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A Microeconomic Model for the Decision of Reverse Mortgage Borrowers to Sell their House Early and its Application on the Estimation of Termination Rates

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  • Shu Ling Chiang

    (National Kaohsiung Normal University)

  • Ming Shann Tsai

    (National University of Kaohsiung)

Abstract

Reverse mortgage (RM) borrowers may get benefit from terminating the contract by selling their house early. For analyzing the termination rate, the authors investigate the rules that govern an elder’s decision to sell a house early. The decision is found to be influenced by the strength of the elder’s desire to stay in the home, the uncertainty of the elder’s death time, and the stochastic price of the house. To more thoroughly elucidate changes in the probability of a sale over time, the authors provide an example illustrating how one can use this decision rule to calculate the probability distribution for selling a house early. Sensitivity analyses are provided to show the influence of the model’s parameters on this distribution. Evidence that the model estimates the termination rate more accurately than the traditional model is also provided. The authors’ investigation should not only help RM lenders better understand the RM borrower’s decision-making process but also help them accurately estimate the RM’s termination rate.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:jrefec:v:61:y:2020:i:2:d:10.1007_s11146-019-09725-9
    DOI: 10.1007/s11146-019-09725-9
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    References listed on IDEAS

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    1. Chiang, Shu Ling & Tsai, Ming Shann, 2016. "Analyzing an elder’s desire for a reverse mortgage using an economic model that considers house bequest motivation, random death time and stochastic house price," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 202-219.
    2. Thomas J. Miceli & C.F. Sirmans, 1994. "Reverse Mortgages and Borrower Maintenance Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 433-450, June.
    3. 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, June.
    4. Steven F. Venti & David A. Wise, 2000. "Aging and Housing Equity," NBER Working Papers 7882, National Bureau of Economic Research, Inc.
    5. Samuel Cox & Yijia Lin, 2007. "Natural Hedging of Life and Annuity Mortality Risks," North American Actuarial Journal, Taylor & Francis Journals, vol. 11(3), pages 1-15.
    6. Hui Shan, 2011. "Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(4), pages 743-768, December.
    7. 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.
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    Cited by:

    1. 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.

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