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The Role of Appreciation and Borrower Characteristics in Reverse Mortgage Terminations

Author

Listed:
  • Thomas Davidoff

    (University of British Columbia)

  • Gerd M. Welke

    (California State Polytechnic University)

Abstract

The Federal Housing Administration ("FHA") insures Home Equity Conversion Mortgage ("HECM") lenders against shortfalls between loan balances and collateral value. Because borrowers may defer repayment until they move out of their homes or die, FHA loses money on HECM loans when borrowers remain in their homes for a long time or prices fall. We show that there is an economically large and positive correlation between reverse mortgage terminations and home price appreciation. Consistent with intuition derived from a simple life-cycle model, we find the relationship between appreciation and termination weakens with borrower age, and appears to weaken with borrower wealth.

Suggested Citation

  • Thomas Davidoff & Gerd M. Welke, 2017. "The Role of Appreciation and Borrower Characteristics in Reverse Mortgage Terminations," Journal of Real Estate Research, American Real Estate Society, vol. 39(1), pages 99-126.
    • Handle: RePEc:jre:issued:v:39:n:1:2017:p:99_126
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    Citations

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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.
    2. Shi, Tianxiang & Lee, Yung-Tsung, 2021. "Prepayment risk in reverse mortgages: An intensity-governed surrender model," Insurance: Mathematics and Economics, Elsevier, vol. 98(C), pages 68-82.
    3. Begley, Jaclene & Fout, Hamilton & LaCour-Little, Michael & Mota, Nuno, 2020. "Home equity conversion mortgages: The secondary market investor experience," Journal of Housing Economics, Elsevier, vol. 47(C).
    4. Steven Caudill & Claudio Detotto & Dominique Prunetti, 2020. "Bargaining power in apartment sales in Corsica: A latent class approach," Urban Studies, Urban Studies Journal Limited, vol. 57(13), pages 2754-2772, October.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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