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Reverse mortgage loans: a quantitative analysis

Author

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  • Makoto Nakajima
  • Irina A. Telyukova

Abstract

Supersedes Working Paper 13-27. Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. Despite growth in this market, only 2.1% of eligible homeowners had RMLs in 2011. In this paper, the authors analyze reverse mortgages in a calibrated life-cycle model of retirement. The average welfare gain from RMLs is $885 per homeowner. The authors? model implies that low-income, low-wealth, and poor-health households benefit the most, consistent with empirical evidence. Bequest motives, nursing-home-move risk, house price risk, and loan costs all contribute to the low take-up. The Great Recession may lead to increased RML demand, by up to 30% for the lowest-income and oldest households.

Suggested Citation

  • Makoto Nakajima & Irina A. Telyukova, 2014. "Reverse mortgage loans: a quantitative analysis," Working Papers 14-27, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:14-27
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    References listed on IDEAS

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    More about this item

    Keywords

    reverse mortgages; Mortgage; Housing; Retirement; Home Equity Conversion Mortgage; HECM;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination

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