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  2. ASSA Annual Meeting
  3. 2021
  4. Preliminary Program
  5. Reverse Mortgages
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Reverse Mortgages

Paper Session

Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Real Estate and Urban Economics Association
  • Chair: Andrea Heuson, University of Miami

Annuity-Enhanced Reverse Mortgage Loans

Thomas Davidoff
,
University of British Columbia

Abstract

This paper proposes a way to make reverse mortgage loans more attractive to both borrowers and lenders by reducing the risk that the loan balance grows to exceed the value of the mortgaged home. In particular, loan amounts would be increased at origination to purchase a life annuity. The annuity would be used to pay down principal and interest on the loan while the borrower remains in the home. This effectively transfers loan balances from long after loan origination, when the borrowers' home is likely to be worth less than the outstanding balance, to earlier dates when the home is most likely worth more than the borrower owes. Numerical examples show that the costs to lenders of limited liability may be signicantly reduced by this smoothing of the loan balance across time. Lenders may thus be able to provide more cash to borrowers at loan origination while offering lower fees and interest rates. This proposal may
ease a signicant problem with reverse mortgage loans, which seem like a promising way to improve retirement finance, but have not proven popular: borrowers may not appreciate the signicant costs that limited liability imposes on lenders.

Reminders to Pay Property Tax Payments: A Field Experiment of Older Adults with Reverse Mortgages

Stephanie Moulton
,
Ohio State University
Michael Collins
,
University of Wisconsin
Caezilia Loibl
,
Ohio State University
Donald Haurin
,
Ohio State University
Julia Brown
,
Ohio State University

Abstract

One of the risks to financial security among older homeowners is the failure to pay property taxes. Tax bills are often due in lump sums, and if the homeowner has a failure of prospective memory, they may neglect to make a payment. This field study tests if reminders to plan ahead and to pay property taxes are effective with an especially liquidity constrained population, older adults who take out a reverse mortgage to extract home equity. Letters mailed to remind homeowners about their obligations reduce the rate of defaults on property taxes, as well as increase timely payments for homeowners’ insurance premiums. These effects are concentrated among subgroups of homeowners who are likely to be the most vulnerable, such as homeowners with no liquid assets, and single households, but also those with more capacity to take actions, such as relatively younger and healthier homeowners.

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

Stephanie Moulton
,
Ohio State University
Donald Haurin
,
Ohio State University
Caezilia Loibl
,
Ohio State University
Julia Brown
,
Ohio State University

Abstract

This study examines the relationship of debt stress and reverse mortgage borrowing and compares it to stress from standard mortgages and consumer 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. We address the endogeneity of our measure of stress using an instrumental variables regression model. We find that reverse mortgage debt causes a complex stress response. Per dollar of debt, a reverse mortgage causes less stress than a standard mortgage. However, because the balance grows over time, total stress from a reverse mortgage increases over time while stress from a forward mortgage decreases as it is repaid. We find that consumer debt causes the greatest stress per dollar; thus, if an older adult uses reverse mortgage funds to repay consumer debt then total stress is reduced.

Are Homeownership Patterns Stable Enough to Tap Home Equity?

Alicia H. Munnell
,
Boston College
Abigail N. Walters
,
Boston College
Anek Belbase
,
Boston College
Wenliang Hou
,
Boston College

Abstract

As retirees live longer, spend more on medical care, and get less income replaced by Social Security, many may need to tap 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. A potential reason that homeowners are reluctant to borrow against their house is that, if they do decide to move, 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 viable financial strategy. The analysis identifies typical housing trajectories in retirement and explores how often, and for whom, tapping home equity would be a viable strategy.
Discussant(s)
Indraneel Chakraborty
,
University of Miami
Nadia Greenhalgh-Stanley
,
Kent State University
Mariya Letdin
,
Florida State University
Tracy Turner
,
Iowa State University
JEL Classifications
  • G5 - Household Finance