Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/225489
Authors: 
Hambel, Christoph
Kraft, Holger
Meyer-Wehmann, André
Year of Publication: 
2020
Series/Report no.: 
SAFE Working Paper 293
Abstract: 
This paper studies a household's optimal demand for a reverse mortgage. These contracts allow homeowners to tap their home equity to finance consumption needs. In stylized frameworks, we show that the decision to enter a reverse mortgage is mainly driven by the differential between the aggregate appreciation of the house price and principal limiting factor on the one hand and the funding costs of a household on the other hand. We also study a rich life-cycle model that can explain the low demand for reverse mortgages as observed in US data. In this model, we analyze the optimal response of a household that is confronted with a health shock or financial disaster. If an agent suffers from an unexpected health shock, she reduces the risky portfolio share and is more likely to enter a reverse mortgage. On the other hand, if there is a large drop in the stock market, she keeps the risky portfolio share almost constant by buying additional shares of stock. Besides, the probability to take out a reverse mortgage is hardly affected.
Subjects: 
reverse mortgage
consumption-portfolio decisions
optimal stopping
biometric risks
financial disasters
JEL: 
D14
E21
G11
G21
J14
R21
Document Type: 
Working Paper

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