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Aging in place, housing maintenance and reverse mortgages

Cocco, Joao F. and Lopes, Paula (2019) Aging in place, housing maintenance and reverse mortgages. Review of Economic Studies. ISSN 0034-6527 (In Press)

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Abstract

We study the role of housing wealth in financing retirement consumption. In our model retirees: (i) derive utility benefits from remaining in their home (aging in place); and (ii) choose in each period whether to maintain their house. The evidence that we present shows that these features are important in explaining the saving decisions of the elderly. The costs and the maintenance requirement of reverse mortgages reduce (or eliminate) the benefits of the loans for retirees who wish to do less maintenance. We evaluate the impact of different loan features on retirees’ utility, cash-flows to lenders and to the government agency that provides mortgage insurance. We show that combining reverse mortgages with insurance against a forced home sale (e.g. due to a move to a nursing home) is Pareto improving and can lead to increased demand for the loans due to product complementarities.

Item Type: Article
Additional Information: © 2019 The Authors
Divisions: Finance
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
Date Deposited: 17 May 2019 16:27
Last Modified: 15 Sep 2019 23:09
URI: http://eprints.lse.ac.uk/id/eprint/100835

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