What the HECM? Evaluating the Effect of Reverse Mortgages on Bequest and Budgetary Decision-Making in Retirement

Reverse mortgages (RM) are an increasingly attractive means for the largely cash-strapped but
house-rich Baby Boomer generation to meet basic liquidity demands in retirement. Given the
importance of bequest in life-cycle models of wealth generation, though, and the outsize role
home equity plays in most Americans’ estates, reverse mortgages’ requirement that the borrower
transfer his or her home to the lender at death could prove disruptive. I investigate the effect of
RMs on seniors’ allocations across saving and consumption in retirement, and subsequent
impacts on realized bequests. I find that the availability of RMs leads those who would get one to
bequest 71% less than they would otherwise, even when accounting for savings financed by the
new liquidity a reverse mortgage provides, and that those who would choose RM bequest 64%
less than those who would not. I find additional implications for the most financially vulnerable,
and that RM could exacerbate inequality among Millenials by singularly diminishing bequests
among middle-class Boomers. Further, I find that the hypothetical event of Social Security trust
fund insolvency would heighten each of these effects and increase RM take-up 27%.