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Valuation of Reverse Mortgages with Surrender: A Utility Approach

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Listed:
  • Yung-Tsung Lee

    (National Chiayi University)

  • Tianxiang Shi

    (Temple University)

Abstract

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.

Suggested Citation

  • Yung-Tsung Lee & Tianxiang Shi, 2022. "Valuation of Reverse Mortgages with Surrender: A Utility Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 65(4), pages 593-621, November.
    • Handle: RePEc:kap:jrefec:v:65:y:2022:i:4:d:10.1007_s11146-021-09869-7
    DOI: 10.1007/s11146-021-09869-7
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    References listed on IDEAS

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