Reverse Annuity Mortgages Research Articles

Seller Financing: Contracting Out of the Lemons and Moral Hazard Problems When They May Co-Exist

Quality problems that are known to the seller of an asset, but will become known to the buyer only after the purchase have the potential to frustrate voluntary exchanges. When the problem is subtle or confounded by the extent of buyer inputs, requiring risk-sharing by the contracting parties, both parties would benefit from a mechanism, such as seller financing, which not only credibly signals to the buyer the veracity of the seller’s representations about the asset (s)he is trying to sell, but also offers the seller sufficient protections against the potential that the buyer may engage in post-sale opportunistic behavior about the maintenance of the asset. We analyze one-time-only mortgage contracts in the National Association of Realtors' Home Financing Transaction database for 1984-1996, (data not collected outside this period), and find empirical support for seller financing as an asset quality signal and, separably, as a mechanism for providing credit when conventional credit sources are tight. We also point out the broad, but not well-acknowledged, reach of seller financing, including the sub-prime loan debacle, the earnout mergers or reverse annuity mortgages, which are inherently embedded with both asymmetric information about the quality of the relevant assets and moral hazard about the asset acquirer’s post-purchase maintenance.

Wealth Composition and Drawdown Patterns of Retirees a Comparative Study

This study aims to pursue a two-fold research objective: first, to examine the wealth composition and its drawdown patterns of the retirement-age households in Korea and, second, to assess policy options to safely monetize real estate assets held by them, the reverse annuity mortgage (RAM) in particular. In so doing, we compare our findings to those from the U.S. as reported by Poterba, Venti, and Weiss (2011). The results indicate that, between the U.S. and Korea, the wealth compositions of the retirees are vastly different in several respects: first, the average share of real estate in Korea is far greater than that in the U.S., over 80 percent vs. 24.7; second, the share of the annuitized public and private pensions is far higher in the U.S. compared to Korea, 44.9 percent vs. 7.7 percent in Korea; third, the share of financial assets is roughly similar, that is, 12.6% in the U.S. and 10.3% in Korea; last but not least, the share of non-residence real estate rapidly rose rapidly between 2006 and 2012 in Korea, quite dramatically for certain consumer cohorts. Hence, the Korea case represents an extreme of ‘real estate-rich-cash-poor’ retirees, making it a fertile ground for trading the monetizing instruments such as RAM. Nonetheless, the market penetration by the product is still minimal, the subscription rate of 0.81 percent among all the eligible households as of 2015. To investigate empirically the reasons behind such low subscription rate, we perform a regression analysis on determinants of the propensity for entering the RAM contract; The results show that the bequest motive does reduce the propensity to subscribe the product, and that the two indicators of the consumer knowledge on the product do yield positive and statically significant results. Based on the findings, we stress the need for a heightened level of consumer education on the viewpoint of the protection financial consumers, for which the government, the lending and guaranteeing institutions, as well as academia should put a concerted effort so as to help elderlies make rational decisions.

On the valuation of reverse mortgages with regular tenure payments

For the valuation of reverse mortgages with tenure payments, this article proposes a specific analytic valuation framework with mortality risk, interest rate risk, and housing price risk that helps determine fair premiums when the present value of premiums equals the present value of contingent losses. The analytic valuation of reverse mortgages with tenure payments is more complex than the valuation with a lump sum payment. This study therefore proposes a dimension reduction technique to achieve a closed-form solution for reverse annuity mortgage insurance, conditional on the evolution of interest rates. The technique provides strong accuracy, offering important implications for lenders and insurers.

Foreclosure Rescue Fraud and Net Benefit Analysis: Making the Case for an Equitable Mortgage

Equity stripping fraud often masquerades as a sale-leaseback contract. Homeowners anticipating a refinance to settle a foreclosure are victimized through a transfer of ownership and theft of equity. The doctrine of equitable mortgage is a legal theory used to challenge these fraudulent transactions. Demonstrating that an economic alternative exists that affords a superior means to retain homeowner equity/wealth can support a recharacterization of a conveyance transaction as an equitable mortgage. The superior sophistication and bargaining power of an acquirer supports comparing the transaction that in fact transpires to a best available alternative. Alternatives will depend on the particulars of the case and can include the accepting the foreclosure, a sale of the property prior to foreclosure, a refinance, or a reverse annuity mortgage. The net benefit of a sale to avoid foreclosure is used here by way of illustration and is a practical alternative when the fair market value of the property is known. In this illustration, the sale to avoid foreclosure yields a preferred impact on net wealth since the homeowner does not suffer a loss of equity to the acquirer. In addition, the sale-leaseback agreement is likely to reduce the likelihood of the homeowner buying back the property or a similar property when there is equity stripping and non-reporting of on-time payments to credit bureaus.

No Place Like Home: Older Adults and Their Housing

The home is both older Americans' largest asset and their largest consumption good. This article employs new data on the consumption and assets of older Americans to investigate what role the home plays in the economic lives of older adults. We used 20 years of data from the Consumer Expenditure Survey to examine the asset and consumption trends of four cohorts of older Americans. We compared the data with other survey results. Older Americans' homeownership rates were stable until age 80. The homes were increasingly mortgage free; home equity increased with age, and relatively few older adults took out home equity loans or reverse annuity mortgages. Housing consumption flows increased with age; nonhousing consumption flows declined after age 60 at a rate of approximately 1.4% per year. The results suggest that the consumption of cohorts of older Americans does not decrease dramatically over a 20-year period and that they are also not converting their housing assets into other types of income or consumption, at least up to age 80. A number of reasons, including the bequest motive and the life cycle hypothesis, might explain this behavior.

No Place Like Home: Older Adults and Their Housing

Objectives: This paper employs new data on the consumption and assets of older Americans to investigate recent research findings that older adults do not convert their home equity into income that can be used for current consumption, as the life-cycle hypothesis predicts.Methods: We use data over twenty years from the Consumer Expenditure Survey to examine the asset and consumption trends of older adults, buttressed with additional findings from the Survey of Consumer Finances and the American Housing Survey.Results: Older American’s homeownership rates are stable until age 80 and after 80 tend to decline slowly. The homes are increasingly mortgage-free; home equity increases with age, and few older adults take out home equity loans or reverse annuity mortgages. Housing consumption-flows increase with age; non-housing consumption-flows decline after age 60 at a rate of approximately 1.4% a year.Discussion: The results suggest that most older Americans are not converting their housing assets into consumption despite the life-cycle hypothesis predictions. This is also inconsistent with international trends where homeownership rates fall substantially with age. One reason may be because older Americans may be holding onto their homes to finance long-term care. If this is the case, their economic behavior may be more consistent with the life-cycle hypothesis than previous research suggests.

Reverse Mortgages and Prepayment Risk

This paper presents a detailed assessment of the Connecticut Housing Finance Authority (CHFA) reverse annuity mortgage (RAM) program. Because of the size and payment history of the program, the analysis provides an empirical framework on which to develop and assess other home equity conversion (HEC) programs. The program offers insights into the economic impact of these programs and the factors affecting prepayment. The program issued 765 annuities over five years, and 240 of these loans have terminated payments. The annuity payments had a demonstrable financial impact on the elderly participants, with an 88% average annual income increase. Prepayment rates varied across borrower and loan characteristics. The rates were most sensitive to marital status and were heavily affected by the age of the borrower and the term of the loan. Although default risk exists, the evidence indicates a low probability of the loan value exceeding the house value.

Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data

A variety of reverse mortgage loan programs have been available to elderly households for over a decade. The number of unrestricted reverse mortgage loans issued by the private sector has been quite small. About 12,000 loans have been issued through mid‐1992. Some researchers take this to mean that the size of the potential market for reverse mortgages is also quite small. Other researchers claim that current low levels of activity reflect supply and demand problems, but that the potential market is in fact quite large.This paper uses American Housing Survey (AHS) data to estimate the potential size of the market for unrestricted reverse mortgages. The 1989 national AHS shows that there are over twelve million elderly homeowners (age 62 and over) who own their homes free and clear. Depending on their income, age and the level of home equity, the group of households most likely to benefit from reverse annuity mortgages is considerably smaller. As one approach to defining a lower bound of the estimate of potential beneficiaries from reverse mortgages, we count the number of homeowners in a prime group consisting of the older elderly, aged 70 or above, with an annual income of $30,000 or less, with home equity between $100,000 and $200,000, who have lived in their homes for over ten years. We estimate that there are about 800,000 elderly households in this prime group. For such households, reverse mortgage payments could represent a substantial percentage increase in income; other definitions of target groups can also be explored using the tables provided.The paper uses the 1985 through 1988 AHS Standard Metropolitan Statistical Area (SMSA) surveys to identify areas that have a large number of elderly homeowners in the prime target group, and in which these homeowners represent a large fraction of the elderly homeowner population. These locations are likely targets for introduction of reverse mortgage products because any campaign can be targeted towards a high concentration of likely eligible beneficiaries.

Aging and the income value of housing wealth

The potential of reverse annuity mortgages to increase the current income of the elderly is analyzed. We conclude that most low-income elderly also have little housing equity. In general, a reverse annuity mortgage would substantially affect the income only of the single elderly who are very old — whose life expectancy is short. On the other hand, if the transfer were in the form of a lump-sum payment, rather than an annuity, the payment would increase the liquid wealth of most elderly families by a large fraction. Thus legislation that would facilitate the market for reverse mortgages could improve substantially the financial status of a small proportion of the elderly.

Mortgage and Lending Instruments Designed for the Elderly

This paper explores the elderly homeowner's need for maintenance/rehabilitation-of-dwelling loans and outlines potential mortgage instruments for which the elderly might qualify in order to obtain modest, modern homes. A delineation of lifestyle, income and psychological factors contributive to the housing-inadequacy of the nondestitute elderly, is presented. This is followed by a discussion of location change stimulated either by housing-dissatisfaction or a desire for family closeness and the resultant financial burden of mortgage payments, taxes, utilities, and assessments. The final section presents mortgage plans available through HUD to address the problems presented and recommendations concerning mortgage plan policy. Key concepts: -Mortgage -Elderly Homeowner -Reverse Annuity Mortgage -Housing-inadequacy -Housing-dissatisfaction -Adult Child Elderly Parent Interaction

Reverse Annuity Mortgages and Recent Tax Changes

Reverse Annuity Mortgages and Recent Tax Changes

Home Equity Conversion Instruments with Fixed Term to Maturity: Alternatives to End of Term Pay‐Off

Standard reverse annuity mortgages obligate the lender to take on the risk that an elderly homeowner will desire to remain in a residence after the RAM has reached maturity. In this case, the best the lender can hope for is that the property will have appreciated sufficiently that the loan can be carried at interest only. There is a possibility for lender loss but not gain over contracted return.Alternatives to the standard RAM are explored in this paper with most attention devoted to shared appreciation and shared equity RAMs. These alternative instruments appear to solve the problem of maturity risk.

Inflation and the Elderly: A Housing Perspective

Inflation causes special problems for the elderly, a group with special characteristics that make it more difficult for them to cope: they have a less flexible mind set; different expenditure patterns; their income drops by half upon retirement; and the period of retirement is lengthening very significantly and rapidly. As a result, a real possibility of intergenerational conflict is being created. Inflation is especially damaging for those on fixed incomes; at current rates of inflation, erosion of pensions compels the doubling of income in a decade just to keep even; future prospects work against any improvement and toward a steady decline in effective elderly income for the rest of the century. Some solutions suggested include later retirement, unified portable indexed pension plans, reverse annuity mortgages, better use of the housing stock, revision of the tax code to slow down condominium conversions, and finally, behavioral changes to cope with energy and other higher cost demands.

Housing trends of the elderly: emerging policy and implications

Housing and living environment options are both one of the most pressing problem are as for the elderly and an unavoidable policy subject for public administrators. This article analyzes the topic of housing and the elderly so as to high light selected dimensions that might have implications for decision - makers in resource considerations and allocations. An opening section gives the status of how and where the elderly are now living. Six events, or environmental and policy changes, that affect the housing options of the elderly are analyzed. These events are: high mortgage rates; rent controls; condominium conversions; tax relief measures; weatherization programs; and reverse annuity mortgages. The two dominant trends that appear to shape the future housing options of the elderly are examined. The first trend is the provision of a range of alternatives in living arrangements. The creation of alternatives, also known as a continuum of living environments, includes congregate housing, share - a - home, li...

Reverse Mortgages: Supplementary Retirement Income from Homeownership

A large proportion of the elderly have very low incomes. Nevertheless, they often have a considerable investment in their houses. A reverse mortgage is a method of dissaving which allows these individuals to convert some of the equity in their homes into a steady income stream while retaining their residence in these homes. Unlike conventional mortgage loans, which require mortgaging future income to acquire a real asset, reverse mortgages involve obtaining a mortgage loan on the house to provide a future stream of income, thereby liquidating wealth already accumulated. Upon retirement, many elderly homeowners are faced with the following dilemma: If they wish to remain in the house in which they have spent most of their lives and to which they may have an emotional attachment, they must accept what is often an inadequate retirement income while eventually leaving a sizeable bequest to their heirs. Alternatively, they can sell their home, which many are reluctant to do, and move to rented accommodation. In so doing, they generate for themselves a higher retirement income from the proceeds realized upon the sale of their house. However, uncertainty as to their life expectancy tends to deter them from selling. As long as they retain ownership of and continue to live in their house, they are provided with a rent-free service. If they sell their house, the capital derived from the sale and the income it generates could be depleted before their death. The objective of a reverse mortgage is to allow individuals to convert some of the equity they have in their homes into a steady income stream, without giving up residence in them. It is the reverse of a conventional mortgage in the sense that the individual receives a monthly payment rather than making one. Two methods of arranging for such a scheme are available. One method is the straightforward reverse mortgage (RM) in which the monthly payment received accumulates over time as a lien against the house. The other method is the RAM or reverse annuity mortgage, which involves the explicit purchase of an annuity with the proceeds of the mortgage loan. If the individual puts a Henry Bartel, Michael Daly, and Peter Wrage are on the staff of the Economic Council of Canada. The views expressed in this paper are solely those of the authors and, as such, have not been endorsed by members of the Economic Council of Canada. They wish to thank C. Hawtin of the Save and Prosper Group, and J.M. Selwyn of Hambro Provident Assurance Limited, both of London, England, for providing helpful material on alternative reverse mortgage schemes now in operation in Great Britain. Furthermore, the authors are grateful to A. Leduc of the Economic Council of Canada for this help in setting up the computer programming required for the examples in the text.

Reverse Annuity Mortgages as a Source of Retirement Income

According to the recently published Report of the Special Senate Committee on Retirement Age Policies (Retirement Without Tears), 'one of the goals of social security policy respecting the elderly should be to enable them to remain in their own homes to the maximum extent possible.' Unfortunately, many elderly homeowners face the following dilemma. Either they retain full ownership of their house and accept a low retirement income, or they sell their home in order to generate a higher retirement income and move to rented accommodation. Reverse mortgages would allow these individuals to convert some of the equity embodied in their homes into a steady stream of income without giving up residence there. This paper discusses reverse mortgages and assesses their possible role in Canada's retirement income system.

Reverse Annuity Mortgages and the Due-on-Sale Clause

Reverse Annuity Mortgages and the Due-on-Sale Clause