Working Paper #780

HECM Reverse Mortgages: Is Market Failure Fixable?

Jack Guttentag

Housing & Residential Mortgages Non-Traditional Mortgages

A sizeable segment of retirees who in years to come will have difficulty maintaining their standard of living have equity in a home that could generate additional funding through the use of a HECM reverse mortgage. The HECM program is well-designed and provides options for meeting a wide variety of retiree needs but very few seniors use it. This mainly reflects market failure, as opposed to a considered preference by senior homeowners not to participate. This article presents the indicators of market failure, the causes, the “remedies” that have not worked, and a proposed set of measures that will create a new distribution channel. Stripped of the baggage that has bedeviled the existing program, reverse mortgages originated through this new channel will be termed “kosher HECMs”, signifying that there are major differences between them and HECMs originated in the mainstream market. The central difference is that the kosher channel will be competitive and the mainstream channel is not.