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. Copyright American Real Estate and Urban Economics Association.

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. Copyright American Real Estate and Urban Economics Association.

Reverse Mortgages and Borrower Maintenance Risk

This paper develops a theoretical model of the problem of maintenance risk in reverse mortgages (RMs) and home equity conversion instruments generally. By maintenance risk, we refer to the incentive homeowners will have to reduce maintenance expenditures as their equity in the house falls during the term of the RM. The underlying reason for this tendency is the limited liability feature of RMs, given that a borrower's obligation to the lender at. maturity is limited to the value of the house.The results of the model show that lenders will respond to this problem either by limiting the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging an interest rate premium to cover the expected cost of default. Unfortunately, there do not exist data to test the importance of maintenance risk as a possible limitation on the extent of the RM market. Copyright American Real Estate and Urban Economics Association.