Expanding Access to Home Equity for Older Adults through Underwriting

• In Event: Home Equity and Wealth Building

Abstract

While home equity comprises a large share of wealth for many older adults, it is often difficult to access. A recent study indicates that about one-third of adults ages 62 and older who applied for a home equity line of credit (HELOC) were denied with the predominant reason (70% of cases) being a high debt to income (DTI) ratio (Mayer and Moulton 2020). While DTI is frequently used in underwriting and is often the focus of federal mortgage policy, this study investigates whether DTI actually predicts mortgage performance, particularly for older adults who tend to have stable incomes, assets, and strong credit histories. 

 This study leverages data on more than 100,000 applicants for a HELOC in Ohio with a large national bank between 2018 and 2022, of whom 40,977 were age 62 and older.  We link administrative data from the bank at the time of application with panel data on checking and savings account activity from the bank and credit panel data from a major credit bureau from 2015-2023. We first use these data to estimate Heckman selection models, predicting the likelihood of obtaining a HELOC in the first stage and HELOC performance in the second stage. We exploit an internal bank change to the maximum credit line as an instrument for obtaining a HELOC. Our results indicate that while DTI is the most substantial factor predicting HELOC origination, it is weakly or insignificantly associated with subsequent HELOC performance. We estimate policy simulations relaxing the DTI threshold while introducing cash flow measures as part of underwriting, identifying alternative underwriting criteria that could expand access without increasing credit risk for the lender. 

For older adults, a fundamental policy question is whether those who would gain access to HELOCs if DTI thresholds were relaxed would be better (or worse) off? On one hand, liquifying home equity through borrowing can improve financial security. On the other hand, as a loan, HELOC repayment can create financial strain. To explore this tradeoff, we exploit the bank’s exogenous DTI lending cutoff to estimate the effects of a HELOC application being approved (or denied) on subsequent indicators of financial insecurity including delinquency on debt payments, collections, and high-cost borrowing. Using a regression discontinuity design, we find that older HELOC applicants just above the DTI cutoff were more likely to exhibit indicators of financial insecurity in the two years following application than older HELOC applicants just below the DTI cutoff. This provides evidence that, among older homeowners with high DTIs (just above and below the existing DTI cutoff), originating a HELOC improves financial security.  

Authors

• Stephanie Moulton, The Ohio State University
  Presenting Author

• Meta Brown, The Ohio State University
  Non-Presenting Co-Author

• Donald R. Haurin, The Ohio State University
  Non-Presenting Co-Author

• Caezilia Loibl, The Ohio State University
  Non-Presenting Co-Author

• Rohan Angadi, The Ohio State University
  Non-Presenting Co-Author

• Zakary Adam Campbell, The Ohio State University
  Non-Presenting Co-Author