Reverse Mortgage Research Articles

Anticipating a Reverse Mortgage Adoption in Croatia

Abstract Reverse mortgage is an alternative source of financing of elderly population that usually has some homeownership, but insufficient income and savings to support desired or indispensable level of consumption. It is a financial innovation mostly provided by banks and finance companies to seniors, which enables a home equity conversion to liquidity without selling or leaving a property. In circumstances of ageing society, modest pension income, increasing long-care expenditures, limited access to loan market and high risk of poverty, a reverse mortgage product has a solid ground for implementation and adoption. Croatia is an ageing country with negative demographic trends, which accelerated in the last few years. Retired population which is “home rich and cash poor” is particularly vulnerable and at strike to sustain a decent life. Therefore, we raised a question concerning the justification of the reverse mortgage introduction in Croatia. After giving an insight into some contextual factors, an estimation of the potential demand for reverse mortgage service in Croatia was made by carrying out an exploratory – pilot study with around 120 questionnaire respondents. We found out that there is a poor knowledge about the reverse mortgage among Croatian financial consumers (i.e. only 24% of respondents are familiar with the reverse mortgage term), as well as the lack of demand for this home equity extraction instrument. Namely, almost 67% of respondents would not accept a reverse mortgage instrument regardless of the circumstances, primarily due to socio-cultural reasons.

인구구조 변화와 주택가격전망을 고려한 주택연금의 중장기 수요추정

For the stable operation of the Home Pension(Korean public reverse mortgage) system, policy establishment and risk management should be made based on demand estimates that reflects the main characteristics of reverse mortgage. In this study, changes in population structure and house price prospect were selected as the main factors that affect Home Pension subscriptions to estimate demand through the Bass diffusion model. The trend of cumulative number of surviving subscribers in Home Pension was investigated to reflect changes in population structure in the diffusion model. In addition, a comparative analysis was conducted to examine the impact of house price forecasts on new Home Pension subscriptions. The analysis shows that the number of new Home Pension subscribers will peak from the mid-2030s to 2040, after which the total number of new subscribers will remain stable with a long-term balance with the death toll.

인구구조 변화와 주택가격전망을 고려한 주택연금의 중장기 수요추정

For the stable operation of the Home Pension(Korean public reverse mortgage) system, policy establishment and risk management should be made based on demand estimates that reflects the main characteristics of reverse mortgage. In this study, changes in population structure and house price prospect were selected as the main factors that affect Home Pension subscriptions to estimate demand through the Bass diffusion model. The trend of cumulative number of surviving subscribers in Home Pension was investigated to reflect changes in population structure in the diffusion model. In addition, a comparative analysis was conducted to examine the impact of house price forecasts on new Home Pension subscriptions. The analysis shows that the number of new Home Pension subscribers will peak from the mid-2030s to 2040, after which the total number of new subscribers will remain stable with a long-term balance with the death toll.

Reverse Mortgage Risks. Time Evolution of VaR in Lump-Sum Solutions

In this study, we analyzed the risk faced by the reverse mortgage provider in the case of the lump-sum solution, which is increasingly becoming one of the most popular types of reverse mortgages. The risk faced by the mortgage provider was estimated by means of a value at risk (VaR) procedure that involves a Monte Carlo simulation method and an ARMA-EGARCH assumption for modeling house price returns in the United Kingdom from 1952 to 2019. The results showed that the reverse mortgage provider faced higher risk and consequently needed to allocate more funds to meet its regulatory capital requirements in the case of relatively young borrowers, especially when they reached their life expectancy and had high roll-up rates. The risk was even higher in the case of the female population. Furthermore, care must be taken when the rental yield rate is higher than the risk-free rate, as is currently the case, as the value of the no-negative-equity guarantee (NNEG) is relatively high and results in higher value at risk (VaR) and expected shortfall (ES) values. These results have important implications in terms of policy decision making when determining the countercyclical buffer for reverse mortgages in Basel III, as well as from a managerial perspective when determining the economic capital needed to support the risk taken by the lender.

The reverse mortgage: a tool for funding long-term care and increasing public housing supply in Spain

Population ageing is one of the most significant challenges facing the world in the twenty-first century. Furthermore, people aged over 65 typically have a level of income below the national average, but the homeownership rate among those in this age group tends to be high. Equity release schemes, specifically reverse mortgages, can help cover increased care costs and ensure a reasonable level of income, thus guaranteeing the well-being of older adults. However, this product has not been greatly developed by private entities. If the State were to implement this financial operation through public administrations, it could obtain homes that might then be included in public housing stocks. Thus, our paper aims to contribute to the literature on government-based reverse mortgage systems. Under our assumptions, the results showed that if 313,833 homes were reverse-mortgaged, the investment by the public administration would be around 0.73% GDP, with this being a feasible proposal. This work helps to create alternative methods to finance problems related with the ageing of societies from a public perspective.

Reverse Mortgage: A Financial Planning Tool for the Retirees— Case Study Approach in India

Reverse mortgage has always been viewed as a product meant exclusively for the elderly with financial hardship. However, there is a brighter side to it too. This article attempts to project reverse mortgage as a financial planning tool through a case study analysis. Using the coordinated strategy, this case explores how the line-of-credit option in reverse mortgage can meet the cash needs of a retiree during market downturns, allowing his portfolio to stay invested. The suggested strategy is a direct attack on investment risks, especially, sequence of return risk. Using this strategy, the depreciated assets are allowed to recover their original value and appreciate, ensuring better returns and longevity of investments. Dilemma: Is reverse mortgage a sustainable retirement plan? How can it be used as a financial planning tool to fund retirement? With the increasing proportion of elderly population in India (projected to be 19% by 2050), reverse mortgage has emerged as an efficient option to fund retirement days. Seeing its success in foreign countries, the dilemma, is: Is it an adequate solution to fund retirement in India? Theory: The premise of the present research is based on a coordinated strategy, used by Sacks and Lafaye (2016) where it is proposed that the client, using the line of credit option in reverse mortgage, would borrow only during market downturns, thereby leaving their market investments untouched and maximizing their gains. Basis of the Case: Phenomena-based case: financial planning for a retiree. Type of the Case: This is basically an applied decisional case, attempting to determine where reverse mortgage is an effective retirement plan or not. Protagonist Present: Mr Rajesh Sharma and Mr Anand Malhotra. Findings: After 20 years into retirement. Mr Rajesh Sharma who does not choose reverse mortgage ends up exhausting his complete investment portfolio value in the 19th year of his retirement life. Thus, he is in financial distress and has no resort to meet his financial needs except to fall back upon his children. On the contrary, Mr Anand Malhotra who opts for the line of credit option in reverse mortgage has positive net worth at the end of 20 years that can ensure a comfortable future for him. Discussions: The case recommends utilising reverse mortgage as financial planning tool for the elderly. Mr Rajesh Sharma is in financial distress and has no resort to meet his financial needs except to fall back upon his children. Mr Anand Malhotra by making the smart choice of reverse mortgage, ensured that his portfolio stayed invested longer, providing it sustenance and longevity. By opting for reverse mortgage, Mr Anand Malhotra not only shielded his investments from unnecessary withdrawals, but the option also gave him the confidence to tide over his financial exigencies The case concludes that reverse mortgage can provide greater probability of the investments/savings to survive the retirement period, coupled with a high probability of greater net worth at the end of the period. It can be safely concluded that reverse mortgage is definitely a golden walking stick for the elderly. If the government and the lending institutions take cognizance of this aspect of reverse mortgage and market it accordingly, it can turn out to be a vanguard product for the Indian elderly.

Debt Stress and Debt Illusion: The Role of Consumer Credit, Reverse and Standard Mortgages

Objectives. This study examines the relationship of debt stress and reverse mortgage borrowing and compares it to stress from standard mortgages and consumer debt. Debt stress is measured as a self-reported response to the amount of debt. Method. Using a unique national data set of 1,026 homeowners who chose whether to obtain a reverse mortgage in 2010, we estimate the relationship of 2014 levels of debt stress with various types of debt, assets, and income. Using an ordered probit model, we address the endogeneity of our measures of mortgage and consumer debt using an instrumental variables regression model. Results. We find that consumer debt causes more stress per dollar of debt compared to mortgage debt. Reverse mortgages cause a relatively low level of stress per dollar of debt compared with standard mortgage debt. The average treatment effect of originating a reverse mortgage indicates statistically significantly higher probability of reporting no and not very much debt stress. Discussion. Reverse mortgage debt causes a complex stress response. Stress per dollar of debt is lower for reverse than standard mortgages four years after origination. However, reverse mortgages’ loan balance grows over time causing total stress to increase, while stress from a standard mortgage decreases as it is repaid. If an older adult uses reverse mortgage funds to repay consumer debt then total stress is reduced.

When Should Retirees Tap Their Home Equity?

This paper studies a household's optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the differential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly affected.

Valuation of Equity Release Contracts in Czech Republic, Republic of Poland and Slovak Republic

An ageing European population and, therefore, a rising dependency ratio of retirees to the working population, strongly suggests that a pension funding gap will be a key social issue in future. Yet many older people have significant real estate assets that they could access using equity release products. They could sell their assets in exchange for lifelong or temporary monthly payments. Equity release products are relatively new to Poland, but are not yet offered by commercial banks in Czechia and Slovakia. This paper estimates the potential benefits of marriage reverse annuity, and reverse mortgage contracts, using the Svensson model function, and empirical property data from selected Czech, Slovak and Polish cities. The results are also compared to the average pension of inhabitants in the selected cities. It is shown that there is substantial scope for boosting retirement income in all the cases considered, though the precise size of the increase depends on factors such as contract buyers' age and life expectancy, the value of their assets, the payment consequences of a spouse's death, and contract suppliers' pricing policies.

How federally insured reverse mortgages affect the credit outcomes of older adults

AbstractThis study examines how the extraction of home equity through the federally insured Home Equity Conversion Mortgage (HECM) affects the credit outcomes of older adults. We use data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel, supplemented with a unique credit panel data set of reverse mortgage borrowers. Using matched sample difference‐in‐differences with individual fixed effects, we estimate credit outcomes for older adults who borrowed through a HECM between 2008 and 2011, relative to older homeowners not borrowing from home equity. Our results indicate that the HECM is associated with a short‐term reduction in revolving credit card debt, as well as a reduction in the probability of bankruptcy. We find some evidence of heterogeneous treatment effects, where older adults with higher levels of consumer debt prior to originating a HECM experience larger subsequent declines in debt, increases in credit score, and steeper reductions in bankruptcy rates.

A Study on the Tendency of Empirical Analysis of Reverse Mortgage

A Study on the Tendency of Empirical Analysis of Reverse Mortgage

Debt Stress and Debt Illusion: The Role of Consumer Credit, Reverse and Standard Mortgages.

This study examines the relationship of debt stress and reverse mortgage borrowing and compares it to stress from standard mortgages and consumer debt. Debt stress is measured as a self-reported response to the amount of debt. Using a unique national data set of 1,026 homeowners who chose whether to obtain a reverse mortgage in 2010, we estimate the relationship of 2014 levels of debt stress with various types of debt, assets, and income. Using an ordered probit model, we address the endogeneity of our measures of mortgage and consumer debt using an instrumental variables regression model. We found that consumer debt causes more stress per dollar of debt compared to mortgage debt. Reverse mortgages cause a relatively low level of stress per dollar of debt compared with standard mortgage debt. The average treatment effect of originating a reverse mortgage indicates statistically significantly higher probability of reporting no and not very much debt stress. Reverse mortgage debt causes a complex stress response. Stress per dollar of debt is lower for reverse than standard mortgages 4 years after origination. However, reverse mortgages' loan balance grows over time causing total stress to increase, while stress from a standard mortgage decreases as it is repaid. If an older adult uses reverse mortgage funds to repay consumer debt then total stress is reduced.

The Market for Reverse Mortgages among Older Americans

This paper examines the usage of reverse mortgages among mortgage borrowers, as well as rejected applicants for new mortgage credit who are age 62+. We find that 17-27 percent of actual and rejected borrowers would have qualified for a HECM reverse mortgage, or nine to 14 times the size of the actual HECM market. The existence of a large number of seniors with an existing mortgage or taking out a new mortgage with quite high LTVs (57-65%, depending on the product) suggests that many seniors do, in fact utilize home equity in order to fund their retirement. Yet they choose products that require monthly payments lasting decades into retirement and rising as a share of (declining) income as they age. We consider a number of possible explanations for why seniors in the US do not spend home equity and rely on loans with high payments, including precautionary savings for health shocks, bequest motives, high costs of reverse mortgages, and the lack of brand name institutions in the reverse mortgage business.

Study on Introduction to Trust-type Reverse Mortgage and Implication for Future Development

Study on Introduction to Trust-type Reverse Mortgage and Implication for Future Development

Evaluation of the Reverse Mortgage Option in Korea: A Long Straddle Perspective

This study explored the option value embedded in a reverse mortgage in Korea through an empirical analysis, using the Black–Scholes option-pricing model. The value of a reverse mortgage is affected by the variation in house prices. However, older homeowners using reverse mortgages are able to choose this option due to the unique characteristics of reverse mortgages, such as non-recourse clauses or being able to redeem the loan. This paper found the following results. First, the call option value is 5.8% of the house price at the age of 60, under the assumption of a KRW three hundred million house value, while the put option value is only 2.0%. Contrary to what it is at sixty years of age, only the call option value will remain when the homeowner reaches the age of 80. Second, this article analyzed the sensitivity of the key variables of real-option analytical models, such as the change of the exercise price, the change of the risk-free rate, volatility, and maturity, on the option value of a reverse mortgage. The sensitivity results of the key variables supported economic rationales for the option pricing model.

가입자 특성을 고려한 주택연금 중도해지 결정요인 분석

가입자 특성을 고려한 주택연금 중도해지 결정요인 분석

A Hybrid Equity Release Plan for Retirement Financing

Abstract There are two main equity release plans for retirement financing: reverse mortgage plan and home reversion plan. Both plans entitle the homeowners not only to release cash from their properties but also to allow them living there for life. In the lease buyback scheme (LBS) recently introduced in Singapore, the home owner sells the tail-end of the property lease to the government in exchange for a cash payment upfront. Unlike the two main equity release plans, the LBS only allows the owner to stay in the property for the front part of the lease but not for life. In this paper, we propose a hybrid home equity release plan that incorporates features of the home reversion plan and the LBS. We provide an actuarial framework to analyze the pricing of the hybrid plan, as well as the LBS and home reversion plan. Some numerical illustrations are presented to show the actuarial values of the plan under different choices of plan parameters, such as the lease period and the portion of property value sold. The hybrid plan provides enhanced flexibility to plan takers to meet their retirement needs.

Determining an Optimal Principal Limit Factor for Reverse Mortgages under Economics-Based Models

Determining an optimal principal limit factor (PLF) is important for a reverse mortgage (RM) contract because it mainly influences the development of the RM market. The goal of this study was to develop a model for calculating the optimal PLF values for both uninsured and insured RMs based on two models: breaking even and maximum profits from the lender’s standpoint. We provide numerical analyses to illustrate the application of our model and compare PLFs calculated by our models with that calculated by using the traditional model in Szymanoski (1994). The results show that our PLFs are all higher than that in Szymanoski (1994) given the same basic parameters. We also provide the sensitivity analyses of PLFs on the parameters of the longevity risk, the collateral risk and the interest rate risk. The sensitivity analyses for these risks can help policymakers and market participants modulate a reasonable PLF responsive to changes in these relevant main risks. Our model provides useful information that can help them determine a reasonable PLF and manage risks with the goal of enhancing RM market development.

Housing equity withdrawal for development of assisted-living facilities

PurposeThe purpose of this study is to develop new type of reverse mortgage contract. How to provide adequate services and housing for an increasing number of people that are dependent on the help of others is a crucial question in the European Union (EU). The housing stock in Europe is not fit to support a shift from institutional care to the home-based independent living. Some 90% of houses in the UK and 70%–80% in Germany are not adequately built, as they contain accessibility barriers for people with emerging functional impairments. The available reverse mortgage contracts do not allow for relocation to their own adapted facilities. How to finance the adaptation from housing equity is discussed.Design/methodology/approachThe authors have extended the existing loan reverse mortgage model. Actuarial methods based on the equivalence of the actuarial present values and the multiple decrement approach are used to evaluate premiums for flexible longevity and lifetime long-term care (LTC) insurance for financing adequate facilities.FindingsThe adequate, age-friendly housing provision that is appropriate to support the independence and autonomy of seniors with declining functional capacities can lower the cost of health care and improve the well-being of older adults. For financing the development of this kind of facilities for seniors, the authors developed the reverse mortgage scheme with embedded longevity and LTC insurance as a possible financial instrument for better LTC services and housing with care in assisted-living facilities. This kind of facilities should be available for the rapid growth of older cohorts.Research limitations/implicationsThe numerical example is based on rather crude numbers, because of lack of data, as the developed reverse mortgage product with LTC insurance is a novelty. Intensity of care and probabilities of care in certain category of care will change after the introduction of this product.Practical implicationsThe model results indicate that it is possible to successfully tie an insurance product to the insured and not to the object.Social implicationsThe introduction of this insurance option will allow many older adult with low pension benefits and a substantial home equity to safely opt for a reverse mortgage and benefit from better social care.Originality/valueWhile currently available reverse mortgage contracts lapse when the homeowner moves to assisted-living facilities in any EU Member State, in the paper a new method is developed where multiple adjustments of housing to the functional capacities with relocation is possible, under the same insurance and reverse mortgage contract. The case of Slovenia is presented as a numerical example. These insurance products, as a novelty, are portable, so the homeowner can move in own specialised housing unit in assisted-living facilities and keep the existing reverse mortgage contract with no additional costs, which is not possible in the current insurance products. With some small modifications, the method is useful for any EU Member State.

Are homeownership patterns stable enough to tap home equity?

Abstract As retirees live longer, spend more on medical care, and get less income replaced by Social Security, many may need to consider tapping their home equity to be comfortable in retirement. The most direct way to access home equity is downsizing, but few choose this option because they generally prefer to stay in their house. The alternative is withdrawing equity through a reverse mortgage or a property tax deferral, but few households use these options either. While this low take-up has been well documented, a more fundamental question is the extent to which homeowners exhibit sufficient stability in their housing patterns to make them well-suited to tap their equity. For example, if homeowners do tap their equity and then end up moving, they have to pay back the loan with interest, which could leave them with inadequate resources at a vulnerable time in their life. This paper assesses how likely households are to move as they age to see if borrowing against one’s home is a reasonable financial strategy. The analysis uses the Health and Retirement Study (HRS) to analyze three cohorts: the HRS cohort (ages 50–54 in 1992), the AHEAD cohort (ages 70–74 in 1993), and a synthetic cohort covering the whole lifespan from age 50 to death. The analysis identifies typical housing trajectories in retirement and explores how often, and for whom, tapping home equity would be a viable strategy. The paper found that: • Seventy percent of households have very stable homeownership patterns, even over several decades. They either stay in the home they own in their 50 s (53 percent) or purchase a new home around retirement and stay for the rest of their life (17 percent). • The 30 percent of households that do move consist of two distinct subgroups. Frequent movers (14 percent) appear to face labor market challenges. Late movers (16 percent) look like a slightly more affluent version of the households that never move, but then face a health shock that forces them out of the home that they owned into a rental unit or a long-term services and supports facility. • Overall, the findings largely support the narrative from prior research that most people want to age in place and move only in response to a shock. The policy implications of the findings are: • Most homeowners experience enough residential stability to tap home equity through reverse mortgages or property tax deferrals. • Retirees might be more likely to tap their home equity if they felt that they had adequate public or private insurance protection against the risk of needing long-term services and supports.