The Scope for Poverty Alleviation among Elderly Home-owners in the United States through Reverse Mortgages

Abstract

This paper investigates the scope for alleviating poverty among elderly home-owners in the US by means of reverse mortgages. A reverse mortgage is a loan secured against the home equity owned by the borrower. This loan does not require monthly repayment and the elderly borrower is allowed to use the home as a principal residence for as long as she wishes. We compute monthly payments that can be obtained by elderly home-owners under a reverse mortgage by simulating the tenure plan of the Home Equity Conversion Mortgage (HECM) reverse mortgage product which is sponsored by the US Department of Housing and Urban Development. This study utilises data from the National File of the American Housing Survey of 1991. We estimate that 621 820 elderly home-owners in poverty could be raised above the poverty line if they obtained a reverse mortgage under the HECM tenure plan. These households constitute 29 per cent of all poor elderly home-owners. There appears to be considerable scope for alleviating poverty among elderly home-owners through reverse mortgages. We estimate that the poverty rate of elderly households in occupied units (both renters and owners) can be reduced by three percentage points (from 17 per cent to 14 per cent) by means of reverse mortgages. It is estimated that if home-owners in poverty had obtained reverse mortgages in 1991, the poverty rate for all elderly persons that year, 12.4 per cent, would have reduced by 2.4 percentage points to 10 per cent.