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Reverse Mortgage Loans: A Quantitative Analysis

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  • Irina A. Telyukova

    (University of California San Diego)

  • Makoto Nakajima

    (Federal Reserve Bank of Philadelphia)

Abstract

Reverse mortgages allow elderly homeowners with limited income or financial wealth to borrow against their housing wealth without downsizing or selling out and becoming a renter. Although the proportion of elderly homeowners using reverse mortgages has been increasing rapidly, only 1.4 percent of elderly homeowners are using reverse mortgages. In this paper, we analyze reverse mortgage loans in a rich structural life-cycle model in retirement. Our model can replicate the low take-up rate with a reasonable calibration. When the model is calibrated to match the observed take-up rate, the welfare gain from introducing reverse mortgages is small -- equivalent to a one-time transfer of 4 dollars for all households, or 300 dollars for those who benefit from reverse mortgage loans. Our model indicates that the reverse mortgages are used by the borrowers to pay for medical expenses while remaining in their home. Through a variety of counterfactual experiments, we identify that bequest motives, moving shocks, and house price fluctuations, as well as costs of insurance, contribute to the observed low take-up rate. Finally we also find that the HECM Saver, which is a recently-introduced reverse mortgage contract, pushes up demand for reverse mortgages. Going forward, we are planning to investigate the optimal design of reverse mortgage loans using our framework.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 387.

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Date of creation: 2011
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Handle: RePEc:red:sed011:387

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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References

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  1. Matt Chambers & Carlos Garriga & Don Schlagenhauf, 2009. "The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 444-468, July.
  2. Hui Shan, 2009. "Reversing the trend: the recent expansion of the reverse mortgage market," Finance and Economics Discussion Series 2009-42, Board of Governors of the Federal Reserve System (U.S.).
  3. Makoto Nakajima, 2012. "Everything you always wanted to know about reverse mortgages but were afraid to ask," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 19-31.
  4. Alan Greenspan & James Kennedy, 2007. "Sources and uses of equity extracted from homes," Finance and Economics Discussion Series 2007-20, Board of Governors of the Federal Reserve System (U.S.).
  5. Sally R. Merrill & Meryl Finkel & Nandinee K. Kutty, 1994. "Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 257-299.
  6. Juan Contreras & Joseph Nichols, 2010. "Consumption responses to permanent and transitory shocks to house appreciation," Finance and Economics Discussion Series 2010-32, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2012. "Is financial fragility a matter of illiquidity? An appraisal for Italian households," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 12061, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  2. Carmen Hoyo & David Tuesta, 2013. "Financiando la jubilacion con activos inmobiliarios: un analisis de caso para Mexico," Working Papers 1334, BBVA Bank, Economic Research Department.
  3. Carmen Hoyo & David Tuesta, 2013. "Financing retirement with real estate assets: an analysis of Mexico," Working Papers 1335, BBVA Bank, Economic Research Department.

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