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"reverse mortgage"
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Valuation of reverse mortgages in the Spanish market for foreign residents
The continuous growth in life expectancy, besides to the difficult economic and financial situation of the public pension system in Spain, makes reverse mortgages an attractive solution for providing additional income to retirees. However, despite being almost 20 years old, the Spanish market remains immature. Consequently, providers face significant risks, due to factors such as interest rates, housing prices, and longevity. Numerous tourists visit Spain, and many retire there, obtaining legal residence. Therefore, lenders could be interested in marketing reverse mortgages to foreign residents. Nevertheless, the longevity risk faced by these lenders may differ depending on the nationality of the borrower, and profits and losses could vary. Consequently, we propose a methodology for comparing the pricing of reverse mortgages in Spain by considering differences in longevity risk. Specifically, we calculate the amount offered by three types of reverse mortgages to customers of different nationalities, genders, and ages with contracts made in Spain. Our conclusions are pertinent to Spanish lenders since the results indicate that, in general, a Spanish lender would assume a slightly larger risk when lending reverse mortgages to borrowers of the selected nationalities, regardless of other considerations, such as legal issues, which are not addressed in this article.
First published online 31 October 2023
Journal Article
Dispossessed : how predatory bureaucracy foreclosed on the American middle class
\"In the aftermath of the 2008 financial crisis, more than 14 million U.S. homeowners lost their homes to foreclosure. Focusing on the hard-hit Sacramento Valley, Noelle Stout uncovers the hellish bureaucracy that organized the largest bank seizure of residential homes in U.S. history. Stout reveals the failure of banks' mortgage assistance programs, backed by over $300 billion of federal funds, to deliver on the promise of relief. Unlike the programs of the Great Depression, in which the government took on the toxic mortgage debt of Americans, these corporate bureaucracies ultimately denied 70 percent of homeowner applicants. In the voices of bank employees and 'dispossessed' homeowners, Stout exposes the tense confrontations between borrowers and banks, reveals how call center representatives felt about denying appeals, and shares the fears of families living on the brink of eviction. Stout exposes the everyday life of rising inequality--for whites who felt their middle-class life unraveling to communities of color who experienced a more precipitous and dire decline. Trapped in a maze of mortgage assistance, borrowers began to view debt refusal as a moral response to lenders. Stout shows how these seemingly mundane bureaucratic dramas came to redefine the meaning of debt and dispossession, opening the door to current contests about the meaning of indebtedness\"--Provided by publisher.
Book
Willingness analysis of middle-aged and older people’s participation in reverse mortgage schemes
Enabling older adults to age at home is an urgent issue. This study focuses on the attitudes of middle-aged and older people (MAOP) in the capital cities of Taiwan, which are characterised by expensive housing prices and living costs, to examine their preferences for reverse mortgage (RM) schemes. The stated preference method and conditional multinomial logit model are utilised for analysis. The study simulates the total payment duration (TPD) and monthly payment amounts (MPA) to determine the market share of MAOPs’ choices regarding terms. The results indicate that MAOPs tend to opt for RM schemes when they have children, partly enhancing the preference toward the long-term alternative (AL). Increasing the MPA has a positive effect on the market share of the AL scheme, but the amount must be increased to 90% to replace the market share of non-participation schemes significantly. The experimental design of this study could serve as a reference for future RM scheme designs. The findings suggest that there should be more alternative funding sources in an ageing society, particularly through revitalising housing assets, to promote ageing in place.
Journal Article
Reverse Mortgages and Pension Sustainability: An Agent-Based and Actuarial Approach
Population aging poses significant challenges to the sustainability of pension systems. This study presents an integrated methodological approach that uniquely combines actuarial life-cycle modeling with agent-based simulation to assess the potential of Reverse Mortgage Loans (RMLs) as a dual lever for enhancing retiree welfare and supporting pension system resilience under demographic and financial uncertainty. We explore Reverse Mortgage Loans (RMLs) as a potential financial instrument to support retirees while alleviating pressure on public pensions. Unlike prior research that treats individual decisions or policy outcomes in isolation, our hybrid model explicitly captures feedback loops between household-level behavior and system-wide financial stability. To test our hypothesis that RMLs can improve individual consumption outcomes and bolster systemic solvency, we develop a hybrid model combining actuarial techniques and agent-based simulations, incorporating stochastic housing prices, longevity risk, regulatory capital requirements, and demographic shifts. This dual-framework enables a structured investigation of how micro-level financial decisions propagate through market dynamics, influencing solvency, pricing, and adoption trends. Our central hypothesis is that reverse mortgages, when actuarially calibrated and macroprudentially regulated, enhance individual financial well-being while preserving long-run solvency at the system level. Simulation results indicate that RMLs can improve consumption smoothing, raise expected utility for retirees, and contribute to long-term fiscal sustainability. Moreover, we introduce a dynamic regulatory mechanism that adjusts capital buffers based on evolving market and demographic conditions, enhancing system resilience. Our simulation design supports multi-scenario testing of financial robustness and policy outcomes, providing a transparent tool for stress-testing RML adoption at scale. These findings suggest that, when well-regulated, RMLs can serve as a viable supplement to traditional retirement financing. Rather than offering prescriptive guidance, this framework provides insights to policymakers, financial institutions, and regulators seeking to integrate RMLs into broader pension strategies.
Journal Article
On which socioeconomic groups do reverse mortgages have the greatest impact? Evidence from Spain
Reverse mortgage is one of the products (perhaps the main one) that is good to obtain additional income by using the habitual residence as collateral. The main objective of this paper is to analyse the effects that reverse mortgage contracting has on household finances over the lifetime of a family according to the socioeconomic group to which it belongs in Spain. Four indicators are employed to measure the immediate and long-term effects. We use a stochastic model with a double source of randomness, survival and entry into dependency, and apply it to the three socioeconomic groups obtained with cluster methodology from the 2017 Spanish Household Financial Survey data. We conclude that the effects are very different depending on the group: regarding only the effects of hiring a reverse mortgage on the income of the family, widowed women aged between 81 and 85 years, with low income and expenses as well as little net wealth, and a habitual residence that represents half of her net wealth (Cluster 1) are the most benefited; considering that the highest impact indicators are on the probability of illiquidity and on the value of lack of liquidity, the use of reverse mortgages benefits more the families in Cluster 3 (high income and expenses and really high net wealth, head of household aged between 76 and 80 years) and less the families in Cluster 2 (medium income, net wealth and expenses, head of household aged between 65 and 75 years).
First published online 17 April 2024
Journal Article
Valuation of Reverse Mortgages with Surrender: A Utility Approach
Reverse mortgages are a financial tool for lower-income seniors to release home equity and increase their retirement income. In the United States, reverse mortgages are generally insured by the Federal Housing Administration (FHA) through the Home Equity Conversion Mortgage (HECM) program, which protects borrowers from owing more than the value of their house. Previous research on reverse mortgage valuation typically focuses on mortgage termination risks related to mortality and morbidity, but few studies explore the impact of early surrender on the entire risk profile of reverse mortgages. To fill this gap, we propose a utility approach to investigate borrowers’ surrender behavior. We explore how a surrender-and-refinance strategy affects the cash flows of the HECM insurance program and also assess its tail risk.
Journal Article
Pension schemes versus real estate
The demographic, economic and social changes that have characterized the last decades, and the dramatic financial crisis that has taken place since 2008, have led to a demand for structural changes in the pension sector and a growing interest in individual pension products. Hence the need, for most elderly people, to liquidate their fixed assets, which are usually the homes in which they live. This highlights products such as reverse mortgages and domestic reversibility plans. Within this context, we propose a contractual scheme where an immediate life annuity is obtained by paying a single-premium in the form of real estate rights (RERs), for example by transferring to an insurer the property title of a house or a similar realty, while keeping its usufruct or a restricted bundle of rights. The level of the installments depends on the fair value of the transferred RER at the contract’s issue, the life expectancy of the insured and the expected growth rate of the real estate market value. The contract design is developed by considering the control of the financial risk inherent in the contract itself, because of the prospective changes in the value of the RERs, and the level of the insurer’s leverage. Finally, we provide some numerical evidence of the proposed contractual structure, in order to compare the level of the installments according to the house return forecasts in different European countries.
Journal Article
Reverse mortgage and financial sustainability
This paper analyzes the effects that contracting a reverse mortgage has on the finances of families of a country or group whose members who aged 65 or older are the sole owners of the 100% of the property, regardless of the receipt of a retirement pension. For this purpose, an economic-financial model based on the life cycle model is defined, which considers a double source of randomness: mortality and dependence of family members. Long-term effects are measured using probabilistic, temporal and monetary indicators. For each country, the model must be adapted according to the legal framework for retirement and long-term care benefits and for the actuarial mortality and long-term care tables. As an illustration, this model was applied on Spanish families using data from the Spanish Survey of Household Finances 2017. The results obtained indicate that a family in Spain that meets the conditions for contracting a reverse mortgage sees, on average, an increase in its initial income and a decrease in both its probability of having liquidity problems in the future and the value of this lack of liquidity. It is also concluded that family composition influences the magnitude of these positive effects.
First pubilshed online 25 April 2022
Journal Article
Addressing the economic and demographic complexity via a neural network approach: risk measures for reverse mortgages
The study deals with the application of a neural network algorithm for fronting and solving problems connected with the riskiness in financial contexts. We consider a specific contract whose characteristics make it a paradigm of a complex financial transaction, that is the Reverse Mortgage. Reverse Mortgages allow elderly homeowners to get a credit line that will be repaid through the selling of their homes after their deaths, letting them continue to live there. In accordance with regulatory guidelines that direct prudent assessments of future losses to ensure solvency, within the perspective of the risk assessment of Reverse Mortgage portfolios, the paper deals with the estimation of the Conditional Value at Risk. Since the riskiness is affected by nonlinear relationships between risk factors, the Conditional Value at Risk is estimated using Neural Networks, as they are a suitable method for fitting nonlinear functions. The Conditional Value at Risk estimated by means of Neural Network approach is compared with the traditional Value at Risk in a numerical application.
Journal Article