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Reverse Mortgage Risks. Time Evolution of VaR in Lump-Sum Solutions

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  • Iván de la Fuente

    (Facultad de Ciencias Económicas y Empresariales, Universidad de Alcalá. Plaza de la Victoria, 2, Alcalá de Henares, 28802 Madrid, Spain
    These authors contributed equally to this work.)

  • Eliseo Navarro

    (Facultad de Ciencias Económicas y Empresariales, Universidad de Alcalá. Plaza de la Victoria, 2, Alcalá de Henares, 28802 Madrid, Spain
    These authors contributed equally to this work.)

  • Gregorio Serna

    (Facultad de Ciencias Económicas y Empresariales, Universidad de Alcalá. Plaza de la Victoria, 2, Alcalá de Henares, 28802 Madrid, Spain
    These authors contributed equally to this work.)

Abstract

In this study, we analyzed the risk faced by the reverse mortgage provider in the case of the lump-sum solution, which is increasingly becoming one of the most popular types of reverse mortgages. The risk faced by the mortgage provider was estimated by means of a value at risk (VaR) procedure that involves a Monte Carlo simulation method and an ARMA-EGARCH assumption for modeling house price returns in the United Kingdom from 1952 to 2019. The results showed that the reverse mortgage provider faced higher risk and consequently needed to allocate more funds to meet its regulatory capital requirements in the case of relatively young borrowers, especially when they reached their life expectancy and had high roll-up rates. The risk was even higher in the case of the female population. Furthermore, care must be taken when the rental yield rate is higher than the risk-free rate, as is currently the case, as the value of the no-negative-equity guarantee (NNEG) is relatively high and results in higher value at risk (VaR) and expected shortfall (ES) values. These results have important implications in terms of policy decision making when determining the countercyclical buffer for reverse mortgages in Basel III, as well as from a managerial perspective when determining the economic capital needed to support the risk taken by the lender.

Suggested Citation

  • Iván de la Fuente & Eliseo Navarro & Gregorio Serna, 2020. "Reverse Mortgage Risks. Time Evolution of VaR in Lump-Sum Solutions," Mathematics, MDPI, vol. 8(11), pages 1-17, November.
    • Handle: RePEc:gam:jmathe:v:8:y:2020:i:11:p:2043-:d:446081
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    References listed on IDEAS

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    Cited by:

    1. Tsai, Pei-Hsuan & Wang, Ying-Wei & Chang, Wen-Chang, 2023. "Hybrid MADM-based study of key risk factors in house-for-pension reverse mortgage lending in Taiwan's banking industry," Socio-Economic Planning Sciences, Elsevier, vol. 86(C).
    2. de la Fuente, Iván & Navarro, Eliseo & Serna, Gregorio, 2023. "Proposal for calculating regulatory capital requirements for reverse mortgages," Socio-Economic Planning Sciences, Elsevier, vol. 88(C).
    3. Hong-Ming Chen & Jing-Yi Chen, 2024. "Structural analysis of reverse mortgages in Taiwan," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-11, December.

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