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Reverse Mortgage Loans: A Quantitative Analysis

Author

Listed:
  • Irina A. Telyukova

    (University of California San Diego)

  • Makoto Nakajima

    (Federal Reserve Bank of Philadelphia)

Abstract
Reverse mortgages allow elderly homeowners with limited income or financial wealth to borrow against their housing wealth without downsizing or selling out and becoming a renter. Although the proportion of elderly homeowners using reverse mortgages has been increasing rapidly, only 1.4 percent of elderly homeowners are using reverse mortgages. In this paper, we analyze reverse mortgage loans in a rich structural life-cycle model in retirement. Our model can replicate the low take-up rate with a reasonable calibration. When the model is calibrated to match the observed take-up rate, the welfare gain from introducing reverse mortgages is small -- equivalent to a one-time transfer of 4 dollars for all households, or 300 dollars for those who benefit from reverse mortgage loans. Our model indicates that the reverse mortgages are used by the borrowers to pay for medical expenses while remaining in their home. Through a variety of counterfactual experiments, we identify that bequest motives, moving shocks, and house price fluctuations, as well as costs of insurance, contribute to the observed low take-up rate. Finally we also find that the HECM Saver, which is a recently-introduced reverse mortgage contract, pushes up demand for reverse mortgages. Going forward, we are planning to investigate the optimal design of reverse mortgage loans using our framework.

Suggested Citation

  • Irina A. Telyukova & Makoto Nakajima, 2011. "Reverse Mortgage Loans: A Quantitative Analysis," 2011 Meeting Papers 387, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:387
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    References listed on IDEAS

    as
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    More about this item

    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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