Panel Paper: The Dynamics of Senior Households' Borrowing Behavior in the Reverse Mortgage Program

Thursday, November 7, 2013 : 3:40 PM
Georgetown I (Washington Marriott)

*Names in bold indicate Presenter

Jessie Zhang, IFE Group
Since the invention of reverse mortgage loans, it has generated debates on whether elderly borrowers can benefit from these programs. Given the complexity of the reverse mortgage and its unique risk exposure comparing to traditional forward mortgage products, it is important to examine whether reverse mortgage borrowers truly understand the loan and are able to make optimal decisions that maximize their welfare. Using data from the Home Equity Conversion Mortgage (HECM), this paper studies the dynamic of households’ borrowing behavior after they take out HECM loans. Specifically, using a life-cycle consumption model, we will examine whether and how HECM borrowers’ behavior changes according to economic conditions, and whether it differs across various dimensions of borrower/loan characteristics. More importantly, we want to find out whether elderly households participating in the reverse mortgage tend to over-borrow which might do more harm to their welfare in the long term. Findings of this paper can be useful to provide better counseling service to potential reverse mortgage users, and it can also help program providers to better understand the borrower behavior and the program cost.

Full Paper: