An after tax economic analysis of home equity conversion for the elderly

Authors

Lowell James Cramer, Florida International UniversityFollow

Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Major/Program

Business Administration

First Advisor's Name

Lewis F. Davidson

First Advisor's Committee Title

Committee Chair

Second Advisor's Name

Amy Dickinson

Third Advisor's Name

Yong S. Choe

Fourth Advisor's Name

Joel Barber

Fifth Advisor's Name

Rolf Auster

Sixth Advisor's Name

Gary Anderson

Keywords

Home equity conversion -- United States, Older people -- Dwellings -- United States

Date of Defense

5-20-1994

Abstract

The FHA program to insure reverse mortgages has brought additional attention to the use of home equity conversion to increase income to the elderly. Using simulation, this study compares the economic consequences of the FHA reverse mortgage with two alternative conversion vehicles: sale of a remainder interest and sale-leaseback. An FHA insured plan is devised for each vehicle, structured to represent fair substitutes for the FHA mortgage. In addition, the FHA mortgage is adjusted to allow for a 4 percent annual increase in distributions to the homeowner. The viability of each plan for the homeowner, the financial institution and the FHA is investigated using different assumptions for house appreciation, tax rates, and homeowners’ initial ages. For the homeowner, the return of each vehicle is compared with the choice of not employing home equity conversion. The study examines the impact of tax and accounting rules on the selection of alternatives. The study investigates the sensitivity of the FHA model to some of its assumptions.

Although none of the vehicles is Pareato optimal, the study shows that neither the sale of a remainder interest nor the sale-leaseback is a viable alternative vehicle to the homeowner. While each of these vehicles is profitable to the financial institution, the profits are not high enough to transfer benefits to the homeowner and still be workable. The effects of tax rate, house appreciation rate, and homeowner's initial age are surprisingly small. As a general rule, none of these factors materially impact the decision of either the homeowner or the financial institution. Tax and accounting rules were found to have minimal impact on the selection of vehicles. The sensitivity analysis indicates that none of the variables studied alone is likely to materially affect the FHA’s profitability.

Although none of the vehicles is Pareato optimal, the study shows that neither the sale of a remainder interest nor the sale-leaseback is a viable alternative vehicle to the homeowner. While each of these vehicles is profitable to the financial institution, the profits are not high enough to transfer benefits to the homeowner and still be workable. The effects of tax rate, house appreciation rate, and homeowner's initial age are surprisingly small. As a general rule, none of these factors materially impact the decision of either the homeowner or the financial institution. Tax and accounting rules were found to have minimal impact on the selection of vehicles. The sensitivity analysis indicates that none of the variables studied alone is likely to materially affect the FHA’s profitability.

Identifier

FI14061537

Recommended Citation

Cramer, Lowell James, "An after tax economic analysis of home equity conversion for the elderly" (1994). FIU Electronic Theses and Dissertations. 2654.
https://digitalcommons.fiu.edu/etd/2654