REVERSE MORTGAGES FOR THE LOW-INCOME ELDERLY: AN ECONOMIC ANALYSIS

An important question concerning the reverse annuity mortgage (RAM) is its potential for impacting the poverty problem. However, before directly addressing the poverty question, the economics of RAMs for the elderly must be examined. The literature contains calculations for the rates of return to the lender for the RAM and its variations, but no calculations for the rate of return to the elderly homeowner. In addition, once the rate of return to the homeowner is found, a method is needed to determine whether the return is adequate compared to investment alternatives.; This study develops cash flow models to find the internal rates of return in the following situations for the low-income elderly household: homeowner without a reverse mortgage; homeowner with a standard RAM; homeowner with a RAM which includes a premium for life tenure; and a homeowner with a reverse shared-appreciation mortgage (RSAM). A new application of portfolio theory is then used to complete the model by providing a yardstick for comparison with alternative investments.; An application of each model is made using data for the elderly in the Orlando Standard Metropolitan Statistical Area (SMSA). Two results from the Orlando Examples are as follows: Homeowners do receive an adequate return on home equity compared to investment alternatives; return on home equity is greater for a RAM with a premium for life tenure than with a standard RAM.; A self-subsidizing program is developed for the RSAM with the objective that the benefit be no less than the mean deficit below poverty. Households with high home values pay premiums in order to subsidize households with low home values. In the Orlando example, the objective can be met for 42% of the households without subsidies, and an additional 20% with subsidies. A subsidy from the government is required to meet the objective for the remaining 38%.