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A Proposal to Calculate the Regulatory Capital Requirements for Reverse Mortgages

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Iván de la Fuente

    (University of Alcalá)

  • Eliseo Navarro

    (University of Alcalá)

  • Gregorio Serna

    (University of Alcalá)

Abstract

In this paper, we propose a new method for estimating the regulatory capital requirements for a portfolio of income stream reverse mortgages owned by a financial institution, according to Basel II and III. The method considers house price risk, mortality risk and interest rate risk and regulatory capital requirements need to be computed using a Monte Carlo simulation procedure. Several scenarios for the reverse mortgage specifications are considered, including fixed or variable mortgage rates and different income stream schemes (with the lump sum as a particular case). The results for the U.K. show that the reverse mortgage provider faces higher risk in the lump-sum case, for relatively young borrowers and for the female population. Furthermore, the lender’s risk grows with the percentage of the loan amount that the borrower receives on the initial date, with the lump sum (100% of the loan amount on the initial date) being the riskiest case. The lender’s risk is also higher with fixed mortgage roll-up rates than with floating rates.

Suggested Citation

  • Iván de la Fuente & Eliseo Navarro & Gregorio Serna, 2022. "A Proposal to Calculate the Regulatory Capital Requirements for Reverse Mortgages," Springer Books, in: Marco Corazza & Cira Perna & Claudio Pizzi & Marilena Sibillo (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 181-187, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-99638-3_30
    DOI: 10.1007/978-3-030-99638-3_30
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