Reverse Mortgage Loans: A Quantitative Analysis

Abstract

Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. In spite of growth in this market, only 2.1% of eligible homeowners had RMLs in 2011. In this paper, we analyze reverse mortgages in a life-cycle model of retirement, calibrated to age-asset profiles. The ex-ante welfare gain from RMLs is sizable at $1,000 per household; ex-post, low-income, low-wealth and poor-health households use them. Bequest motives, nursing-home moving risk, house price risk, and interest and insurance costs all contribute to the low take-up rate. The model predicts market potential for RMLs to be 5.5% of households.

Housing Price Dynamics, Mortgage Credit and Reverse Mortgage Demand: Theory and Empirical Evidence

“…We find that households with lower wealth (incomes), better health and no motivation to bequeath are theoretically more likely to select a reverse mortgage, as depicted in Figures 4A–C. This result suggests that households with high home equity but low levels of liquid assets are more likely to select a reverse mortgage (similar to Nakajima and Telyukova's [] finding). However, poor health status is not significantly associated with borrowers who would tend to benefit from reverse mortgages.…”

“…Following existing simulation approaches (Poterba, Venti and Wise , Nakajima and Telyukova ), we use the Poisson distribution to model the numbers of claims. The fitting parameter λ is set to capture the probable count of events, determined under the Poisson processes for obtaining a reverse mortgage.…”

“…Models to describe the dynamics between housing prices and reverse mortgage demand are desperately needed. Nakajima and Telyukova () suggest that aggregate house price dynamics can significantly affect demand for reverse mortgages, but they leave the deeper analysis of this issue to future research. Haurin et al .…”

“…Because home equity and credit expansion are closely related, eligible homeowners should be more likely to take out a reverse mortgage when housing prices are relatively high compared with historical averages. Nakajima and Telyukova () develop and calibrate a theoretical model that replicates the take‐up rates of senior citizen demand in a reverse mortgage market. They argue that a reverse mortgage taps the borrower's home equity in a way that is different from that of a traditional forward mortgage.…”

“…Limitations on reverse mortgage demand are generally attributed to high costs ( i.e ., insurance payments, tax fees and interest rates), because mortgage credit is too poor to make it actuarially feasible to neutralize consumption‐smoothing benefits over time. Nakajima and Telyukova () also address reverse mortgage demand in a model parameterized with Health and Retirement Study (HRS) data. They show that bequest motives, uncertainty about health and expenses and significant contract costs dampen reverse mortgage demand.…”