IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v133y2017icp151-171.html
   My bibliography  Save this article

Reverse mortgages: What homeowners (don’t) know and how it matters

Author

Listed:
  • Davidoff, Thomas
  • Gerhard, Patrick
  • Post, Thomas

Abstract

Reverse mortgages allow elderly homeowners to unlock and consume home equity without leaving their homes. Relative to the number of elderly homeowners with limited financial resources, the take-up rates of reverse mortgages are low. To understand the low take-up rates we first survey U.S. homeowners aged 58 and older assessing their knowledge (literacy) about the most popular reverse mortgage product, the Home Equity Conversion Mortgage (HECM). Next, we study the relationship between knowledge and the intention to use a HECM. Awareness of reverse mortgages is high, but knowledge of contract terms is limited. More knowledgeable homeowners and those with peers who have a reverse mortgage express greater intention to use such a product. Respondents who would benefit most from reverse mortgages (those with low incomes and limited savings) express greater intention to use reverse mortgages, but lack knowledge of the contract terms. Our findings suggest that take-up rates might be increased through improving knowledge about contract terms or changing the product’s design to make it easier to understand in the first place.

Suggested Citation

  • Davidoff, Thomas & Gerhard, Patrick & Post, Thomas, 2017. "Reverse mortgages: What homeowners (don’t) know and how it matters," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 151-171.
    • Handle: RePEc:eee:jeborg:v:133:y:2017:i:c:p:151-171
    DOI: 10.1016/j.jebo.2016.11.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S016726811630261X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2016.11.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Davidoff, 2015. "Can "High Costs" Justify Weak Demand for the Home Equity Conversion Mortgage?," The Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2364-2398.
    2. Daniel Fernandes & John G. Lynch & Richard G. Netemeyer, 2014. "Financial Literacy, Financial Education, and Downstream Financial Behaviors," Management Science, INFORMS, vol. 60(8), pages 1861-1883, August.
    3. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
    4. Yogo, Motohiro, 2016. "Portfolio choice in retirement: Health risk and the demand for annuities, housing, and risky assets," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 17-34.
    5. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
    6. John Y. Campbell, 2016. "Restoring Rational Choice: The Challenge of Consumer Financial Regulation," American Economic Review, American Economic Association, vol. 106(5), pages 1-30, May.
    7. Hui Shan, 2011. "Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(4), pages 743-768, December.
    8. Lusardi, Annamaria & Tufano, Peter, 2015. "Debt literacy, financial experiences, and overindebtedness," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(4), pages 332-368, October.
    9. Daniel S. Hamermesh, 1985. "Expectations, Life Expectancy, and Economic Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 389-408.
    10. Thomas Davidoff, 2009. "Housing, Health, and Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(1), pages 31-52, March.
    11. Esther Duflo & Emmanuel Saez, 2003. "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 815-842.
    12. Alicia H. Munnell & Steven A. Sass, 2014. "The Government’s Redesigned Reverse Mortgage Program," Issues in Brief ib2014-1, Center for Retirement Research.
    13. Duflo, Esther & Saez, Emmanuel, 2002. "Participation and investment decisions in a retirement plan: the influence of colleagues' choices," Journal of Public Economics, Elsevier, vol. 85(1), pages 121-148, July.
    14. Moulton, Stephanie & Haurin, Donald R. & Shi, Wei, 2015. "An analysis of default risk in the Home Equity Conversion Mortgage (HECM) program," Journal of Urban Economics, Elsevier, vol. 90(C), pages 17-34.
    15. Annamaria Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," CeRP Working Papers 46, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    16. Louis Eeckhoudt & Philippe Godfroid, 2000. "Risk Aversion and the Value of Information," The Journal of Economic Education, Taylor & Francis Journals, vol. 31(4), pages 382-388, December.
    17. Meier, Stephan & Sprenger, Charles D., 2013. "Discounting financial literacy: Time preferences and participation in financial education programs," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 159-174.
    18. Katja Hanewald & Thomas Post & Michael Sherris, 2016. "Portfolio Choice in Retirement—What is The Optimal Home Equity Release Product?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 421-446, June.
    19. Makoto Nakajima & Irina A. Telyukova, 2017. "Reverse Mortgage Loans: A Quantitative Analysis," Journal of Finance, American Finance Association, vol. 72(2), pages 911-950, April.
    20. Chalmers, John & Johnson, Woodrow T. & Reuter, Jonathan, 2014. "The effect of pension design on employer costs and employee retirement choices: Evidence from Oregon," Journal of Public Economics, Elsevier, vol. 116(C), pages 17-34.
    21. Wong-Parodi, Gabrielle & Bruine de Bruin, Wändi & Canfield, Casey, 2013. "Effects of simplifying outreach materials for energy conservation programs that target low-income consumers," Energy Policy, Elsevier, vol. 62(C), pages 1157-1164.
    22. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
    23. Davidoff, Thomas, 2010. "Home equity commitment and long-term care insurance demand," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 44-49, February.
    24. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2004. "Social Interaction and Stock-Market Participation," Journal of Finance, American Finance Association, vol. 59(1), pages 137-163, February.
    25. Johnson, Devon & Grayson, Kent, 2005. "Cognitive and affective trust in service relationships," Journal of Business Research, Elsevier, vol. 58(4), pages 500-507, April.
    26. Artle, Roland & Varaiya, Pravin, 1978. "Life cycle consumption and homeownership," Journal of Economic Theory, Elsevier, vol. 18(1), pages 38-58, June.
    27. Christopher J. Mayer & Katerina Simons, 1994. "A new look at reverse mortgages: potential market and institutional constraints," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 15-26.
    28. Christopher J. Mayer & Katerina V. Simons, 1994. "Reverse Mortgages and the Liquidity of Housing Wealth," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 235-255, June.
    29. Rik Dillingh & Henriette Prast & Mariacristina Rossi & Cesira Urzì Brancati, 2013. "The psychology and economics of reverse mortgage attitudes: evidence from the Netherlands," CeRP Working Papers 135, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    30. Fornero, Elsa & Rossi, Mariacristina & Urzí Brancati, Maria Cesira, 2016. "Explaining why, right or wrong, (Italian) households do not like reverse mortgages," Journal of Pension Economics and Finance, Cambridge University Press, vol. 15(2), pages 180-202, April.
    31. Jeffrey R. Brown & Zoran Ivković & Paul A. Smith & Scott Weisbenner, 2008. "Neighbors Matter: Causal Community Effects and Stock Market Participation," Journal of Finance, American Finance Association, vol. 63(3), pages 1509-1531, June.
    32. Park, C Whan & Lessig, V Parker, 1977. "Students and Housewives: Differences in Susceptibility to Reference Group Influence," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 4(2), pages 102-110, Se.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sharma, Tripti & French, Declan & McKillop, Donal, 2022. "The UK equity release market: Views from the regulatory authorities, product providers and advisors," International Review of Financial Analysis, Elsevier, vol. 79(C).
    2. Collins, J. Michael & Hembre, Erik & Urban, Carly, 2020. "Exploring the rise of mortgage borrowing among older Americans," Regional Science and Urban Economics, Elsevier, vol. 83(C).
    3. Gilles E. Gignac & Elizabeth Ooi, 2022. "Measurement error in research on financial literacy: How much error is there and how does it influence effect size estimates?," Journal of Consumer Affairs, Wiley Blackwell, vol. 56(2), pages 938-956, June.
    4. Mohammed Ishaq Mohammed & Noralfishah Sulaiman & Dahiru Adamu, 2018. "Dimensionality and Reliability of the Determinants of Reverse Mortgage Use Intention," Traektoriâ Nauki = Path of Science, Altezoro, s.r.o. & Dialog, vol. 4(2), pages 1013-1023, February.
    5. Murray, Tim, 2019. "Defined benefit pensions and homeownership in the post-Great Recession era," MPRA Paper 92601, University Library of Munich, Germany.
    6. Ismael Choinière-Crèvecoeur & Pierre-Carl Michaud, 2023. "Reverse Mortgages and Financial Literacy," CIRANO Working Papers 2023s-06, CIRANO.
    7. Badescu, Alexandru & Quaye, Enoch & Tunaru, Radu, 2022. "On non-negative equity guarantee calculations with macroeconomic variables related to house prices," Insurance: Mathematics and Economics, Elsevier, vol. 103(C), pages 119-138.
    8. Alessandro Piergallini, 2020. "Demographic change and real house prices: a general equilibrium perspective," Journal of Economics, Springer, vol. 130(1), pages 85-102, June.
    9. Ruiz, José Luis & Tapia, Pablo & Donoso, José, 2019. "The social and economic effects of introducing reverse mortgages in Chile," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    10. Hanewald, Katja & Bateman, Hazel & Fang, Hanming & Wu, Shang, 2020. "Is there a demand for reverse mortgages in China? Evidence from two online surveys," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 19-37.
    11. Florian Bartsch & Florian Buhlmann & Karolin Kirschenmann & Carolin Schmidt, 2021. "Is There a Need for Reverse Mortgages in Germany? Empirical Evidence and Policy Implications," EconPol Policy Reports 31, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    12. Wei Han & Ping Wang & Hongjie Dong, 2020. "Influence of Egoistic and Altruistic Bequest Motives on the Willingness to Participate in Reverse Mortgages in China," Asian Economic Journal, East Asian Economic Association, vol. 34(4), pages 430-463, December.
    13. Hambel, Christoph & Kraft, Holger & Meyer-Wehmann, André, 2023. "When should retirees tap their home equity?," Journal of Banking & Finance, Elsevier, vol. 154(C).
    14. James Conklin & Kristopher Gerardi & Lauren Lambie-Hanson, 2022. "Can Everyone Tap Into the Housing Piggy Bank? Racial Disparities in Access to Home Equity," FRB Atlanta Working Paper 2022-17, Federal Reserve Bank of Atlanta.
    15. Cocco, Joao F. & Lopes, Paula, 2019. "Aging in place, housing maintenance and reverse mortgages," LSE Research Online Documents on Economics 100835, London School of Economics and Political Science, LSE Library.
    16. Mohammed Mohammed Ishaq & Sulaiman Noralfishah, 2018. "Determinants of Reverse Mortgage Usage in Malaysia," Real Estate Management and Valuation, Sciendo, vol. 26(3), pages 5-23, September.
    17. KUNDID NOVOKMET Ana & MATKOVIĆ MARTINA, 2020. "Anticipating A Reverse Mortgage Adoption In Croatia," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 15(3), pages 132-151, December.
    18. Junxue Jia & Jia Gu & Guangrong Ma, 2021. "Real Estate Boom and Firm Productivity: Evidence from China," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(5), pages 1218-1242, October.
    19. Hambel, Christoph & Kraft, Holger & Meyer-Wehmann, André, 2020. "When should retirees tap their home equity?," SAFE Working Paper Series 293, Leibniz Institute for Financial Research SAFE.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    2. Kawamura, Tetsuya & Mori, Tomoharu & Motonishi, Taizo & Ogawa, Kazuhito, 2021. "Is Financial Literacy Dangerous? Financial Literacy, Behavioral Factors, and Financial Choices of Households," Journal of the Japanese and International Economies, Elsevier, vol. 60(C).
    3. Mugerman, Yevgeny & Sade, Orly & Shayo, Moses, 2014. "Long term savings decisions: Financial reform, peer effects and ethnicity," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 235-253.
    4. Tran Huynh, 2023. "Financial Literacy and Mortgage Payment Delinquency?," Jena Economics Research Papers 2023-007, Friedrich-Schiller-University Jena.
    5. Hanewald, Katja & Bateman, Hazel & Fang, Hanming & Wu, Shang, 2020. "Is there a demand for reverse mortgages in China? Evidence from two online surveys," Journal of Economic Behavior & Organization, Elsevier, vol. 169(C), pages 19-37.
    6. Calcagno, Riccardo & Monticone, Chiara, 2015. "Financial literacy and the demand for financial advice," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 363-380.
    7. repec:mea:meawpa:14282 is not listed on IDEAS
    8. Samuel Dodini & Donald R. Haurin & Stephanie Moulton & Maximilian D. Schmeiser, 2015. "How House Price Dynamics and Credit Constraints affect the Equity Extraction of Senior Homeowners," Finance and Economics Discussion Series 2015-70, Board of Governors of the Federal Reserve System (U.S.).
    9. Grohmann, Antonia, 2018. "Financial literacy and financial behavior: Evidence from the emerging Asian middle class," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 129-143.
    10. Annamaria Lusardi & Olivia S. Mitchell & Vilsa Curto, 2009. "Financial Literacy among the Young: Evidence and Implications for Consumer Policy," CeRP Working Papers 91, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    11. Gathergood, John & Weber, Jörg, 2017. "Financial literacy, present bias and alternative mortgage products," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 58-83.
    12. Ziyuan Lyu & Li Wei, 2021. "Information sources and participation in the Chinese insurance market: knowledge as a mediator," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(1), pages 79-106, January.
    13. Leora F. Klapper & Annamaria Lusardi & Georgios A. Panos, 2012. "Financial Literacy and the Financial Crisis," NBER Working Papers 17930, National Bureau of Economic Research, Inc.
    14. Grohmann, Antonia & Kouwenberg, Roy & Menkhoff, Lukas, 2015. "Childhood roots of financial literacy," Journal of Economic Psychology, Elsevier, vol. 51(C), pages 114-133.
    15. Kaustia, Markku & Conlin, Andrew & Luotonen, Niilo, 2023. "What drives stock market participation? The role of institutional, traditional, and behavioral factors," Journal of Banking & Finance, Elsevier, vol. 148(C).
    16. Klapper, Leora & Lusardi, Annamaria & Panos, Georgios A., 2013. "Financial literacy and its consequences: Evidence from Russia during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3904-3923.
    17. Ismael Choinière-Crèvecoeur & Pierre-Carl Michaud, 2023. "Reverse Mortgages and Financial Literacy," Cahiers de recherche / Working Papers 12, Institut sur la retraite et l'épargne / Retirement and Savings Institute.
    18. Kubitza, Christian & Hofmann, Annette & Steinorth, Petra, 2019. "Financial literacy and precautionary insurance," ICIR Working Paper Series 34/19, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    19. Stephanie Moulton & Donald Haurin & Samuel Dodini & Maximilian D. Schmeiser, 2016. "How Home Equity Extraction and Reverse Mortgages Affect the Credit Outcomes of Senior Households," Working Papers wp351, University of Michigan, Michigan Retirement Research Center.
    20. Philip Young P. Hong & Maria V. Wathen & Alanna J. Shin & Intae Yoon & Jang Ho Park, 2022. "Psychological Self-Sufficiency and Financial Literacy among Low-Income Participants: An Empowerment-Based Approach to Financial Capability," Journal of Family and Economic Issues, Springer, vol. 43(4), pages 690-702, December.
    21. Dillingh, Rik, 2016. "Empirical essays on behavioral economics and lifecycle decisions," Other publications TiSEM 0e2143e3-bd86-4302-90eb-e, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Reverse mortgage demand; Reverse mortgage knowledge; Reverse mortgage literacy;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:133:y:2017:i:c:p:151-171. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.