People who decide to engage with the Federal Housing Administration (FHA)’s Home Equity Conversion Mortgage (HECM) program do so largely through a needs-based set of motivations, but the cash flow which can be provided by a HECM loan can also meet the needs of both engaged HECM prospects and the broader American senior population. In fact, the broader senior population may even face more risks, in some cases, than those who actively seek out a reverse mortgage solution. This is according to the perspective of Dr. Barbara Stucki, a researcher with a focus on helping older Americans manage the financial challenges of aging.

In research Stucki co-authored with members of the National Council on Aging (NCOA) and which she presented at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting this month, it was determined that many reverse mortgage decisions remain needs-based.

However, issues that could threaten the financial stability of older Americans are not isolated to seniors considering a reverse mortgage, and home equity could plan an important role in a senior’s cash flow situation while enabling more older adults to age in place in their own homes.

Sources of concern for seniors

During HECM counseling, prospective reverse mortgage borrowers are asked a series of questions related to issues of aging that can have a major impact on the stability of their finances. A series of 18 sources of financial vulnerability came up in the questions, including health status; physical limitations; recent shocks including a divorce, fall or nursing home stay; housing costs; livability; access to a pension or life insurance policy; and access to unpaid help.

These attributes from HECM counseling households are then compared to the attributes of the wider U.S. senior population to determine any commonality in terms of financial risks that seniors experience, and which could be impacted by accessing home equity. Not all risk factors had the same level of impact on seniors, Stucki noted.

“Research has shown that older people who are socially isolated often face additional out-of-pocket health expenses for increased length of stay in hospitals for example, or need more time in a skilled nursing facility or rehab,” she said. “We found that HECM counseling households were more likely to be living alone, and therefore could be at greater risk for these additional expenses than older homeowners in the U.S. population.”

Data on the general population was derived from the 2014 Health and Retirement Study (HRS) survey, which is the most up-to-date example of such data, Stucki said.

Households seeking HECM had less destabilizing attributes than general population

There were some notable instances in which HECM counseling households were actually in better shape than the general population, which is surprising considering the needs-based motivation many have for seeking out a HECM in the first place, she said.

“We found that HECM counseling households were far less likely to report that they had no access to unpaid help compared to older homeowners in the U.S. population,” she said. “These findings were actually rather surprising [in terms of] the real, significant difference between these two [cohorts]. Over half of older homeowner households in the general population indicated that they didn’t have someone living nearby or someone that they felt they could rely on for future help, versus only 7% among HECM counseling households.”

This is an idea that persisted through other issues which afflict seniors’ finances, including events that are generally considered to be financially destabilizing, Stucki said.

“Since older households often face a bundle of problems, we tallied up the total number of financial stresses for each household, up to a maximum of 17 that we were able to compare between the two groups of older homeowners,” she said. “The results show that the potential for financial trouble is rarely an isolated event. However, HECM counseling households tended to have fewer potentially destabilizing financial vulnerabilities per household than older homeowner households in the U.S. population.”

Of a selection of typical financial stressors present among the senior population, HECM counseling households also appeared to maintain fewer vulnerabilities than the general population, according to the research.

“Most HECM counseling households – about 75% – had a total of between one and three of the 17 possible household stressors,” she said. “Very few reported six or more sources of financial vulnerability that could direct make them more susceptible to a cash flow crunch. [Directly comparing those households with the general population], we can see that 54% of older homeowner households in the  U.S. population have between three and five of these households stressors. In addition, 24% were facing seven or more of these potential sources of financial stress. Only about 9% of homeowners in the general population might have low susceptibility to cash flow and later life with two or fewer vulnerability factors.”

The importance of adequate cash flow

A significant portion of HECM counseling households may have been at risk of experiencing a financial shock that had the potential to destabilize their living situations, including roughly 10% with an underlying health issue, and roughly 28% of HECM counseling households had experienced a destabilizing event such as a divorce or the loss of a spouse. As many as 25% of HECM counseling households were entirely dependent on Social Security benefits as the source of their fixed income.

For those counseling households, they turned to a HECM option in several different ways in an attempt to mitigate their financial risks, Stucki explained. For a segment measured based on risk related to housing debt, 88% of such households were focused on eliminating their forward mortgage payment through the use of a HECM.

“One of [the needs motivating HECM use] is the need to manage the financial risks of aging solo,” Stucki said. “This is a growing challenge among older Americans with higher rates of divorce and childlessness. A higher proportion of HECM counseling houses live alone, compared to older households in the U.S. population. So, it may be that aging solo is one of those underlying financial strategies.”

Increasing financial flexibility is also a strong motivation, Stucki explained. While HECM counseling households measured in the research had less general vulnerabilities that could destabilize cash flow, they were nonetheless burdened with debt that could impair the ability to respond to such risks.

“Perhaps the biggest underlying financial strategy may be the desire to maintain financial flexibility and financial stability, even though relatively few HECM counseling households could be classified as poor,” she said. “Many were living on the edge. In total, 45% may have been economically insecure, which is high compared to older households in the U.S. population, which is 39%. In addition, half of all HECM counseling households had internal household stressors, which may have put them at risk for a destabilizing financial shock.”