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Reverse Mortgages, Financial Inclusion, and Economic Development : Potential Benefit and Risks

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  • Knaack,Peter
  • Miller,Margaret J.
  • Stewart,Fiona Elizabeth

Abstract

This paper examines the state of reverse mortgage markets in selected countries around the world and considers the potential benefits and risks of these products from a financial inclusion and economic benefit standpoint. Despite potentially increasing demand from aging societies -- combined with limited pension income -- a series of market failures constrain supply and demand. The paper discusses a series of market failures on the supply side, such as adverse selection, moral hazard, and the costly regulation established to address these problems, leading to only a small number of providers, even in developed markets. Demand-side constraints are equally relevant, in particular high non-interest costs, abuse concerns, and the inability of reverse mortgages to cover key risks facing the elderly, particularly health and elder care. In developing countries, constraints are likely to be even higher than in advanced economies, due to high transaction costs and lack of consumer knowledge and protection. The enabling conditions for such markets to develop are outlined, along with examples of regulatory oversight. The paper concludes that these still seem to be largely products of last resort rather than well-considered purchases as part of good retirement planning.

Suggested Citation

  • Knaack,Peter & Miller,Margaret J. & Stewart,Fiona Elizabeth, 2020. "Reverse Mortgages, Financial Inclusion, and Economic Development : Potential Benefit and Risks," Policy Research Working Paper Series 9134, The World Bank.
  • Handle: RePEc:wbk:wbrwps:9134
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    References listed on IDEAS

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    Cited by:

    1. Kyung Jin Choi & Byungkwon Lim & Jaehwan Park, 2020. "Evaluation of the Reverse Mortgage Option in Korea: A Long Straddle Perspective," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 8(3), pages 1-14, September.

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