Reverse mortgage and risk profile awareness: Proposals for securitization

Abstract

AbstractReverse mortgages (RMs) are acquiring a growing centrality to meet the needs of a progressive aging population and to support the fragility of traditional pension systems. With an RM, an elderly individual gets a lump sum or a series of recurring payments whose amounts depend upon the expected liquidation value of his property and his age; he continues living in it until he dies, when the asset is sold and the proceeds are used to pay back the loan. The risk of these contracts, due to volatility of interest rates, house prices, and mortality rates, requires careful management strategies. This article analyzes the risk profile of the contract and suggests a securitization procedure where the lender averts the risks of the contract by engaging into an insurance contract through a special purpose vehicle that will issue ad‐hoc bonds, whose underlying is determined by the lender's gain/loss on the contract.