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Stochastic Modeling of Federal Housing Administration Home Equity Conversion Mortgages with Low‐Cost Refinancing

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  • David T. Rodda
  • Ken Lam
  • Andrew Youn

Abstract

Federal Housing Administration‐insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), did not originally have a provision for low‐cost refinancing. If a borrower's house value increased faster than expected, the borrower could not tap that additional equity without terminating the first loan and originating a new HECM loan with full closing costs. We test several low‐cost refinancing options using a stochastic simulation model that allows interest rates and house prices to vary in historically accurate patterns. Low‐cost refinancing decreases the net value of the fund by 54% to $98.5 million, but it remains positive in 80% of the trials.

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  • David T. Rodda & Ken Lam & Andrew Youn, 2004. "Stochastic Modeling of Federal Housing Administration Home Equity Conversion Mortgages with Low‐Cost Refinancing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 589-617, December.
    • Handle: RePEc:bla:reesec:v:32:y:2004:i:4:p:589-617
    DOI: 10.1111/j.1080-8620.2004.00104.x
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    Cited by:

    1. Shan Jiang & Chen L. Miller, 2019. "Termination Risk of Reverse Mortgages," International Real Estate Review, Global Social Science Institute, vol. 22(2), pages 169-196.
    2. Moulton, Stephanie & Haurin, Donald R. & Shi, Wei, 2015. "An analysis of default risk in the Home Equity Conversion Mortgage (HECM) program," Journal of Urban Economics, Elsevier, vol. 90(C), pages 17-34.
    3. 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.
    4. Shi, Tianxiang & Lee, Yung-Tsung, 2021. "Prepayment risk in reverse mortgages: An intensity-governed surrender model," Insurance: Mathematics and Economics, Elsevier, vol. 98(C), pages 68-82.
    5. Begley, Jaclene & Fout, Hamilton & LaCour-Little, Michael & Mota, Nuno, 2020. "Home equity conversion mortgages: The secondary market investor experience," Journal of Housing Economics, Elsevier, vol. 47(C).
    6. Chen, Hua & Cox, Samuel H. & Wang, Shaun S., 2010. "Is the Home Equity Conversion Mortgage in the United States sustainable? Evidence from pricing mortgage insurance premiums and non-recourse provisions using the conditional Esscher transform," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 371-384, April.
    7. Seungryul Ma & Yongheng Deng, 2006. "Insurance Premium Structure of Reverse Mortgage Loans in Korea," Working Paper 8568, USC Lusk Center for Real Estate.
    8. Shu Ling Chiang & Ming Shann Tsai, 2020. "A Microeconomic Model for the Decision of Reverse Mortgage Borrowers to Sell their House Early and its Application on the Estimation of Termination Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 61(2), pages 288-312, August.

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