Termination Risk of Reverse Mortgages
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Shan Jiang, Chen L. Miller
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International Real Estate Review
Reverse mortgages generally have open maturity dates. The variability of the exact termination time of a mortgage is one of the most important risks faced by the lenders and mortgage insurers. This paper analyzes the termination experience of reverse mortgages in the United States (US). We find that reverse mortgages can be terminated by three distinct events: refinancing, mortality and mobility. Using the Federal Housing Administration (FHA) insured Home Equity Conversion Mortgage (HECM) loan data, we estimate the probability of the termination through individual events. The results show that refinance termination and other termination events are driven by different factors. Refinances are mainly driven by macroeconomic conditions, such as the appreciation of the house value and decline in interest rate, and usually done in the beginning years of the loan origination. Mortality terminations follow closely the US mortality tables, which are governed by age and gender. Mobility termination shares a similar pattern with mortality termination, especially in the later years of the loan life. Meanwhile, the initial cash drawdown pattern has significant but different impacts on each type of termination. By separating refinance termination from the two other types of terminations, we show that refinance termination slows down when the interest rate starts to rise. Without separating refinance termination, HECM investors could over-project the number of future HECM terminations in a rising interest rate scenario and result in loss of funds.
Reverse Mortgage, HECM, Competing Risk, Refinance, Mortality, Mobility Termination