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The Role of Appreciation and Borrower Characteristics in Reverse Mortgage Terminations

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  • Thomas Davidoff
  • Gerd M. Welke

Abstract

The Federal Housing Administration (FHA) insures Home Equity Conversion Mortgage (HECM) lenders against shortfalls between loan balances and collateral value. Because borrowers may defer repayment until they move out of their homes or die, the FHA loses money on HECM loans when borrowers remain in their homes for a long time or prices fall. We show that there is an economically large and positive correlation between reverse mortgage terminations and home price appreciation. Consistent with intuition derived from a simple life-cycle model, we find the relation between appreciation and termination weakens with borrower age, and appears to weaken with borrower wealth.

Suggested Citation

  • Thomas Davidoff & Gerd M. Welke, 2017. "The Role of Appreciation and Borrower Characteristics in Reverse Mortgage Terminations," Journal of Real Estate Research, Taylor & Francis Journals, vol. 39(1), pages 99-126, January.
    • Handle: RePEc:taf:rjerxx:v:39:y:2017:i:1:p:99-126
    DOI: 10.1080/10835547.2017.12091465
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