Mr. and Mrs. Martin received a brochure offering Reverse Mortgage

      Profile: Mr. and Ms. Martin are above 65 years of age. They are both retired. They estimate that their house would be appraised at $550,000. They have total savings of $250,000 in financial investments. Monthly social security: $4,000 Monthly Investment income: $1,000 Average monthly Property Maintenance: $600 Average Monthly Living expenses: $3,500 Average Monthly Savings: -$100 Monthly Home Insurance: $400 Monthly Property Taxes: $600 Mr. and Mrs. Martin received a brochure offering Reverse Mortgage and decided the contact the lender. They hoped that the payments from the Reserve Mortgage would ensure a more secure financial future. They were given an estimate of $8,500 in fees for a formal appraisal, title search, title insurance, underwriting, and other compliance-related expenses. They were advised that the bank would consider a reverse mortgage for only 52% of the appraised value, around $280,000 and if approved, would receive, about $1,100 a month. Decision: Mr. and Mrs. Martin decided to apply for the reverse mortgage, but was turned down by the underwriter for negative monthly savings. 1. How does adverse selection and/or moral hazard impact borrowers’ decisions to stick by the terms of the loan when the reverse loan balance exceeds the market value of the house (due to sharp declines in housing prices)? 2. Explore the moral hazard resulting from potential hesitancy of lenders to foreclose because of reputational risk. 3. Explore the consequences of asymmetric information that the lender has regarding the longevity of the borrower. 4. Explore the consequences of adverse selection and/or moral hazard on the borrower resulting from high initial expenses. 5. Explore the nature of adverse selection and/or moral hazard resulting from tenure loan, versus cash out? 6. How do the requirements of reverse mortgages mitigate adverse selection and moral hazard risks for the lender?