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 Bank’s Finance, Competitiveness and Innovation Global Practice. 

Their research claims that even though reverse mortgages could potentially heighten in demand as the world’s population ages, such mortgages are still seen as a “last resort” versus 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 world’s 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 lenders’ viability 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.”