The Department of Economics Macroeconomics Seminar Series presents

"Reverse Mortgage Loans: A Quantitative Analysis"
with Irina Telyukova, Assistant Professor of Economics, UC Davis

Wednesday, April 24, 2013
3:30-5:00 p.m.
Social Science Plaza B, Room 3218

Reverse mortgages allow elderly homeowners with limited income or financial wealth to borrow against their housing wealth without downsizing or moving out and becoming a renter. Although the proportion of eligible older homeowners using reverse mortgages has been increasing rapidly, that proportion is only 1.4 percent at present. In this talk, Telyukova analyzes reverse mortgage loans in a rich structural life-cycle model of retirement. Our model can replicate the low take-up rate with a reasonable calibration. When the model is calibrated to match the observed take-up rate, the welfare gain from introducing reverse mortgages is sizable at $510 per household in the economy. Telyukova's model indicates that one-third of reverse mortgage borrowers use them for medical expenses, while remaining in their home. Through counter-factual experiments, she identifies that, conditional on the existing RML contracts, bequest motives, moving shocks, and house price fluctuations all contribute to the observed low take-up rate, and that if households expect a housing boom, reverse mortgage demand increases, consistent with the data. However, the interest and insurance costs of reverse mortgages are important determinants of demand as well. Finally, the addition of the HECM Saver, a recently-introduced reverse mortgage contract with lower upfront costs designed to boost demand for reverse mortgages, fails to create
that boost.

For further information, please contact Gloria Simpson, simpsong@uci.edu or 949-824-5788.

 

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