undertaken in socialist economies where a pensioner would bequeath the tenancy rights to his or her apartment upon death to a caregiver in return for care during their remaining life.'<sup>3</sup> Reverse mortgages provide homeowners with a loan collateralized by the equity in the home. In contrast to regular mortgages in which the buyer makes monthly payments to the lender, with a reverse mortgage the process is "reversed," the homeowner receives payments from the lender, thereby increasing rather than reducing debt as is the case with the more traditional mortgage instrument. The lender uses the value of the home as an eventual source of repayment and accrued interest. The payments to the homeowner can also be structured as an annuity, making the reverse annuity mortgage a special case of a general annuity contract.

Annuities are contracts between an insurance company and an individual under which the insured person receives a monthly sum as long as he or she lives in return for a one-time flow of premium payments. The market for annuities in the U.S. has grown rapidly in recent years, with more than 23 million individual annuities in force in 1995, and almost $800 billion in reserves to cover the promised payments to individuals.'<sup>4</sup> To illustrate, consider the situation of a 65 -year - old man purchasing a typical $100,000 single-premium annuity. In return for the payment of this premium, he would receive a monthly payment of $ 794 for the duration of his life. Because women on average live longer than men, a 65 -year -old woman would be eligible for a monthly payment of only $648. Similarly, because the older a person is the shorter is his or her expected life span, older purchasers will receive higher monthly payments. For instance, a 75 -year-old man making the same purchase described above would receive over $1,000 per month.'<sup>5</sup> Currently in the U.S. there are several public and private sector programs available which allow older homeowners to use their housing equity as the basis for the purchase of an annuity or a reverse mortgage. These contracts usually entail either one-time payments targeted toward specific purposes, such as home repairs, or annual payments to be used to cover property taxes or defer payments for holusing repair expenditures. As is the case with all annuity contracts, private companies offer a variety of payment options, including up-front lump sum payments, fixed monthly or annual payments, credit lines, or a combination of the three. Payments may be made for a specific time period or as long as the homeowner lives in his or her home. The common feature of reverse mortgage programs, whether annuity or not, is that the lender is repaid from the proceeds of the house value when the homeowner dies or moves from the house.

Lenders face various risks in offering reverse mortgage loans. Most importantly, they face the adverse selection risk that characterizes all annuities. This risk arises because borrowers know more about future mortality than do lenders. As a result, those individuals with shorter than expected mortality may not purchase the annuity leaving only those with average or longer expected mortality in the pool of annuitants. With this composition of annuitants, a lender would make more payrnents than predicted by the expected mortality rate. Certainly the mortality tables

> of their properties to the city. The Government of Hungary has also prepared a study of the desirability of establishing such a program

> **13** Problems can arise with such individual based life annuity schemes. For example, there is the well known French experience of a Madame Calmant of Arles who wrote a viager, i.e. - reverse mortgage - contract with a notary public

> at the age of 75. Her notary predeceased her as she lived to be 122.

> **4** American Council on Life Insurance (1996).. Data on payment rates are from Mitchell et al. (1999).

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