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Reversing the trend: the recent expansion of the reverse mortgage market

  • Hui Shan
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Reverse mortgages allow elderly homeowners to tap into their housing wealth without having to sell or move out of their homes. However, very few eligible homeowners have used reverse mortgages to achieve consumption smoothing until recently when the reverse mortgage market in the United States witnessed substantial growth. This paper examines 1989-2007 loan-level reverse mortgage data and presents a number of findings. First, I show that recent reverse mortgage borrowers are significantly different from earlier borrowers in many respects. Second, I find that borrowers who take the line-of-credit payment plan, single male borrowers, and borrowers with higher house values exit their homes sooner than other reverse mortgage borrowers. Third, I combine the reverse mortgage data with county-level house price data to show that elderly homeowners are more likely to purchase reverse mortgages when the local housing market is at its peak. This finding suggests that the 2000-05 housing market boom may be partially responsible for the rapid growth of reverse mortgage markets. Lastly, I show that the Federal Housing Administration (FHA) mortgage limits, which cap the amount of housing wealth that an eligible homeowner can borrow against, have no effect on the demand for reverse mortgages. The findings have important implications to both policy-making and the economics of housing and aging.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2009-42.

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Date of creation: 2009
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Handle: RePEc:fip:fedgfe:2009-42
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  1. Steven F. Venti & David A. Wise, 1987. "Aging, Moving, and Housing Wealth," NBER Working Papers 2324, National Bureau of Economic Research, Inc.
  2. Todd Sinai & Nicholas S. Souleles, 2007. "Net Worth and Housing Equity in Retirement," NBER Working Papers 13693, National Bureau of Economic Research, Inc.
  3. Steven F. Venti & David A. Wise, 2001. "Aging and Housing Equity: Another Look," NBER Working Papers 8608, National Bureau of Economic Research, Inc.
  4. Venti, Steven F. & Wise, David A., 1991. "Aging and the income value of housing wealth," Journal of Public Economics, Elsevier, vol. 44(3), pages 371-397, April.
  5. repec:crr:issbrf:ib2007-7-7 is not listed on IDEAS
  6. Bradford Case & Ann B. Schnare, 1994. "Preliminary Evaluation of the HECM Reverse Mortgage Program," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 301-346.
  7. 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.
  8. 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.
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