Prospects for Expansion of the U.S. Reverse Mortgage Industry
Thomas Davidoff Haas School of Business, University of California, Berkeley
My research will ask whether a program along the lines of HUD's Home Equity Conversion Mortgage (HECM) can be profitable to lenders while providing welfare gains to significant numbers of older homeowners. I will also investigate the possibility that reverse mortgages complement other services to older homeowners such as long term care insurance and home maintenance contracts. The results should prove useful both in the marketing of reverse mortgages and in understanding the role of housing in households' portfolios.
Reverse mortgages can benefit older homeowners who are “house rich but cash poor'' by transferring money from the wealthy period after the home is sold to the poor period before the home is sold. Despite the intuitive appeal of these products, demand has been relatively weak, with approximately 77,000 HECM loans originated in the decade of the product's existence. The absence of demand is mirrored in the tendency of older Americans to retain ownership of their homes until very late in life and in the absence of demand for annuities.
I will create the first economic model of the potential gain to reverse mortgages. I will draw on standard dynamic programming tools to model the savings, home maintenance and mobility behavior of older homeowners with and without access to a reverse mortgage. The model will allow estimation of a dollar value of the right to take on a reverse mortgage akin to that frequently calculated for annuities. I will compare the predictions of the model to observed behavior of older homeowners with and without reverse mortgages based on data from the American Housing Survey, the AHS/AHEAD surveys and HUD's database of individual HECM loan performance. In particular, I will examine the extent to which home maintenance and mobility react to changes in housing prices with and without reverse mortgages in place. The economic model will be used to determine whether the positive selection observed to date among HECM borrowers on the dimensions of time to departure from the home and regional house price appreciation can be expected to continue under changing macroeconomic conditions. I will also evaluate the consequences of different Medicaid rules for the appeal of reverse mortgages.
It will be quite interesting to see how this study goes, I will keep everyone updated on my Reverse Mortgage Blog.
Source: NationalAcademies.org
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