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Reverse Mortgages and Prepayment Risk


  • Linda S. Klein
  • C.F. Sirmans


This paper presents a detailed assessment of the Connecticut Housing Finance Authority (CHFA) reverse annuity mortgage (RAM) program. Because of the size and payment history of the program, the analysis provides an empirical framework on which to develop and assess other home equity conversion (HEC) programs. The program offers insights into the economic impact of these programs and the factors affecting prepayment. The program issued 765 annuities over five years, and 240 of these loans have terminated payments. The annuity payments had a demonstrable financial impact on the elderly participants, with an 88% average annual income increase. Prepayment rates varied across borrower and loan characteristics. The rates were most sensitive to marital status and were heavily affected by the age of the borrower and the term of the loan. Although default risk exists, the evidence indicates a low probability of the loan value exceeding the house value. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Linda S. Klein & C.F. Sirmans, 1994. "Reverse Mortgages and Prepayment Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 409-431.
  • Handle: RePEc:bla:reesec:v:22:y:1994:i:2:p:409-431

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    Cited by:

    1. Lee, Yung-Tsung & Wang, Chou-Wen & Huang, Hong-Chih, 2012. "On the valuation of reverse mortgages with regular tenure payments," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 430-441.
    2. Tsay, Jing-Tang & Lin, Che-Chun & Prather, Larry J. & Buttimer, Richard J., 2014. "An approximation approach for valuing reverse mortgages," Journal of Housing Economics, Elsevier, vol. 25(C), pages 39-52.

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