| Description: | Reverse mortgage design might invite two dimensions of moral hazard. The first,is that a mortgagor facing default has no incentive to maintain property values. The second moral hazard issue is that by giving funds to an older homeowner, life in the home is made relatively more attractive than life after moving or death, and so the act of giving a borrower a reverse mortgage may extend the borrower’s stay in the home beyond the optimal length for an otherwise identical non-mortgagor.
This paper explains that neither adverse selection nor moral hazard is guaranteed by the structure of the reverse mortgage industry. In fact, to date, reverse mortgage borrowers in the US have moved out of their homes, whether due to death or voluntary mobility, at a rate that far exceeds the rate of demographically similar non-borrowers. |
