The Reverse Mortgage Market: Problems and Prospects

There has been considerable debate in the academic literature on the economic potential of the reverse mortgage market. Yet even the most pessimistic assessment suggests that this market should be larger than it is by an order of magnitude. We outline some of the economic forces that may help to explain the gap between the current market and its theoretical potential. These include transactions costs, moral hazard, and consumer uncertainty about future preferences. In addition we explore some psychological forces that may help explain lack of enthusiasm for these products among the majority of older home owners. We also focus attention on impediments to market development that originate in the legal, regulatory, and tax systems. We believe that similar inertial forces may impact the supply of a far broader class of innovative financial contracts. These include the equity insurance products proposed by Case, Shiller, and Weiss (1993), and the equity participation products proposed by Caplin, Chan, Freeman, and Tracy (1997). These are all examples of schemes in which there is some shifting of risk and return from the home owner to the broader financial community. We outline some of the policy measures that may be required if policy makers wish to encourage development of any or all of these markets. The Current Status of the Market In the United States, reverse mortgages are the major product in the market for home equity conversion. Reverse mortgages have advantages over more standard hom