Reverse Mortgages: Private Incentives, Market Constraints, and Public Policy
Posted: 9 Jul 1998
Date Written: December 1995
This paper considers the (slowly) emerging reverse mortgage market from the perspective of this financial planning and risk management perspective. Agency problems, moral hazard issues, adverse selection, and uncertainty about housing market conditions are factors that affect the development of the reverse mortgage market because they undermine the incentive compatibility between buyers and sellers. These issues are examined in the context of the financial planning perspective.The use of housing equity as a financial planning and risk management tool is partly determined by public policies not directly related to reverse mortgages per se. Factors that may have a substantial impact on the reverse mortgage market are explored in this paper. Among them are tax policies that tend to affect the speed with which households increase home equity (e.g., tax policies that make 15 year mortgages relatively more attractive), developments in the private long-term care insurance market, and public "safety-net" policies that influence the choice between in-home care versus nursing home care.
JEL Classification: G21, H53
Suggested Citation: Suggested Citation