Reverse Mortgage Research Articles

The Legal Structure and Finical Risk of Reverse Mortgage

The Legal Structure and Finical Risk of Reverse Mortgage

Analysis on the Application of Reverse Mortgage combined with Trust in the Super Aged Era

Analysis on the Application of Reverse Mortgage combined with Trust in the Super Aged Era

Analysis of the transformation of demand willingness for housing reverse mortgages in China based on a scenario simulation experiment

AbstractAs the population rapidly ages, Housing Reverse Mortgages (HRMs) have emerged as a valuable addition to the multilevel pension insurance system, helping to alleviate the pressure on pension financing. However, the HRM market in China faces challenges due to the limited financial literacy among middle‐aged and elderly residents; there is a “cognitive bias” toward understanding the mechanisms and benefits of HRMs leading to “insufficient effective demand.” This study empirically investigates the likelihood of changing the “demand willingness” for an HRM through a scenario‐simulation experiment focused on HRM‐related information disclosure. The findings include: (1) Up to 46.78% of the subjects' attitudes toward adopting HRMs shifted from “unwilling” to “willing” after receiving disclosed information, indicating that cognitive bias significantly impacts the insufficient effective demand for these housing products. The information disclosure experiment can correct the inadequate financial literacy to a certain extent, thereby significantly enhancing the potential demand willingness. (2) After the experiment, subjects with strong motives to bequeath their property to family members (referred to as “strong bequest motives”) significantly changed their willingness to adopt HRMs (“demand willingness”). This suggests that a clear, comprehensive promotional strategy can better align middle‐aged and elderly residents' perceptions of the role of HRMs in protecting inheritances, reducing the impact of bequest‐related considerations on their financial decisions. (3) Participants initially exhibiting lower financial literacy also demonstrated notable shifts in their demand willingness postexperiment. Access to easily understood, high‐quality information appears to help older individuals recognize the potential benefits of HRMs, mitigating the negative effects of cognitive limitations on their decision‐making. These findings highlight the importance of enhancing financial literacy and promoting a better understanding of HRMs among middle‐aged and elderly individuals, which may effectively manage the challenges associated with an aging population and the pressures on pension financing.

Willingness analysis of middle-aged and older people’s participation in reverse mortgage schemes

Enabling older adults to age at home is an urgent issue. This study focuses on the attitudes of middle-aged and older people (MAOP) in the capital cities of Taiwan, which are characterised by expensive housing prices and living costs, to examine their preferences for reverse mortgage (RM) schemes. The stated preference method and conditional multinomial logit model are utilised for analysis. The study simulates the total payment duration (TPD) and monthly payment amounts (MPA) to determine the market share of MAOPs’ choices regarding terms. The results indicate that MAOPs tend to opt for RM schemes when they have children, partly enhancing the preference toward the long-term alternative (AL). Increasing the MPA has a positive effect on the market share of the AL scheme, but the amount must be increased to 90% to replace the market share of non-participation schemes significantly. The experimental design of this study could serve as a reference for future RM scheme designs. The findings suggest that there should be more alternative funding sources in an ageing society, particularly through revitalising housing assets, to promote ageing in place.

Optimal surrender policy for reverse mortgage loans

Abstract This study conducts an optimal surrender analysis of reverse mortgage (RM) loans offered to elderly homeowners as a financing option. Recent market evidence on borrower early surrenders has raised concerns about the marketability of RM products and their impact on the program viability. In this article, we derive the borrower optimal surrender strategy as a function of the underlying value of the home used as collateral for RM contracts with tenure payment option. Using a probabilistic approach to American option pricing, we present a decomposition result for the value of the contract as the sum of its European counterpart without the surrendering provision and an early exercise premium. The methodology allows policymakers to assess the financial incentive of their policy design, from which we explain the existing market evidence about borrower rational lapse by means of the resulting surrender boundary and reference probabilities.

Structural analysis of reverse mortgages in Taiwan

This study investigated the framework of reverse mortgage (RM) programs in Taiwan, with a particular emphasis on the perspectives of both debtors and creditors. Employing the Lee–Carter model, the research estimated mortality rates in Taiwan while utilizing the theoretical framework to analyze various aspects of RM. House prices were assessed using the house price index as a foundational metric for estimating prices, along with lump-sum loanable amounts and RM considerations. Empirical analysis was conducted on debtors’ loans and incomes and financial institutions’ perspectives. The study delved into parameters such as maximum loanable amounts and income replacement ratios for debtors based on demographic factors such as sex, age, and occupation. Furthermore, the structure of RM programs was scrutinized from the viewpoint of financial institutions, considering factors such as rental income, remaining house value, creditor insurance protection, premium expenses, and creditor profitability. A series of simulations were performed to gauge the effects of different variables on the outcomes. The normal distribution of the house price index (HPI), as verified through the Anderson-Darling (AD) test and Kolmogorov–Smirnov (KS) test, bolstered the theoretical findings. This study’s primary contribution lies in its comprehensive exploration of the structure and advantages of RMs from the dual perspectives of debtors and creditors, a departure from insights from previous research predominantly focused on financial institutions. This research can aid debtors and creditors in evaluating RM programs and making informed decisions regarding asset allocation, thereby facilitating the selection of more suitable programs tailored to debtor characteristics.

The constraining impact mechanism of financial cognitive ability on the effective demand for housing reverse mortgages in China

In the context of rapidly aging populations, Housing Reverse Mortgages (HRMs) offer a valuable supplement to the multi-tiered pension insurance system and can effectively ease the burden on pension financing. However, a widespread lack of financial cognitive ability among elderly residents often leads to cognitive biases towards the operating principles and potential benefits of HRMs, creating “insufficient effective demand” in China's HRM market. This study empirically examines how limited financial cognitive ability constrains the demand willingness to use HRM services. The findings reveal: (1) Elderly residents with higher financial cognitive ability are better able to understand and objectively evaluate the operating principles and potential value of HRMs, thus displaying a stronger willingness to utilize these services. (2) Bequest motivations and risk preferences are significant mediators through which financial cognitive abilities influence HRM demand willingness. (3) Financial education and increased social interaction among elderly residents substantially reduce the negative impact of limited financial cognitive ability on their demand willingness for HRMs.

Optimal annuitisation, housing and reverse mortgage in retirement in the presence of a means-tested public pension

In this paper we develop a model to find optimal decisions in retirement with respect to the consumption, risky asset allocation, access to annuities, reverse mortgage and the option to scale housing in the presence of a means-tested public pension. To solve the corresponding high-dimensional optimal stochastic control problem, we use the Least-Squares Monte Carlo simulation method. The model is applied in the context of the Australian retirement system. Few retirees in Australia utilise financial products in retirement, such as annuities or reverse mortgages. Since the government-provided means-tested Age Pension in Australia is an indirect annuity stream which is typically higher than the consumption floor, it can be argued that this could be the reason why many Australians do not annuitise. In addition, in Australia where assets allocated to the family home are not included in the means tests of Age Pension, the incentive to over-allocate wealth into housing assets is high. This raises the question whether a retiree is really better off over-allocating into the family home, while accessing home equity later on either via downsizing housing or by taking out a reverse mortgage. Our findings confirm that means-tested pension crowds out voluntary annuitisation in retirement, and that annuitisation is optimal sooner rather than later once retired. We find that it is never optimal to downscale housing when the means-tested pension and a reverse mortgage are available; only when there is no other way to access equity then downsizing is the only option.

Analysis, modelling, and financial perspectives of reverse mortgage implementation in Colombia

PurposeIncreased life expectancy in recent years, together with the downward trend in fertility rates, will accelerate the aging of the Latin American population (Flamini and et al., 2018) [1]. This demographic change represents a problem for pension systems as the economic capacity to finance the retirement of the population could be insufficient in the future. This creates a favorable scenario for new financial products, including reverse mortgages. This study determines, from the supply approach, the potential of reverse mortgages in the main cities of Colombia as a complement to the financing of old age according to the guidelines of Benavides et al. (Benavides Franco et al., Jan. 2021) [2]. MethodologyThe following variables were used: housing prices, interest rates, mortality rates, and the consumer price index. The econometric testing simulates the possible paths of these variables, estimates the probability of occurrence of the paths, and calculates the expected losses of bidding banks. FindingsThe results show that reverse mortgages are a good complement to Colombia's pension system and confirm the feasibility of implementation at city level. It is recommended that the State stimulate the growth of this market and improve the corresponding regulatory framework. OriginalityThis study confirms the hypothesis that the reverse mortgages are a good complement to the pension system with city-level data. Specifically, it uses housing prices and mortality records from the main cities of the country (Bogotá, Cali, and Medellín) to capture their idiosyncrasies.

ON WHICH SOCIOECONOMIC GROUPS DO REVERSE MORTGAGES HAVE THE GREATEST IMPACT? EVIDENCE FROM SPAIN

Reverse mortgage is one of the products (perhaps the main one) that is good to obtain additional income by using the habitual residence as collateral. The main objective of this paper is to analyse the effects that reverse mortgage contracting has on household finances over the lifetime of a family according to the socioeconomic group to which it belongs in Spain. Four indicators are employed to measure the immediate and long-term effects. We use a stochastic model with a double source of randomness, survival and entry into dependency, and apply it to the three socioeconomic groups obtained with cluster methodology from the 2017 Spanish Household Financial Survey data. We conclude that the effects are very different depending on the group: regarding only the effects of hiring a reverse mortgage on the income of the family, widowed women aged between 81 and 85 years, with low income and expenses as well as little net wealth, and a habitual residence that represents half of her net wealth (Cluster 1) are the most benefited; considering that the highest impact indicators are on the probability of illiquidity and on the value of lack of liquidity, the use of reverse mortgages benefits more the families in Cluster 3 (high income and expenses and really high net wealth, head of household aged between 76 and 80 years) and less the families in Cluster 2 (medium income, net wealth and expenses, head of household aged between 65 and 75 years).

An Analysis of the Impact of House Price Fluctuations on Subscription or Termination of Reverse Mortgage

An Analysis of the Impact of House Price Fluctuations on Subscription or Termination of Reverse Mortgage

The reverse mortgage market in New Zealand: key drivers of loan determination

ABSTRACT This paper examines the drivers of loan principals in the reverse mortgage and equity release market in New Zealand using a hedonic price model (HPM) approach. Our analysis using reverse mortgages data between 2004–2021, sourced from one major reverse mortgage bank, provides four key findings. First, the term of payment for repaid reverse mortgages is positively associated with loan principals, implying that longer repayment terms allow applicants who were able to repay mortgages to borrow more. Second, there is partial evidence to suggest the presence of a positive linear impact of the value of the current property on its loan principal, in line with previous house price modelling studies. Third, older applicants (age 75+) borrow less than younger applicants, which may be due to their repaying ability. Fourth, we confirm a positive effect of interest rates on reverse mortgage amounts but reject the positive association between wider loan-to-value policy restrictions and equity release lending amounts. The results broadly highlight that the house price is more relevant than any individual characteristic of a property in determining loan principals, and that all drivers are relevant in the early stage of the development of the reverse mortgages market in New Zealand.

How suitable are equity release mortgages as investments for pension funds?

This article examines the claim that equity release mortgages, the U.K. equivalent of reverse mortgages in the U.S., are suitable investments for pension funds. We present valuation, stress test and scenario analysis results that suggest that equity release mortgages are unsuitable for pension funds because: (i) they bear returns that are typically below the risk-free rate; (ii) they are not hedges for annuity books, let alone good hedges; and (iii) they are heavily exposed to house price risk, which annuity books are not. Our results suggest that equity release mortgages meet none of these criteria to be suitable for pension funds and are almost entirely dominated by risk-free government bonds. We offer an explanation for why investors appear to be unaware of the low returns on equity release mortgages.

Transforming homeownership: an innovative financing model with a future value approach

Purpose This study aims to address the critical need for innovative financing solutions in the global housing sector, focusing specifically on Malaysia’s distinct housing finance system encompassing both conventional and Islamic loans. The primary objective is to develop a transformative housing finance model that addresses affordability challenges and reshapes the Malaysian housing landscape. Design/methodology/approach The study presents an alternate housing finance model for Malaysia, integrating lower monthly payments and reduced household debt. Key variables include house price appreciation rates, interest rates, initial guarantee fees and loan-to-value ratios. Inspired by the Help to Buy (HTB) scheme, the model aligns with proven global initiatives for enhanced affordability, balancing payment amounts, loan interest rates and acceptable price thresholds. Findings The study’s findings promise to address affordability disparities and reshape Malaysia’s housing finance landscape. The emphasis is on introducing a structured repayment plan that offers a sustainable path to homeownership, particularly for low-income families. Incorporating the future value adaptation concept, inspired by reverse mortgages and Islamic finance, enhances adaptability, ensuring long-term sustainability despite economic shifts. Practical implications The proposed model promotes widespread access to homeownership, offering practical solutions for policymakers to improve affordability, prompting adaptable risk management strategies for financial institutions and empowering potential homebuyers with increased flexibility. Originality/value The study introduces a transformative housing finance model for Malaysia, merging elements from reverse mortgages, Islamic finance and the HTB scheme, offering potential applicability to similar systems globally.

Reasoning Around Wealth Decumulation Choices for Adults Aged 50 Years and Older: The Role of Family Values

AbstractStudies have shown that older people do not dissave and that they dissave slower than theoretically predicted. They also rarely use wealth decumulation products like annuities and reverse mortgages, despite the longevity insurance these provide. Most extant explanations characterized financial decumulation choices as rational, independent, and egocentric, overlooking the socioeconomic context and cultural values. The Confucian cultural heritage concerning family values may provide an alternative explanation and enrich the understanding of this phenomenon. Consequently, we explored how adults aged 50 years and older in Hong Kong reason about their financial decumulation choices, specifically with respect to four financial decumulation products: annuities, reverse mortgages, joint accounts, and wills. Focus groups and semi-structured interviews were used to collect data in this participatory qualitative study, conducted in partnership with older adults and law students. Sixty community-dwelling residents in Hong Kong ages 50–70 years participated in the study. The results show that wealth decumulation is largely influenced by relational and family values and is complicated by intersecting political, social, and cultural circumstances. The Confucianism-based, collectivist familism and filial piety underpinning Hong Kong society incline adults to adopt an attitude of self-restrain when making financial decumulation choices. Family morality values must be considered in the development of retirement products and retirement protection policies in contemporary Chinese society.

Drawing on real estate assets for investment in smart silver villages

The existing housing stock in Europe, including scattered farmhouses, is grossly inadequate for long-term care (LTC) at home. Renovating these houses suitable for LTC requires a considerable new investment. An alternative is to sell or transfer ownership of family homes and farms and buy a residential unit in a retirement community by taking out a reverse mortgage loan. We present an approach to investing in the removal of barriers in part of an extended retirement home or the purchase of a property in a Smart Silver Village (SSV) from farm transfer subsidies if permitted by the call for proposals to encourage the rejuvenation of farm ownership. Our approach includes the actuarial present value method and periodic longevity insurance premia. It also includes funds from the agricultural transfer program for younger members of farming households. Moreover, it allows older farmers to move to a SSV if they pass the farm on to their successors and receive a portion of the reimbursement from government funds. This way, they become co-investors alongside the municipality in the SSV located relatively close to their respective farms. The current retirement home location in Slovenia is quite far from the farms. Existing reverse mortgage contracts in EU member states end when a homeowner moves into an assisted living home. Our approach with minor adjustments applies to all EU Member States.

The Role of Reverse Mortgages in Private Pension Income

The Role of Reverse Mortgages in Private Pension Income

Analysis on the Elderly Care Model of Housing Reverse Mortgage System

Analysis on the Elderly Care Model of Housing Reverse Mortgage System

Addressing the economic and demographic complexity via a neural network approach: risk measures for reverse mortgages

The study deals with the application of a neural network algorithm for fronting and solving problems connected with the riskiness in financial contexts. We consider a specific contract whose characteristics make it a paradigm of a complex financial transaction, that is the Reverse Mortgage. Reverse Mortgages allow elderly homeowners to get a credit line that will be repaid through the selling of their homes after their deaths, letting them continue to live there. In accordance with regulatory guidelines that direct prudent assessments of future losses to ensure solvency, within the perspective of the risk assessment of Reverse Mortgage portfolios, the paper deals with the estimation of the Conditional Value at Risk. Since the riskiness is affected by nonlinear relationships between risk factors, the Conditional Value at Risk is estimated using Neural Networks, as they are a suitable method for fitting nonlinear functions. The Conditional Value at Risk estimated by means of Neural Network approach is compared with the traditional Value at Risk in a numerical application.

A feasibility analysis of reverse mortgages in Brazil

In this study, we examine the feasibility of reverse mortgages in Brazil from the perspectives of both policyholders and insurers. Reverse mortgage is a financial product where the property's ownership is transferred to an insurance company in exchange for a guaranteed annuity, while the insured retains the right to use such property until their death. Using monthly real state pricing data (2008–2019) provided by FipeZAP, we employ statistical modeling to predict future prices of properties to get the future insurer's expected results, while policyholders' annuity benefits are calculated using actuarial approach. To assess attractiveness, we calculate internal rate of return for different policyholder profiles and conduct profit test for the insurer. Our results indicate that, as an investment strategy, reverse mortgage has little or no attractiveness to the policyholder despite its actuarial fairness. However, it may be a viable option for increasing retirement income in case of a consistent real estate overvaluation. For insurers, the results are unfeasible due to the extended time lag for positive financial results, which only occurs after the policyholder's death. The inclusion of safety loadings can produce more favorable outcomes. Nonetheless, we recommend incorporating reverse mortgages as an elderly policy strategy to reduce reliance on state support during retirement, even if no attractive returns are provided as a financial investment. We also discuss policy implications (e.g., right to the city) to help the elderly stay connected to social support networks and local services.