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
The purpose of this paper is to build a modeling and pricing framework to investigate the sustainability of the Home Equity Conversion Mortgage (HECM) program in the United States under realistic economic scenarios, i.e., whether the premium payments cover the fair premiums for the inherent risks in the HECM program. We note that earlier HECM models use static mortality tables, neglecting the dynamics of mortality rates and extreme mortality jumps. The earlier models also assume housing prices follow a geometric Brownian motion, which contradicts the fact that housing prices exhibit strong autocorrelation and varying volatility over time. To solve these problems, we propose a generalized Lee-Carter model with asymmetric jump effects to fit the mortality data, and model the house price index via an ARIMA-GARCH process. We then employ the conditional Esscher transform to price the non-recourse provision of reverse mortgages and compare it with the calculated mortgage insurance premiums. The HECM program turns out to be sustainable based on our model setup and parameter settings.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Karl E. Case & Robert J. Shiller, 1988.
"The Efficiency of the Market for Single-Family Homes,"
NBER Working Papers
2506, National Bureau of Economic Research, Inc.
- Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Chinloy, Peter & Cho, Man & Megbolugbe, Isaac F, 1997. "Appraisals, Transaction Incentives, and Smoothing," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 89-111, Jan.-Marc.
- Hamilton, Bruce W. & Schwab, Robert M., 1985. "Expected appreciation in urban housing markets," Journal of Urban Economics, Elsevier, vol. 18(1), pages 103-118, July.
- Hua Chen & Samuel H. Cox, 2009. "Modeling Mortality With Jumps: Applications to Mortality Securitization," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 727-751.
- Goovaerts, Marc J. & Laeven, Roger J.A., 2008. "Actuarial risk measures for financial derivative pricing," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 540-547, April.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Badescu, Alex & Elliott, Robert J. & Siu, Tak Kuen, 2009. "Esscher transforms and consumption-based models," Insurance: Mathematics and Economics, Elsevier, vol. 45(3), pages 337-347, December.
- Edward J. Szymanoski, 1994. "Risk and the Home Equity Conversion Mortgage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 347-366.
- Peter Chinloy & Isaac F. Megbolugbe, 1994. "Reverse Mortgages: Contracting and Crossover Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 367-386.
- Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
- Takatoshi Ito & Keiko Nosse Hirono, 1993.
"Efficiency of the Tokyo Housing Market,"
Monetary and Economic Studies,
Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(1), pages 1-32, July.
- 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.
- Thomas P. Boehm & Michael C. Ehrhardt, 1994. "Reverse Mortgages and Interest Rate Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 387-408.
- Linneman, Peter, 1986. "An empirical test of the efficiency of the housing market," Journal of Urban Economics, Elsevier, vol. 20(2), pages 140-154, September.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Jin-Chuan Duan, 1995. "The Garch Option Pricing Model," Mathematical Finance, Wiley Blackwell, vol. 5(1), pages 13-32.
- Biffis, Enrico, 2005. "Affine processes for dynamic mortality and actuarial valuations," Insurance: Mathematics and Economics, Elsevier, vol. 37(3), pages 443-468, December.
- Lin, Yijia & Cox, Samuel H., 2008. "Securitization of catastrophe mortality risks," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 628-637, April.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:46:y:2010:i:2:p:371-384. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.