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Reverse Mortgages and Borrower Maintenance Risk


  • Thomas J. Miceli
  • C.F. Sirmans


This paper develops a theoretical model of the problem of maintenance risk in reverse mortgages (RMs) and home equity conversion instruments generally. By maintenance risk, we refer to the incentive homeowners will have to reduce maintenance expenditures as their equity in the house falls during the term of the RM. The underlying reason for this tendency is the limited liability feature of RMs, given that a borrower's obligation to the lender at. maturity is limited to the value of the house.The results of the model show that lenders will respond to this problem either by limiting the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging an interest rate premium to cover the expected cost of default. Unfortunately, there do not exist data to test the importance of maintenance risk as a possible limitation on the extent of the RM market. Copyright American Real Estate and Urban Economics Association.

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  • Thomas J. Miceli & C.F. Sirmans, 1994. "Reverse Mortgages and Borrower Maintenance Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 433-450.
  • Handle: RePEc:bla:reesec:v:22:y:1994:i:2:p:433-450

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    References listed on IDEAS

    1. Case, Bradford & Pollakowski, Henry O & Wachter, Susan M, 1997. "Frequency of Transaction and House Price Modeling," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 173-187, Jan.-Marc.
    2. Jesse M. Abraham & William S. Schauman, 1991. "New Evidence on Home Prices from Freddie Mac Repeat Sales," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 333-352.
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    Cited by:

    1. Tsay, Jing-Tang & Lin, Che-Chun & Prather, Larry J. & Buttimer, Richard J., 2014. "An approximation approach for valuing reverse mortgages," Journal of Housing Economics, Elsevier, vol. 25(C), pages 39-52.
    2. 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.
    3. Ming Pu & Gang-Zhi Fan & Yongheng Deng, 2014. "Breakeven Determination of Loan Limits for Reverse Mortgages under Information Asymmetry," The Journal of Real Estate Finance and Economics, Springer, vol. 48(3), pages 492-521, April.
    4. Robert J. Shiller & Allan N. Weiss, 2000. "Moral Hazard in Home Equity Conversion," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(1), pages 1-31.
    5. Sanders, Anthony B. & Slawson, V. Jr., 2005. "Shared appreciation mortgages: Lessons from the UK," Journal of Housing Economics, Elsevier, vol. 14(3), pages 178-193, September.

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