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Reverse Mortgages Seen as ‘Last Resort’

A recent report from Reverse Mortgage Daily highlights a research paper by Peter Knaak, Margaret Miller, and Fiona Stewart on behalf of the World Banks Finance, Competitiveness and Innovation Global Practice

Their research claims that even though reverse mortgages could potentially heighten in demand as the worlds population ages, such mortgages are still seen as a last resortversus a real option in preparation for retirement. The reasons for this are mostly attributed to limited supply and demand, as well as a limited number of providers.

The paper says the particular potential benefits of reverse mortgages: The academic literature on the topic suggests that reverse mortgages can be a welfare-enhancing tool to supplement pension income, or as a form of insurance. In particular, low-income senior homeowners may tap into their accumulated housing wealth to smooth consumption and increase their resilience against financial shocks. The welfare-enhancing potential of this instrument has been modeled in academic studies using data from a variety of jurisdiction.

In light of such information, the ways that reverse mortgages can benefit the elderly population is impressive. Also aided by such mortgages could be the worlds demographic of women who are aging and currently living off lower pensions. It is also stated that reverse mortgages could potentially prevent seniors from being excluded from participating in the mortgage market due to their not being able to meet the minimum required income criteria usually accompanying the pre-approval process for most traditional home loans.

However, the paper continues on, with Stewart highlighting the huge elephant in the room, specifically that this type of elder care is something that reverse mortgages cannot yet address: Elderly care is the big gap which needs addressing in developed and developing countries alike—and which reverse mortgages are currently not designed to address. 

The reasons for market failures and risk factors, as well as high insurance costs, an absence of risk pooling mechanisms reducing lendersviability in offering reverse mortgages and a tough regulatory climate may have all contributed to barriers for the reverse mortgage market in many nations, according to the experts. 

Stewart goes on to offer a suggestion for moving forward and addressing this gap: The U.K. experience—and the U.S. to some extent—suggest that a strong regulatory framework (including some degree of financial education and/or advice) may be required, over and above market practice alone. That said, the introduction of credible, established providers, as well as relatively unknown, niche firms, may help.

About Author: Andy Beth Miller

Andy Beth Miller is a well-established freelance editor and writer with almost 20 years’ experience working within the media industry, contributing to various publications such as Lonely Planet, Zicasso, Honolulu Star-Advertiser, Midweek Magazine, Kauai Traveler Magazine, HILuxury, and many more. She also currently serves as the Editor-in-Chief of ProcuRising Magazine, which enables procurement professionals to increase their knowledge base within a creative and collaborative community.
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