{"id":5999,"date":"2024-12-19T17:56:21","date_gmt":"2024-12-19T16:56:21","guid":{"rendered":"https:\/\/www.rivistaeco.com\/?p=5999"},"modified":"2024-12-19T17:56:21","modified_gmt":"2024-12-19T16:56:21","slug":"what-is-a-reverse-mortgage","status":"publish","type":"post","link":"https:\/\/www.rivistaeco.com\/en\/2024\/12\/19\/what-is-a-reverse-mortgage\/","title":{"rendered":"What is a Reverse Mortgage?"},"content":{"rendered":"

While growing in Anglo-Saxon and emerging countries, the reverse mortgage market is not very developed in Italy. Yet, this financial tool could channel part of household wealth to support elderly expenses\u2014an increasing need in an aging population. However, high costs and, above all, the desire to leave an inheritance to children hinder its spread.<\/span><\/i><\/p>\n

In aging societies, pension and healthcare expenditures heavily influence public finances and the evolution of public debt. By the end of 2023-2024, according to the Italian State General Accounting Office, pensions account for 15.6% of GDP, while healthcare spending amounts to 6.4%. Against this backdrop, an open question remains: how can financial intermediaries and insurance companies redirect part of household wealth to cover elderly expenses?<\/span><\/p>\n

One of the instruments that can achieve this is the reverse mortgage (PVI, prestito vitalizio ipotecario in Italian). This financing scheme, known in Anglo-Saxon contexts as a Reverse Mortgage, allows the elderly to cover consumption expenses without giving up homeownership. The PVI addresses the need to \u201cliquidate\u201d home equity, which is especially useful for elderly individuals who own their residence but have low pensions or limited liquid wealth.<\/span><\/p>\n

Its effectiveness in meeting these needs, however, depends on various factors, including both the potential demand from elderly individuals and the characteristics of the PVI offered by financial intermediaries.<\/span><\/p>\n

What is it?<\/b><\/h3>\n

Introduced in Italy by Legislative Decree 203\/2005, later converted into Law No. 248 of December 2, 2005, and subsequently amended by Law No. 44 of April 2, 2015, the reverse mortgage is a financing scheme reserved for individuals aged 60 and over who own a residential property. The loan is secured by the property itself, with annual capitalization of interest and costs (repayable upon debt extinction or earlier with periodic payments). Typically, the loan is settled upon the debtor’s death by their heirs, using proceeds from selling the property or other resources.<\/span><\/p>\n

The financing can be disbursed as a lump sum, in tranches, or even as a lifetime annuity (or a combination of these methods). A Ministerial Decree dated December 22, 2015, No. 226, established regulations concerning transparency, the certainty of financing amounts, and circumstances under which the lender can demand full repayment of the loan, aside from the borrower\u2019s death.<\/span><\/p>\n

In practical terms, the PVI is a financial contract secured by the property\u2019s value (on which a mortgage is registered). The main factors include the property\u2019s value, the borrower\u2019s remaining life expectancy at the time of contract signing, and the interest rate used to capitalize the interest. The loan amount granted increases with the property\u2019s value and, all else being equal, decreases with higher interest rates. The loan also depends on the borrower\u2019s age at the time of signing, as the interest will presumably accumulate over a number of years equal to their remaining life expectancy. If, at repayment, the outstanding debt exceeds the value of the mortgaged property, neither the borrower nor their heirs are required to pay an amount exceeding the property\u2019s market value. From this perspective, the PVI protects the borrower from negative fluctuations in property prices.<\/span><\/p>\n

International and Italian Experiences<\/b><\/h3>\n

The first reverse mortgages were signed in the 1960s in the United States and the United Kingdom, later spreading to Australia, Canada, South Africa, Hong Kong, and, more recently, emerging economies like Brazil, Chile, and Thailand. As documented in a study published this year (\u201cReverse Mortgages, Housing and Consumption: An Equilibrium Approach\u201d by Shize Li, Jialu Shel, and Ariel Sun), in the United States, these loans have nearly decupled over the past 25 years: in 1997, only 0.3% of the elderly signed them; by 2021, the figure reached 2.8%. The study also shows that, during the same period, the number of loans increased fivefold in the UK and threefold in Australia.<\/span><\/p>\n

In these economies, it is a rapidly growing market influenced by the interplay between residential property price dynamics and interest rates. In contrast, the situation in Europe is different, where loans to the elderly secured by property are still uncommon and fall outside the scope of mortgage credit regulation (Directive 2014\/17\/EU of the European Parliament and the Council), currently under revision. Italy is no exception: only a limited number of banks offer reverse mortgages.<\/span><\/p>\n

Who Could Use Them?<\/b><\/h3>\n

Who are the potential subscribers of a reverse mortgage? Elderly homeowners, often owning large properties with high maintenance costs, but with limited financial resources and insufficient income to cover late-life expenses. There is no doubt that Italian society is aging. In 2024, individuals over 65 will number slightly over 14 million, accounting for 24% of residents\u2014a proportion expected to rise to 34% by 2050, according to ISTAT projections.<\/span><\/p>\n

Simultaneously, property ownership among the elderly is widespread. Data from the Bank of Italy\u2019s 2020 Survey on Household Budgets (the latest available year) indicates that 80% of households own their primary residence, and half own at least one additional property. Among those over 65, ownership rises to 82.3% (half of them own at least one additional property). The same survey reveals that, for half of these families, real estate represents at least 90% of their total wealth\u2014sufficient to conclude that Italians’ wealth is predominantly in real estate.<\/span><\/p>\n

As for income, ISTAT data shows that annual net household incomes increase with the age of the primary earner until 64, after which they drop by about a quarter (from \u20ac42,000 annually for those aged 55-64 to \u20ac31,000 among those over 65). The decline is more pronounced among homeowners. Additionally, the Household Budgets Survey indicates that among families living in poverty, about 40% own their residence. Thus, the phenomenon termed \u201chouse-rich, cash-poor\u201d in the academic literature also exists in Italy, referring to families living in poverty despite owning their home. Since the PVI allows homeowners to liquidate part of their property\u2019s value while continuing to live in it, the potential demand is significant.<\/span><\/p>\n

The Risks for Creditors<\/b><\/h3>\n

For creditors, the PVI carries inherent risks, including interest rate fluctuations, property value changes, and the borrower\u2019s life expectancy. Loans are generally offered with a fixed interest rate, exposing the creditor to risk when rates rise. There is no risk of borrower default, but a substitution risk occurs when the debt exceeds the property\u2019s value. A third risk arises from uncertainty about the borrower\u2019s life expectancy.<\/span><\/p>\n

Quantifying these risks is not easy. In the Italian context, assessing risks related to life expectancy uncertainty is further complicated by the lack of a viable annuity market. This issue is compounded by competition from usufruct rights, a legal construct (Article 981 of the Italian Civil Code) with deep roots in Roman law. According to the 2020 Household Budgets Survey, usufruct rights are utilized by 2.3% of households.<\/span><\/p>\n

A Market Still in its Infancy<\/b><\/h3>\n

In Italy, the reverse mortgage market struggles to achieve significant scale despite the high number of elderly homeowners with low incomes. This is partly due to the challenges in risk assessment. These difficulties are exacerbated by moral hazard problems (e.g., the borrower has less incentive to maintain the property in good condition) and adverse selection issues (e.g., the contract attracts healthier borrowers with longer life expectancies), which increase the risk premium charged by banks on PVI interest rates.<\/span><\/p>\n

The sluggish pace of civil justice further inflates costs. At an annual rate of 6% (close to what banks currently offer for PVIs), a 70-year-old borrowing \u20ac100,000 secured by a property worth \u20ac420,000 would need to repay \u20ac226,105 over 15 years. Adding costs for maintaining a bank account, appraisal fees, and notary fees, direct and indirect expenses could amount to 30% of the debt.<\/span><\/p>\n

Can these costs be reduced? Some guidance comes from the American experience. In the United States, most contracts are signed under a Federal Housing Administration (FHA) program known as the Home Equity Conversion Mortgage. The FHA insures creditors against the risk of property price declines, with part of the cost passed onto borrowers as an insurance premium and part borne by general taxation. However, the 2008 financial crisis demonstrated that shifting creditor risks onto individuals, institutions, or the state is ill-advised when incentives for proper risk assessment are removed.<\/span><\/p>\n

It\u2019s not just a matter of price. The limited development of the reverse mortgage market in Italy likely also stems from a desire to leave an inheritance. Twenty-two percent of Italian families cite the wish to leave an inheritance and financially support their children and grandchildren as their main reason for saving, making them reluctant to incur debt.<\/span><\/p>\n

Conclusion<\/b><\/h3>\n

The reverse mortgage does not yet seem capable of meeting elderly spending needs, despite the evident necessity to redirect private savings\u2014particularly wealth locked in real estate\u2014towards funding the growing expenses of an aging society like Italy\u2019s. High costs and the desire to leave an inheritance limit its adoption.<\/span><\/p>\n

Tullio Jappelli is a professor of economics at the University of Naples Federico II, director of the Centre for Studies in Economics and Finance (CSEF), and a research fellow at the Centre for Economic Policy Research (CEPR, London).<\/span><\/em><\/p>\n

Mario Padula is a full professor of political economy at Ca\u2019 Foscari University of Venice. He has served as Chairman of the Pension Fund Supervisory Commission.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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