A Dynamic Model of Reverse Mortgage Borrower Behavior

Jason R. Blevins, Wei Shi, Donald R. Haurin, and Stephanie Moulton.

Abstract. We carry out an empirical analysis of the Home Equity Conversion Mortgage (HECM) program using a unique and detailed dataset on the behavior of HECM borrowers from 2006–2012 to semiparametrically estimate a structural, dynamic discrete choice model of borrower behavior. Our estimator is based on a new identification result for models with multiple terminating actions where we show that the utility function is identified without the need to impose ad hoc identifying restrictions (i.e., assuming that the payoff for one choice is zero). Such restrictions are required to identify more general models, but they also lead to incorrect counterfactual choice probabilities and welfare calculations. Our estimates, which are robust to these issues, provide insights about the factors that influence HECM refinance, default, and termination decisions. We use the results to quantify the trade-offs involved for proposed program modifications. We find that income and credit requirements would indeed be effective in reducing undesirable HECM outcomes, at the expense of excluding some borrowers, and we quantify the relative welfare losses due to restricting access to the program. We also investigate how shocks to housing prices affect HECM outcomes and household welfare.

Keywords: reverse mortgages, mortgage default, senior housing, dynamic discrete choice, identification, semiparametric estimation.

JEL Classification: R21, G21, C25, C61.

BibTeX Record:

@TechReport{ddc-hecm-2016,
  author       = {Jason R. Blevins and Wei Shi and
                  Donald R. Haurin and Stephanie Moulton},
  title        = {A Dynamic Model of Reverse Mortgage Borrower Behavior},
  year         = {2016},
  type         = {Working Paper},
  institution  = {Ohio State University}
}