Reverse Mortgages: Risks and Opportunities

Abstract

Reverse Mortgages (RM) provide an attractive way to increase retirement incomes and to face the needs of health care for elderly people. The RM market is exposed to a number of risks: longevity risk, as retirees’ life expectancy increases, interest rate risk, especially in the low-rate post-crisis period, property market risk, in the last stage of the current business cycle. The paper focuses on reverse mortgage contracts whose expiry is a function of the contractor’s life span and whose assets depend on the evolution of real estate market prices. A neural network procedure is employed in order to include a range of explanatory variables as part of the Reverse Mortgage evaluation algorithms.