A Behavioral Model Of Reverse Mortgage Choice

"This paper develops a behavioral model of the decision-choice of an elderly homeowner who owns her home free and clear in the starting period. The homeowner is faced with a choice among four scenarios: To maintain status quo by aging in place in a home that is owned free and clear, to sell the home, to obtain a reverse mortgage as a tenure plan, and to obtain a reverse mortgage as a line of credit. The homeowner hypothetically maximizes her utility in each of the scenarios, subject to the relevant budget constraint, and then chooses the scenario that yields the highest utility among the four maxima. The model is also represented graphically using the tools of budget sets and indifference """"curves."""" This is the first formal analysis of the role of preference structures (over flexible assets, aging in place, bequest, free and clear ownership, and other goods) in determining the demand for reverse mortgages. The model yields useful insights into understanding the reasons why maintaining status quo is the most popular option among the elderly, followed by the selling option, under current preference structures and market conditions. The model provides demand-side explanations for the largely untapped potential market for reverse mortgages."