Debt Stress and Debt Illusion: The Role of Consumer Credit, Reverse and Standard Mortgages

Objectives: This study examines the relationship of debt stress and reverse mortgage borrowing and compares it to stress from standard mortgages and consumer debt. Debt stress is measured as a self-reported response to the amount of debt.

Method: Using a unique national data set of 1,026 homeowners who chose whether to obtain a reverse mortgage in 2010, we estimate the relationship of 2014 levels of debt stress with various types of debt, assets, and income. Using an ordered probit model, we address the endogeneity of our measures of mortgage and consumer debt using an instrumental variables regression model.

Results: We find that consumer debt causes more stress per dollar of debt compared to mortgage debt. Reverse mortgages cause a relatively low level of stress per dollar of debt compared with standard mortgage debt. The average treatment effect of originating a reverse mortgage indicates statistically significantly higher probability of reporting no and not very much debt stress.

Discussion: Reverse mortgage debt causes a complex stress response. Stress per dollar of debt is lower for reverse than standard mortgages four years after origination. However, reverse mortgages' loan balance grows over time causing total stress to increase, while stress from a standard mortgage decreases as it is repaid. If an older adult uses reverse mortgage funds to repay consumer debt then total stress is reduced.