Who Gets a Reverse Mortgage? Identifying Household Level Determinants of U.S. Reverse Mortgage Choices

Internationally, there is increasing interest in the potential of elderly households to withdraw their home equity, but remain in their home, through some form of reverse mortgage. However, reverse mortgage markets are limited to the U.S. and South Korea. One question is whether seniors will originate reverse mortgages if the contract and process are well documented, the mortgage is insured and relatively riskless. If seniors are willing to tap home equity through this mechanism, then the potential for growth in the reverse mortgage market is very large in both the U.S. and world.However, very little is known about the characteristics of those who obtain reverse mortgages in the U.S. compared with the general population of seniors. The penetration rate is only about two percent. Our study helps address this deficiency through the analysis of a unique data set of senior households who sought counseling in 2010 and 2011 for the predominant form of reverse mortgages, the government insured Home Equity Conversion Mortgage (HECM). We combine data on counseled households with weighted nationally representative data from the 2010 wave of the Health and Retirement Study. Our estimation model focuses on two decisions: seeking counseling (which is a prerequisite for applying for a reverse mortgage) and obtaining the mortgage. We use a truncated bivariate probit model for the estimation. We find that household income, home equity, race and prior credit performance are associated with the probability of obtaining a reverse mortgage. Specifically, the largest demand for reverse mortgages is among seniors who have high home equity but a low income flow. Seniors who were past due on their previous mortgage also have a relatively high probability of seeking a reverse mortgage; however, counseling tends to moderate this demand. In general, the required counseling session tends to increase the probability that credit worthy households apply for reverse mortgages, reducing the probability for seniors with a poor credit history. We exploit an exogenous change in counseling requirements and find that enhanced counseling is associated with a reduced likelihood of obtaining a HECM, and that this effect is largely explained by information provided about eligibility for alternative public benefits.