Reverse Mortgages, Financial Inclusion, and Economic Development: Potential Benefit and Risks

29 Pages Posted: 31 Jan 2020 Last revised: 5 Feb 2020

Date Written: January 30, 2020

Abstract

This paper examines the state of reverse mortgage markets in selected countries around the world and considers the potential benefits and risks of these products from a financial inclusion and economic benefit standpoint. Despite potentially increasing demand from aging societies -- combined with limited pension income -- a series of market failures constrain supply and demand. The paper discusses a series of market failures on the supply side, such as adverse selection, moral hazard, and the costly regulation established to address these problems, leading to only a small number of providers, even in developed markets. Demand-side constraints are equally relevant, in particular high non-interest costs, abuse concerns, and the inability of reverse mortgages to cover key risks facing the elderly, particularly health and elder care. In developing countries, constraints are likely to be even higher than in advanced economies, due to high transaction costs and lack of consumer knowledge and protection. The enabling conditions for such markets to develop are outlined, along with examples of regulatory oversight. The paper concludes that these still seem to be largely products of last resort rather than well-considered purchases as part of good retirement planning.

Suggested Citation

Knaack, Peter and Miller, Margaret and Stewart, Fiona, Reverse Mortgages, Financial Inclusion, and Economic Development: Potential Benefit and Risks (January 30, 2020). World Bank Policy Research Working Paper No. 9134, Available at SSRN: https://ssrn.com/abstract=3528858

Peter Knaack (Contact Author)

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Margaret Miller

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Fiona Stewart

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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