-my-equity, 2017)

Home Reversion: A home reversion allows a person sell part of or all of their home to a home reversion lender, with an arranged life-lease the allows the borrower to remain in the home until they die or have to move out. It is similar to a lifetime mortgage, but it is not a loan secured on the home. Rather, it is a lump sum loan or regular installments that are given in exchange for the immediate physical exchange of the home or part of the home. It is normal for the lender to have complete ownership in this type of product.

(Homereversion.org, 2017)

It seems immediately safer when written like that, however, according to ARC

Centre of Excellence in Population Ageing Research, there has not been nearly as much research into the home reversion risks like there has been for the HECM reverse mortgage. (Cepar, 2013) Later in that the same working paper Cepar (who is a group, not a person) briefly mentions that on paper home reversion contracts are riskier and less profitable for the lender. However, they follow this statement by saying (with respect to the Australian market, not the US market)

“Interestingly, using higher LVRs in the range of those offered under the US HECM program, we find exactly opposite results: reverse mortgage contracts are less profitable and riskier than home reversion contracts. This finding confirms that the of crossover risk in reverse mortgages provided by the Federal Housing Agency (FHA) is an important factor in the US market. The finding also indicates that there is a large potential market for home reversion schemes in the US.” (Cepar, 2013)

The cross-over risk they refer to is when the loan to be rapid ends up being more than the house is worth. The same risk that is covered by contracts with the NNEG. (No negative equity guarantee)

29 Put simply, this source which is a working paper on risk analysis for reverse mortgages and home reversion of Australia, suggests that for countries with big home equity release markets it would be beneficial to shift towards more home reversions and less reverse mortgages, at least in terms of consumer safety. (Cepar, 2013) One can imagine that selling the home first and being able to remain in it would be less risky than selling part of the home and paying back the loan later when they sell their home. Put simply this type of product is not a loan but rather an exchange of equity for liquid currency that allows the tenant to remain in the home with similar termination clauses as the lifetime mortgage and the reverse mortgage. (Cepar, 2013) (Which?, 2016) (Homereversion.org,

2013) It separates itself in that the equity is exchanged before the sale, often letting people sell their homes but remain in them under a life-time lease that requires the product consumer to pay taxes and maintenance on the home until they leave.

Shared Appreciation Mortgage: A shared appreciation mortgage (SAM) as investopedia.com and others call it is a type of mortgage where the lender is allowed to give some of the expected appreciation the home will gain in exchange for a lower interest rate on the loan. This allows the borrower to have less risk of experiencing high compounding interest while giving up their homes potential investment opportunity.

(Investopedia, 2017) (Tergesen, 2008)

Drawdown Mortgage: This type of lifetime mortgage essentially establishes a line of credit for the borrower to be used at his or her discretion. This product helps to alleviate fear or uncertainty of the future and gives the borrower the opportunity to take out the

30 money as needed. This option can help borrowers in that interest is only applied to money that has been taken out of the line of credit. (Telegraph Financial Services, 2017)

(Nerdwallet, 2017)

Product Risks

Lifetime mortgage: The standard lifetime mortgage is subject to the same termination clauses as most reverse mortgages, and that is that the loan is paid back to the government when the primary holder dies or has to enter assisted living. Similarly, because you are not making regular payments back to the lender, interest can accumulate and is added to the original loan. Even though cross-over risk for this product is often eliminated by the no negative equity guarantee, the debt can become very large. This type of loan does provide the loaner an opportunity to put the loan on another property if they wanted to move, which is more of a benefit than a risk, but can make contracts confusing which usually benefits the lenders. (Aviva, 2017)

Another big risk to consider is that if the loan is taken with the home as security, and no equity is sold, then the borrower will have to come up with at least the loan amount plus the interest when the contract is terminated. Unfortunately, sometimes real estate depreciates. If the borrowers cannot come up with the money, then it puts the lender in a position to force the sale of the home in order to get back what they are owed.

(Telegraph Financial Services, 2017) Another big risk is that if an NNEG is not negotiated in the contract, the borrower might find themselves owing more than the house ends up being worth at the time of sale. (Willis Tower Watson Wire, 2016) If the

31 property was to greatly depreciate, this product would have been a bad choice, because ultimately (depending on the contract) the depreciation effect falls all on the consumer.

The lender wouldn’t suffer from it, since they do not necessarily own any of it, but they would still expect the same amount of money to be repaid to them.

Reverse mortgage: Because the reverse mortgage is a loan, similar to the other products, the consumer may be at risk of the loan becoming bigger than the value of the home itself if an NNEG is not negotiated. Fortunately, most reverse mortgage contracts are the FHA

HECM which are government insured and have the NNEG guaranteed. (U.S.

Department of Urban Development and Housing, 2017)

Over the life of the loan, the interest and the fees grow and are repaid to the lender upon the sale of the house or death of the borrower. In an article titled Dangers of

Reverse Mortgages by Angie Mohr of Investopedia, Angie identifies some of these risks.

One of the risk factors is that as time has gone on and reverse mortgages have become more popular, many types of reverse mortgages have been implemented. (Mohr, 2017)

At the end of the day, someone is selling the reverse mortgage, and may not have the consumers best interest in mind. If finances are not managed properly, then upon the termination of the contract, the lenders can force the borrower(s) sell their home and pay back what they owe. Part of what makes the reverse mortgage dangerous is that upon sale of the home, the lender is titled to whatever profit their percent is worth. (Rosenblatt,

2012)

Another risk Mohr identified was future health. We don't know what is going to happen, and because this product is primarily only offered to people 62 years and older,

32 there is a chance the borrower won't be able to remain in the house for the lifespan of the contract. Forbes published an article titled The Hidden Truths about Reverse Mortgages that examines instances where reverse mortgage holders for one reason or another need to be moved from their house and into assisted living. (Clements, 2015) Doing so violates the moving clause at which point the borrower(s) are responsible for paying back the loan, as well as the high cost of assisted living.

If there are non-borrowing family members still residing in the house, they have to leave when the borrower leaves. (Cook, 2016) Similarly, upon death, the family members have to pay the loan in full. This may put someone in a position to not only not leave an inheritance, but to also leave their family in debt. If the other family members or secondary borrowers cannot pay what they owe, the lender can foreclose and sell the property. (Rosenblatt, 2012).

The lender can also foreclose and sell if the house goes into default which means taxes, insurance, or general maintenance were not taken care of. In such situations, the lender is at a big advantage in that they are in a position to foreclose and sell immediately, with the goal of getting their return on investment paid in full. An example she gives where this came back to hurt economy was the housing bubble and crisis.

People without NNEG protected contracts owed outstanding loans that were much greater than the depreciated value of the house, leaving many people homeless and a lot of unpaid debt to the lenders. (Rosenblatt, 2012) (Consumer Financial Protection Bureau,

2017) (U.S. Department of Urban Development and Housing, 2017) (Joosten, 2015)

(Clements, 2015) (Release-my-equity, 2017)

33

Home Reversion: The major risk they identified is that home reversion products offer a well below market offer on the home but expect a market value repayment if the borrower wants to get out of a contract early. (HomeReversion.org, 2017) Another risk they mention is that if the market value of the home or released equity increases, the borrower(s) are not entitled to any increase in value that sold equity experiences. In the

Product section for home reversion, I briefly discussed the life-lease which makes this aspect of the product not seem as bad, since really most of the time the homes are sold and leased back to the seller.

An early death of the borrower here results in the lender selling the house and the family getting very little for what may have been a much larger asset.

(Homereversion.org, 2017). This affect on inheritance is something important to consider before entering a home reversion contract.

Another risky aspect of the reversion is that even though the borrower isn't entitled to the profits that the sold equity might have gained from appreciation, the borrower has to pay the house maintenance and general fees associated with the sold equity; this equates to paying for the upkeep on the equity you don't even own anymore.

This risk is shared by the reverse mortgage and the lifetime mortgage as well.

(HomeReversion.org, 2017) (Joosten, 2015) (Clements, 2015)

Shared Appreciation Mortgage: The risk accompanied by this type of mortgage has to do with the contract agreement, being that in this type of mortgage the borrower is usually given a finite amount of time to pay the lender what he is owed. Similar to what

34 happens with the other products aforementioned if the borrower cannot pay the lender what the lender is owed at any point during finite time with money the appreciation has brought in, the borrower has to sell the house and pay what is due.

Inversely if the house doesn’t end up appreciating then the borrower gets the same loan with a lower interest rate. This is very important to consider before signing a shared appreciation mortgage contract. The borrowers essentially the home to keep its value, or for the value to drop because the lender makes money when the house appreciates. If a home under a SAM mortgage were to extremely appreciate, the borrower might end up owing much more than was foreseeable, in that how much they pay back to the lender would be affected by how much the estate appreciated. (Gans, 2012)

(Investopedia, 2017)

Draw Down Mortgage: The draw-down mortgage is essentially a line of credit that is established between a lender and a borrower. Nerdwallet, who is a financial service company has a blog on their company website, and posted an entry titled Understanding

Home Equity Lines of Credit which examines the home equity line of credit (HELOC as they call it) and the risks they bring.

One risk factor is that most of these products have variable interest rates, meaning the interest paid is subject to potentially rising interest rates. (Nerdwallet, 2017) The major risk factor here is that if monthly payments on the credit line aren’t met, the lender can foreclose and sell the home. Draw down mortgages can be implemented similarly to a reverse mortgage and many lenders offer the credit line for equity exchange. In these

35 cases, the borrower is subject to some the risks that accompany reverse mortgage contracts. (Nerdwallet, 2017) (Equity-Release-Centre, 2017)

Other Risks

Aging Risk: As people get older, the likelihood of getting sick, disabled or in need of assisted living increases. This is a very important factor to consider when deciding which product to buy. The graphs below from an AARP sponsored Harvard University study identifies the increasing likelihood of having to move into assisted living. (President and

Fellows of Harvard College, 2014)

Figure 4:

(President and Fellows of Harvard College, 2014)

The graphs show how much burden is added in each of the six categories. It is very easy to recognize that as a person becomes 80 and older the burden of all categories goes up.

A interesting value in the last graph shows us that the percent of people experiencing housing cost burden actually dips a small amount from 50-64 to the 65-79 age range.

36 Borrower Risk: Home equity release product loans across the board are usually based on below-market valuations of the house, to minimize risk to the lender by lessening how much they will initially give. This below market valuation that was paid to the borrower, combined with healthcare and house maintenance cost burdens that accompany our aging population as seen in Figure 2 in the Aging America section, can put the borrower in a very bad monetary situation. Considering that the most common reason to undergo a reverse mortgage product is to increase financial safety and to maintain the quality of life, it seems ironic that many people have been forced out of their homes owing more than expected to a lender. High levels of assisted living make these contracts riskier for the borrower and can make them more beneficial to the lenders. (This information came from my own understanding of the market after I had finished research)

Lender Risk: Throughout this thesis, it may have seemed like the lenders are in some way ripping off the borrowers or reverse mortgage product consumers on the grounds that there are many ways for the borrower to end up owing a low more than they expected. However, with any loan, the lenders run a chance to not get repaid in full. If the homeowner sells more equity to cover unexpected costs in the home or with their health, then the homeowner might in the end up without enough money to pay back the loan.

The NNEG that was discussed earlier puts more risk on the lender as well. If the loan cannot be paid because the loan has become bigger than the house's value, then the lenders are getting back a return that is smaller than what was expected. This challenges the integrity of whatever model the lenders are using, and more so than the borrower, puts the lender at risk of irresponsible borrowers not planning accordingly and not being

37 able to pay back what is due. (This information came from my own understanding of the market after I had finished research)

Loan Payment

In his Forbes article Reverse Mortgages: The Rewards and Risks, Nick Clement mentions the three general types of loan repayment as Lump Sum, in equal installments, or as needed through a line of credit. (Clements, 2015) Joosten extends that list to identify two types of equal installment and three types of credit lines. She doesn't go into the research or identifies differences for the consumer, but she does affirm that different types of payments can make risks and benefits different for different consumers. (Joosten,

2014) Put simply the payment depends on the contract that is agreed on by the borrower and the lender, but can come in installments or in a lump sum. The drawdown mortgage that establishes a line of credit, as well as any other home equity release products that pay out in a line of credit, are subject to different types of repayment from the borrower to the lender depending on how much money is taken out on the credit line and when it was taken out. (Clements, 2015) (Joosten, 2015) (Telegraph Financial Services, 2017)

(Nerdwallet, 2017)

Data

The data I will be using to conduct quantitative analysis on Virginia’s HECM reverse mortgage market comes from the U.S. Department of Housing and Urban

Development and was last updated in 2011. The data comes from a reverse mortgage program called the FHA-HECM which stands for The Home Equity Conversion

38 Mortgage program. (U.S. Department of Housing and Urban development, 2017). The

HECM is the only program that is government insured, making it less risky than private lenders, for them most part. The program offers the lender and the borrower less risk by guaranteeing each party is held responsible for their obligations, to a level that is decided at the creation of the HECM contract. To qualify for an FHA-HECM loan the consumer must be at least 62 years old.

The HECM dataset contains hundreds of thousands of pieces of datum, and other people have done more general market research on national reverse mortgage trends, thus

I have narrowed my data down to a subset that is more relevant to me. The subset I am referring Virginia data. I have taken out all data that did not take place in the state of

Virginia, my home state, and from there I took out all data that had missing or blank spaces in columns that I needed for my analysis. Any blank spaces or spaces lacking numerical value made my analysis much harder and left Stata trying to compute data that is strung together rather than separated numerically. Once I had my data set condensed to what I was looking for, I began to delete columns that had information I am not going to use.

A problem I ran into was that many of the loans had a co-borrower and the ones who didn't have blank spaces in the ‘Co-borrower-age' column, making it impossible to analyze jointly. I separated the remaining subset of data into two different data sets allowing me to analyze both the sets, as well as distinguish differences between the two, helping to identify existing conclusions concerning whether or not having a co-borrower would affect the life of the loan, and what effect the role of gender plays in the model.

Another problem was that the data with the co-borrower had a ‘3' under the gender

39 column, a 3 meaning couple. This was unfortunate because the I am not able to analyze the contracts with co-borrowers based on their gender. The non-co-borrower data set however did identify the gender role of the borrower. For this reason, I will only have data analysis concerning the role of gender in the first of the two HECM data subsets.

The dataset did not contain the reasoning for contracts ending and did not include the dates when the contracts were supposed to pay out for the lender, and thus I have had to use the length of contract as a proxy for what I am looking for. Contract duration serves as the proxy for contract length, which helps me to measure what independent variables might help to extend or shorten a contract. A short contract results in the lender benefitting, so correlating what affects that will help me find what I am looking for.

In order to analyze duration, since that was not an existing column, I created a new column that subtracted the contract start date from the date of contract termination, which has given me contract duration, the proxy I am using as my dependent variable.

From there I had to use Stata to split the data, so that five years and four months was expressed as 5.33 instead of 504.

By creating the column and regressing it against independent variables I have chosen from the dataset I will be able to correlate which independent variables are having an effect on the contract length of the HECM. This is important because while the analysis does not include why each individual HECM was terminated, the duration of the contract does give us a proxy for what might make contracts last longer. This is vitally important because reaching a contract's termination date would assure the borrower got what they were expecting, which is of the utmost importance in terms of reverse mortgage product consumers not ending up worse off financially than they when they

40 began the contract. If the contract terminates to early, the borrower can be forced to sell early, or depending on the contract the lender could foreclose the property and sell it at auction. (U.S. Department of Urban Development and Housing, 2017)

HECM

It found it important to add this section following the previous Data section to briefly identify again the FHA-HECM product. Simply on the grounds that private companies do not produce all of their reverse mortgage data, and because HECM is the only government insured reverse mortgage product, I can only analyze the government sponsored HECM data. The FHA lender approved and government backed HECM mortgages have safe guards to minimize the borrower's risk, and if someone is eligible for an FHA-HECM, then they should buy this product simply on the merit that it is government backed and upon sale of the product is less likely to price gouge the borrower.

Model

For this thesis, I am using the HECM government data like aforementioned and the type of models I am using are two simple regression and one multiple linear regression. Since I am trying to measure the risk associated with reverse mortgages, I am regressing different independent variables against my continuous dependent variable

Contract Length, which like aforementioned is a duration variable that is a proxy for what

I am looking for. What I am looking for being what factors might affect my dependent variable and extend or shorten contract length. A contract that terminates early is harmful

41 to the consumer of a reverse mortgage product, thus by inversely measuring what makes contracts last longer, I will be able to analyze what is causing contracts to end early.

Using Stata, I am going to linearly regress Gender and Co-borrower age against

Contract Length first, then follow that with a multi-linear regression where I will regress

Initial Principal Limit, Interest Rate, Property Appraisal Value, Max Claim, and Service

Fee Set-Aside so I can analyze the Coefficients, the P-values, and the Correlation

Coefficient (R^2) of each one. This will allow me to understand how each of my independent variables is affecting the contract duration. Written out the model will look like this:

Note: the Dependent variable, Y is Y hat, and b__ represents the coefficient of each variable, that can be found in the Stata tables below.

1) Y= b1A+ei :

Where Y= Termination date- Starting date and A = Co-borrower’s age

2) Y=b1B+ei :

Where Y= Termination date-Starting date and B = Gender

3) Y=b1C+b2D+b3E+b4F+b5G+ei :

Where Y= Termination date-Starting date and the remaining five

independent variables are Initial Principal Limit, Interest Rate, Property

Appraisal Value, Max Claim, and Service Fee Set-Aside

Data Analysis and Stata Tables

Note: In response to the dilemma of not being able to regress co-borrower age and gender together (because the mess up each other data columns) there will be a subsection

42 called Co-borrower vs. Non-Co-borrower, then a section called Gender, after which I will

be using the subset of data that has no-co borrower, but has gender, for the rest of the multi-linear regressions. This decision came from which model could explain more of the

variance in the dependent variable.

Co-borrower vs. no Co-borrower

The HECM dataset is limited in that every piece of datum (contract) that had a co- borrower had a ‘3' for gender, meaning couple. Similarly, contracts with on co-borrower had blank spaces where the co-borrowers age would go. When converted to Stata the blank spaces made the data a string, and not numeric, and in response I have separated my Virginia subset of the data into two subsets one of which can account for gender and the other is able to analyze the effect of having a co-borrower, and how much the co- borrowers age affects my dependent variable. The summary statistics below show the affect of having a co-borrower.

Tables 1 and 2

Co-Borrower

No Co-Borrower

43 (Summary statistics from my own Stata input)

What we can tell from the statistics above is that having a co-borrower increases the contracts mean, or life span, by over half a year which is significant considering the two means are both below four and a half years. The standard deviation of the Co-

Borrower data tells us that its data is a little more spread out than that of the no co- borrower, although some of the variation might be explained by the difference in data size from the first to the second subset.

Before analyzing the independent variable gender, I will briefly explain the linear regression results from regressing the explanatory variable co borrowers age against the response variable contract length. The results are below:

Table 3:

The coefficient tells us that for every year the co-borrower is older, the contracts life span is shortened by 2.25%. This is shown in by the negative coefficient following a simple regression against Contract Length. Co-borrower age is significant at the 92.2% level, as seen by its p value of .088

Gender

44 Like aforementioned, I had to turn my Virginia subset into two subsets so I could measure the effect that gender and the age of the co-borrower would have on the response variable, contract length. The results were that the subset with gender when regressed with the other independent variables had an R2 value of .3098, while the subset with co- borrowers age and not gender had an R2 of .3714. This tells us that more of the variance in my response variable is explained in the multi-linear regression model that contains the co borrowers age in it. Both results can be seen below

Tables 4 and 5:

(Tables came from my own stat input)

A quick summarize command into Stata shows us that the mean for gender is 1.705. We know that female = 1 and male =2 in this dataset so this mean tells us that the at least for this subset, being a no co-borrower HECM reverse mortgage contract, the market is male dominated just over 40%. (1.5 would be an even market).

45 A regression of gender produces the following:

Table 6:

(Table came from my own Stata input)

The positive correlation tells us that as contracts go up one year, the gender goes up 26%. We know that 1= female and 2 = male which means that the male gender and the extension of the contract duration are positively correlated. This regression result is significant at the 99.6% level, seen by the p value of .004.

Continued analysis

Now that I have gotten the Stata results I want for understanding the effect having a co-borrower, the co-borrowers age, and the affect of gender, I am going to take the data set that better explains the variance in Y and regress the remaining five independent variables (Initial Principal Limit, Interest Rate, Max Claim Amount, Property Appraisal

Value, and Service Fees Set Aside) against the response variable Contract Length to find out the affect my independent variables are having on my response variable. The following data analysis and tables come from the no co-borrower data, like aforementioned based on R2 values.

46 Model Part II, Explanatory Variables

Table 7:

The R2 value tells us that these remaining financial independent variables account for

34.76% of the variance in the dependent variable Contract Length. For every dollar

increase in each other variables, the contract length will increase or decrease by the

coefficient amount. All of the variables were significant at the 99.99% level except for

property appraisal value which had a p-value of .195, making it significant at the 80.15

level. Interest rate was not a dollar value, but was a percent, thus for every year the

contract length goes up the interest rate drops, showing us that a lower the interest rate yields a longer contract. That same conclusion tells us that a smaller principal limit will

increase contract length, a bigger max claim amount will increase contract length, a higher property appraisal value will extend contract length, and finally a lower amount of service fees set aside will extend the contracts life. This information is very important to

consider before buying one of the mentioned products. The definitions of the variables,

47 and what the numbers represent can be found by clicking the last link at the end of the

references.

Conclusion

In conclusion, there are many factors to consider before entering a home equity release or reverse mortgage product. There are many different benefits and risks associated with the different products, and sometimes it can be hard to understand what the subtle differences mean and how they will affect the contract in the long run. After finishing my research and analysis, I would recommend that before buying one of these products, the potential consumer should at least consider selling the home and downsizing. The average contract lengths were short, much shorter than what you read about on websites that offer these contracts. This means that contracts are terminated early, hurting the consumers.

After analyzing the different products, if a consumer was going to purchase one of these products, I would recommend the home reversion. It takes away a lot of the risk of a huge compounding interest if the consumer sells the home first, and puts a life lease on it. Similarly, if I was buying one of these products in Virginia, I would use the analysis I produced to make sure my contract was minimally risky. However, the analysis I conducted is only relevant to the FHA-HECM reverse mortgage market in Virginia, thus using my analysis elsewhere wouldn’t be necessarily be helpful, for the most part. The takeaway from this thesis is that these products and contracts can be extremely tricky and risky, and that anyone who is considering entering one needs to fully understand what the

48 contract entails. Not doing so might result with people signing off on contracts for short term monetary aid, not realizing the pit of debt they will end up in.

Thank you for taking the time to read this thesis.

49 References

Tergesen, A. (2008, September 13). Trading on the Future. Retrieved April 11, 2017, from https://www.wsj.com/articles/SB122098042460615437

U.S. Department of Urban Housing and Developement. (n.d.). Frequently asked questions about HUD's Reverse Mortgages. Retrieved April 11, 2017, from https://portal.hud.gov/hudportal/HUD?src=%2Fprogram_offices%2Fhousing%2Fsfh %2Fhecm

Clements, N. (2015, February 19). Reverse Mortgages: Safety and Risks. Retrieved April 11, 2017, from https://www.forbes.com/sites/nextavenue/2015/02/19/reverse- mortgages-the-rewards-and-risks/#25a930e52a81

Joosten, A. (2015, December 8). Equity Release Analysis for the Netherlands. Retrieved April 1, 2017, from https://www.netspar.nl/assets/uploads/021_-_MSc_-_Joosten.pdf

Release-My-Equity. (n.d.). The No Negative Equity Guarantee. Retrieved April 11, 2017, from http://www.release-my-equity.co.uk/the-no-negative-equity-guarantee/

Mohr, A., & Investopedia. (2017, January 12). The Dangers of a Reverse Mortgage. Retrieved April 11, 2017, from http://www.investopedia.com/financial-edge/0113/the- dangers-of-a-reverse- mortgage.aspx

Rosenblatt, C., & Forbes. (2015, April 13). The Hidden Truths About Reverse Mortgages. Retrieved April 11, 2017, from https://www.forbes.com/sites/carolynrosenblatt/2012/07/23/hidden-truths-about- reverse-mortgages/#5eb0660e6a56

Ortman, J. M., Velkoff, V. A., & Hogan, H. (2014, May). An Aging Nation: The Older Population in The United States. Retrieved March 20, 2017, from https://www.census.gov/prod/2014pubs/p25-1140.pdf

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Data Definitions

https://portal.hud.gov/hudportal/documents/huddoc?id=hecmdataed_nov2011.pdf

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