EURO 2024 Copenhagen
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2911. Utility based evaluation of Reverse Mortgages

Invited abstract in session MB-63: Insurance Risk Management, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.

Monday, 10:30-12:00
Room: S14 (building: 101)

Authors (first author is the speaker)

1. Gabriella Piscopo
University of Naples Federico II

Abstract

The reverse mortgage (RM) contract allows elder homeowners to borrow money using their home as security for the loan maintaining the right to live in the house. The debt is repaid by the heirs when the borrower moves out or dies. This contract can constitute a valid support for the spending needs that may arise during retirement. The paper deals with a decision problem of a homeowner who is approaching old age and has to evaluate contracting a Reverse Mortgage or not. We built elders lifetime utility functions considering consumptions, bequest motivations and lifespan uncertainty and solve the maximization problem to find the optimal allocation of the wealth between housing/nonhousing, consumptions and bequest with and without RM. Through our analysis, we expect to find that, in presence of long-term care expenses and house mainteinance costs, individual’s liquid wealth significantly increase with reverse mortgage. Moreover, homeowner with a higher bequest motivation may have lower utility gains from contracting RM plan as well as individuals with a lower house value respect to liquid assets.

Keywords

Status: accepted

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