Hacking Reverse Mortgages

Reverse mortgages allow retirees to access a portion of their home equity to meet spending needs while insuring that they can age in place. In the U.S., almost all reverse mortgages are in the form of a Home Equity Conversion Mortgage (HECM)--a product designed and administered by the federal government. Despite the potential liquidity and insurance benefits, and the presence of a government subsidy, the take-up rate among eligible borrowers is very low. I develop and calibrate a valuation model for HECMs that suggests a purely financial reasons for why the current product remains so unpopular: the cost to borrowers is extremely high relative to estimated fair market value. Rents go to the guaranteed private lenders that originate the loans but bear little of the risk and face limited competition. I consider structural changes to the HECM program that could lower costs to borrowers and improve the product’s functionality without increasing taxpayer cost, and discuss some general lessons for the design of government credit programs