Could Life Annuities Make Reverse Mortgages More Attractive?
October 29, 2019 by Melanie Waddell
How can reverse mortgages become more attractive to both borrowers and lenders? Life annuities could help, according to a new paper written for the Brookings Institution in Washington.
A retiree with a Home Equity Conversion Mortgage receives payment against the value of her home until she dies or moves out of the home, at which point the lender is owed the lesser of the home’s value or the balance of the loan. This presents a risk to the lender: The loan balance they are paying out may grow to exceed the value of the mortgaged home. The borrower has limited liability — the lender cannot collect the difference from her estate. Because of the risks to lenders and the resultant higher fees to borrowers, reverse mortgages are relatively unpopular.
Enter the “annuity-enhanced reverse mortgage loan.”
Thomas Davidoff of the Sauder School of Business proposed what he says is a “novel” new approach to reducing lenders’ risk.