A New Look at Reverse Mortgages: Potential Market and Institutional Constraints

by Christopher J. Mayer and Katerina V. Simons
March/April 1994

Most elderly hold a significant portion of their non-pension wealth in housing equity. Although they might prefer to use this housing equity to finance current consumption, to pay for an emergency, or to help out a relative in need, utilizing this wealth, would force the sale of their home. Traditional home equity lines of credit require that principal and interest be paid back over a fixed time interval, yet many elderly want to avoid mortgage payments because they live on a limited income. Reverse mortgages hold the promise of helping elderly homeowners out of this bind by allowing them to borrow against their housing equity and receive monthly payments, while still living in their home until they die or choose to move.

Although reverse mortgages have been offered for more tl~an a decade, the market has never gained significant size. This afticle demonstrates a large potential market for reverse mortgages and discusses demand and supply explanations as to why the current number of reverse mortgages is so small.

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