Credit, Equity Conversion and Housing Endowment: Analysis of Reverse Mortgage Markets

This study contributes to addressing the problem of an aging population by providing important information that determines feasible annuity payments for the clients of reverse mortgage products and by promoting the implementation of reverse mortgages. From the empirical analysis, we demonstrate that demand for reverse mortgages recently took a big jump after the 2008 global financial crisis because housing prices gradually declined, which generated home equity conversion preferences in the United States. This study also examines loan-level reverse mortgages and presents a number of findings. First, we employ the reverse mortgage data to show that elderly homeowners are more likely to purchase reverse mortgages 5-10 years after retirement. This finding illustrates the particular phenomenon that the younger elderly homeowners have more initial principal limit and reverse mortgage demand. Second, we also evaluate the possible variation in the retirement income for the aged people who utilize reverse mortgage, therefore leading to the increment in the income replacement ratio as the borrower’s age grows. The findings have important implications for policymakers and elderly individuals. This paper’s empirical results also show that the reverse mortgage is an appropriate housing endowment among older American homeowners’ portfolios.