Reverse Mortgage Loans: A Quantitative Analysis
34 Pages Posted: 17 Jul 2011 Last revised: 11 Jun 2013
Date Written: June 4, 2013
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 sizeable 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.
Keywords: Reverse Mortgage, Mortgage, Housing, Retirement, Home Equity Conversion Mortgage, HECM
JEL Classification: D91, E21, G21, J14
Suggested Citation: Suggested Citation