A Comparative Analysis of Reverse Mortgages: Evidence from Puerto Rico and the United States

By Cardona, Rogelio J.; Castro-González, Karen C. | Global Journal of Business Research, September 1, 2014 | Go to article overview

A Comparative Analysis of Reverse Mortgages: Evidence from Puerto Rico and the United States


Cardona, Rogelio J., Castro-González, Karen C., Global Journal of Business Research


ABSTRACT

This paper is a comparative and descriptive analysis of reverse mortgage loans originated in the United States and Puerto Rico from 2010 to 2012 and examines whether differences exist between both jurisdictions and the possible reasons for the latter. The study also compares the average profde of a reverse mortgage borrower in the United States and Puerto Rico. The number of new reverse mortgages generated in the United States and in Puerto Rico decreased from 2010 to 2012. However, during that same time period, the interest rate charged in Puerto Rico on reverse mortgages was higher than in the United States. There was also a reduction in the age of the average borrower. The distribution or the uses of the borrowed funds in Puerto Rico is consistent with prior studies performed in the United States.

JEL: G21, H31

KEYWORDS: Reverse Mortgages, Home Equity, Elderly Consumers, Home Equity Conversion Mortgage

INTRODUCTION

From 2000 to 2005 the individual residential market in the United States (U.S.) and in Puerto Rico (P.R.) exhibited sustained price increases (housing bubble). The financial markets in the U.S. took advantage of that bubble to aggressively promote a product known as a reverse mortgage loan ("reverse mortgage"). Reverse mortgages allow elderly consumers to obtain cash during their pre and post-retirement years using their primary home as collateral without having to abandon the property. As a result of the aforementioned housing bubble, there was a significant increase in the demand for reverse mortgages in the U.S. Although reverse mortgages were initially offered in P.R. in 1993, demand for this type of financing did not increase until 2010. The objective of this investigation is to perform a comparative and descriptive analysis of reverse mortgages originated in P.R. and the U.S. from 2010 to 2012. This study contributes to the household finance literature by studying the use of reverse mortgages by senior citizens as a financial planning tool. The results are compared with data on reverse mortgages in the United States to examine whether differences exist between both jurisdictions and the possible reasons for the latter. The rest of this paper is organized as follows. The next section presents the prior research and the institutional background, followed by the research motivation. The following section presents the research design and methodology. The last two sections present the results and conclusions.

LITERATURE REVIEW AND INSTITUTIONAL BACKGROUND

Evolution and Regulation of Reverse Mortgages in the U.S.

Shan (2011) defines a reverse mortgage as a loan granted to elderly housing owners that transforms their home equity in a source of cash that does not require the payment of interest or principal until the last of the surviving borrowers dies (in the case of a couple), or the borrower moves permanently from the house. Michelangeli (2008) defines these instruments as private loans insured by the U.S. government designed for home owners that have their net worth tied to their homes but have little or no cash. Szymanoski, Enriquez and DiVenti (2007) state that reverse mortgages receive their name because the observed payment pattern is the opposite of a traditional mortgage (forward mortgage).

There are different types of reverse mortgages that depend on the way the borrowers receive the funds. According to the Department of Housing and Urban Development (HUD), the six possibilities are: Lump Sum, Tenure, Term, Line of Credit, Tenure and Line of Credit (also known as "Modified Tenure"), and Term and Line of Credit (also known as "Modified Term"). A Lump Sum reverse mortgage (LSUM) refers to the receipt of the net equity in the borrowers' residence in one single amount. In a Tenure reverse mortgage (TEN), the borrowers receive equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. …

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