Abstract
Abstract This study conducts an optimal surrender analysis of reverse mortgage (RM) loans offered to elderly homeowners as a financing option. Recent market evidence on borrower early surrenders has raised concerns about the marketability of RM products and their impact on the program viability. In this article, we derive the borrower optimal surrender strategy as a function of the underlying value of the home used as collateral for RM contracts with tenure payment option. Using a probabilistic approach to American option pricing, we present a decomposition result for the value of the contract as the sum of its European counterpart without the surrendering provision and an early exercise premium. The methodology allows policymakers to assess the financial incentive of their policy design, from which we explain the existing market evidence about borrower rational lapse by means of the resulting surrender boundary and reference probabilities.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
