Annuity-enhanced reverse mortgage loans

Retirees Gene Bloczynski (L) and Eric Vannieuwburg fish from a public dock on the Sacramento River in the Sacramento San Joaquin River Delta in Rio Vista, California September 4, 2013. California water officials have proposed redesigning two water diversion tunnels planned for the Delta, away from several small towns along the Sacramento River that Delta residents said would be threatened under the existing plan. Water from the tunnels would flow to urban areas in the Silicon Valley, Los Angeles and San Diego and farmers in the San Joaquin Valley. Picture taken September 4, 2013.   REUTERS/Robert Galbraith  (UNITED STATES - Tags: AGRICULTURE ENVIRONMENT SOCIETY) - GM1E99A0DRA01
Editor's note:

This report was produced in concert with the event, “Reverse mortgages: Promise, problems, and proposals for a better market” held October 28, 2019 and co-sponsored by Brookings and the Kellogg Public-Private Initiative.


This paper proposes a way to make reverse mortgage loans more attractive to both borrowers and lenders by reducing the risk that the loan balance grows to exceed the value of the mortgaged home. In particular, loan amounts would be increased at origination to purchase a life annuity. The annuity would be used to pay down principal and interest on the loan while the borrower remains in the home. This effectively transfers loan balances from long after loan origination, when the borrowers’ home is likely to be worth less than the outstanding balance, to earlier dates when the home is most likely worth more than the borrower owes. Numerical examples show that the costs to lenders of limited liability may be significantly reduced by this smoothing of the loan balance across time. Lenders may thus be able to provide more cash to borrowers at loan origination while offering lower fees and interest rates. This proposal may ease a significant problem with reverse mortgage loans, which seem like a promising way to improve retirement finance but have not proven popular: borrowers may not appreciate the significant costs that limited liability imposes on lenders.