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Valuation of reverse mortgages under (limited) default risk

Author

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  • Andreas Kolbe
  • Rudi Zagst

Abstract

In this paper, we develop a consistent valuation framework for reverse mortgages based on reduced-form intensity models as used in credit risk modelling. Within our modelling framework, we explicitly calculate the probability that the total loan amount exceeds the house value at termination of the contract and derive the maximum payment(s) which can be made to the homeowner under certain constraints. We apply our results to data from the German market and discuss implications for the design of reverse mortgages from a lender's perspective.

Suggested Citation

  • Andreas Kolbe & Rudi Zagst, 2010. "Valuation of reverse mortgages under (limited) default risk," The European Journal of Finance, Taylor & Francis Journals, vol. 16(4), pages 305-327.
    • Handle: RePEc:taf:eurjfi:v:16:y:2010:i:4:p:305-327
    DOI: 10.1080/13518470903211640
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    Cited by:

    1. Noordegraaf-Eelens, L.H.J. & Franses, Ph.H.B.F., 2014. "Do loss profiles on the mortgage market resonate with changes in macro economic prospects, business cycle movements or policy measures?," Econometric Institute Research Papers EI 2014-08, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    2. Ju, Yonghan & Jeon, Song Yi & Sohn, So Young, 2015. "Behavioral technology credit scoring model with time-dependent covariates for stress test," European Journal of Operational Research, Elsevier, vol. 242(3), pages 910-919.

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