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Reverse Mortgage Loans: A Quantitative Analysis

40 Pages Posted: 12 Sep 2014  

Makoto Nakajima

Federal Reserve Bank of Philadelphia

Irina Telyukova

University of California, San Diego

Multiple version iconThere are 3 versions of this paper

Date Written: September 8, 2014

Abstract

Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. Despite growth in this market, only 2.1% of eligible homeowners had RMLs in 2011. In this paper, the authors analyze reverse mortgages in a calibrated life-cycle model of retirement. The average welfare gain from RMLs is $885 per homeowner. The authors’ model implies that low-income, low-wealth, and poor-health households benefit the most, consistent with empirical evidence. Bequest motives, nursing-home-move risk, house price risk, and loan costs all contribute to the low take-up. The Great Recession may lead to increased RML demand, by up to 30% for the lowest-income and oldest households.

Keywords: Reverse Mortgage, Mortgage, Housing, Retirement, Home Equity Conversion Mortgage, HECM

JEL Classification: D91, E21, G21, J14

Suggested Citation

Nakajima, Makoto and Telyukova, Irina, Reverse Mortgage Loans: A Quantitative Analysis (September 8, 2014). FRB of Philadelphia Working Paper No. 14-27. Available at SSRN: https://ssrn.com/abstract=2494405 or http://dx.doi.org/10.2139/ssrn.2494405

Makoto Nakajima (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Irina Telyukova

University of California, San Diego ( email )

9500 Gilman Drive
San Diego, CA 92093
United States

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