Reverse Mortgage Contracts Research Articles

Drawing on real estate assets for investment in smart silver villages

The existing housing stock in Europe, including scattered farmhouses, is grossly inadequate for long-term care (LTC) at home. Renovating these houses suitable for LTC requires a considerable new investment. An alternative is to sell or transfer ownership of family homes and farms and buy a residential unit in a retirement community by taking out a reverse mortgage loan. We present an approach to investing in the removal of barriers in part of an extended retirement home or the purchase of a property in a Smart Silver Village (SSV) from farm transfer subsidies if permitted by the call for proposals to encourage the rejuvenation of farm ownership. Our approach includes the actuarial present value method and periodic longevity insurance premia. It also includes funds from the agricultural transfer program for younger members of farming households. Moreover, it allows older farmers to move to a SSV if they pass the farm on to their successors and receive a portion of the reimbursement from government funds. This way, they become co-investors alongside the municipality in the SSV located relatively close to their respective farms. The current retirement home location in Slovenia is quite far from the farms. Existing reverse mortgage contracts in EU member states end when a homeowner moves into an assisted living home. Our approach with minor adjustments applies to all EU Member States.

Equity Release Contracts with Varying Payments

Equity release contracts allow property owners to receive a financial benefit in exchange for surrendering their real estate to a company. The benefits depend on the life expectancy of owners, the real value of properties, and the rate of interest. These parameters are not the same throughout the years. The aim of the paper is to analyse varying payments of equity release contracts which have already been offered to customers for several years in Poland. A recalculation procedure year by year is proposed applying the actuarial and financial methods. This paper estimates the potential advantages of reverse annuity and reverse mortgage contracts in a changing economic environment. The calculations were made based on actual Polish market data, including the Svensson model of spot interest rate. It is shown that there is considerable scope for increasing retirement income; however, the exact amounts may be unknown. The advantages for customers resulting from changes in parameters and valorization are shown, as well as the risk associated with equity release.

Estimating regulatory capital requirements for reverse mortgages. An international comparison

In this paper, we estimate the value of the no-negative-equity guarantee (NNEG) embedded in reverse mortgage contracts and develop a method for calculating regulatory capital requirements according to Basel II and III. We employ a Monte Carlo simulation method that assumes an ARMA-EGARCH process for house prices in four European countries: France, Germany, Spain and the United Kingdom. The results show different estimated values for the NNEG among countries. Specifically, the value of the NNEG tends to be related to the level of the interest rates, the rental yield and house price volatility in each country, as well as the age of the borrower. Different values for value-at-risk and the expected shortfall among countries are also found, which depend on the volatility of each country’s house price series.

Valuation of Equity Release Contracts in Czech Republic, Republic of Poland and Slovak Republic

An ageing European population and, therefore, a rising dependency ratio of retirees to the working population, strongly suggests that a pension funding gap will be a key social issue in future. Yet many older people have significant real estate assets that they could access using equity release products. They could sell their assets in exchange for lifelong or temporary monthly payments. Equity release products are relatively new to Poland, but are not yet offered by commercial banks in Czechia and Slovakia. This paper estimates the potential benefits of marriage reverse annuity, and reverse mortgage contracts, using the Svensson model function, and empirical property data from selected Czech, Slovak and Polish cities. The results are also compared to the average pension of inhabitants in the selected cities. It is shown that there is substantial scope for boosting retirement income in all the cases considered, though the precise size of the increase depends on factors such as contract buyers' age and life expectancy, the value of their assets, the payment consequences of a spouse's death, and contract suppliers' pricing policies.

Housing equity withdrawal for development of assisted-living facilities

PurposeThe purpose of this study is to develop new type of reverse mortgage contract. How to provide adequate services and housing for an increasing number of people that are dependent on the help of others is a crucial question in the European Union (EU). The housing stock in Europe is not fit to support a shift from institutional care to the home-based independent living. Some 90% of houses in the UK and 70%–80% in Germany are not adequately built, as they contain accessibility barriers for people with emerging functional impairments. The available reverse mortgage contracts do not allow for relocation to their own adapted facilities. How to finance the adaptation from housing equity is discussed.Design/methodology/approachThe authors have extended the existing loan reverse mortgage model. Actuarial methods based on the equivalence of the actuarial present values and the multiple decrement approach are used to evaluate premiums for flexible longevity and lifetime long-term care (LTC) insurance for financing adequate facilities.FindingsThe adequate, age-friendly housing provision that is appropriate to support the independence and autonomy of seniors with declining functional capacities can lower the cost of health care and improve the well-being of older adults. For financing the development of this kind of facilities for seniors, the authors developed the reverse mortgage scheme with embedded longevity and LTC insurance as a possible financial instrument for better LTC services and housing with care in assisted-living facilities. This kind of facilities should be available for the rapid growth of older cohorts.Research limitations/implicationsThe numerical example is based on rather crude numbers, because of lack of data, as the developed reverse mortgage product with LTC insurance is a novelty. Intensity of care and probabilities of care in certain category of care will change after the introduction of this product.Practical implicationsThe model results indicate that it is possible to successfully tie an insurance product to the insured and not to the object.Social implicationsThe introduction of this insurance option will allow many older adult with low pension benefits and a substantial home equity to safely opt for a reverse mortgage and benefit from better social care.Originality/valueWhile currently available reverse mortgage contracts lapse when the homeowner moves to assisted-living facilities in any EU Member State, in the paper a new method is developed where multiple adjustments of housing to the functional capacities with relocation is possible, under the same insurance and reverse mortgage contract. The case of Slovenia is presented as a numerical example. These insurance products, as a novelty, are portable, so the homeowner can move in own specialised housing unit in assisted-living facilities and keep the existing reverse mortgage contract with no additional costs, which is not possible in the current insurance products. With some small modifications, the method is useful for any EU Member State.

Fair-value analytical valuation of reset executive stock options consistent with IFRS9 requirements

AbstractExecutive stock options (ESOs) are widely used to reward employees and represent major items of corporate liability. The International Accounting Standards Board IFRS9 financial reporting standard which came into full effect on 1-Jan 2018, along with its Australian implementation AASB9, requires public corporations to report their fair-value cost in financial statements. Reset ESOs are typically issued to re-incentivise employees by allowing the option to be cancelled and re-issued with a lower exercise price or later maturity. We produce a novel analytical Reset ESO valuation consistent with the IFRS9 financial reporting standard incorporating the simultaneous resetting of vesting period, exercise window, reset level and maturity. We allow for voluntary and involuntary exercise. Our analytical result is expressed solely in terms of standardised European binary power option instruments. Using the multi-state mortality model of Hariyanto (2014, Mortality and disability modelling with an application to pricing a reverse mortgage contract, PhD thesis, University of Melbourne), we estimate longitudinal disability and death transition probabilities from cross-sectional data. We determine survival functions for pre-vesting forfeiture or post-vesting involuntary exercise for use with weighted portfolios of our formulae to illustrate the effect of survival on the fair value. We examine the IFRS9 method of valuation using expected time to option exercise and demonstrate a consistent overestimation of fair value of up to 27% for senior executives.

On an Efficient Design of Reverse Mortgages: A Possible Solution for Aging Asian Populations

While aging population is a worldwide issue, it is more profound in Asia. Reverse mortgages are useful instrument to alleviate the continuous and steady consumption needs of retirees. The “puzzle” is why there has been rather modest uptake even in the US, UK, and Korea where it has been available for a considerable time. We propose a structural design for a reverse mortgage contract that works across geopolitical borders, including key design criteria, issues of education/marketing for both the retirees and their beneficiaries, and a feasible approach to funding reverse mortgage with reliable, cost-efficient supply of funds available consistently so that the reverse mortgages can be supported as a “standard” consideration for everyone considering for retirement. We will also examine the role of the government as regulator and as risk-bearing provider, in the reverse mortgage process. Our preliminary work suggests that an effective institutional means of funding reverse mortgages is likely to be considerable different from current practice. We also discuss how the possible obstacles, particularly Asian traditions, could be solved so as to allow reverse mortgage to be an instrument for improving retirement.

The Need for Flexible Take-Ups of Home Equity and Pension Wealth in Retirement

This paper analyzes for the Netherlands the need to introduce flexible take-ups of home equity and pension wealth, complementary to recent reforms in Dutch pensions and mortgages. The young may gain from supplementing a possible pension shortfall with additional retirement income from reverse mortgage contracts. The elderly may benefit of the innovation of partial lump sum of accrued pension rights in order to partly redeem mortgage debt, whilst maintaining an adequate net replacement rate from pensions.

Risk Analysis for Reverse Mortgages with Different Payout Designs

Abstract We analyze the risk and profitability of reverse mortgages with lump-sum or income stream payments from the lender’s perspective. Reverse mortgage cash flows and loan balances are modeled in a multi-period stochastic framework that allows for house price risk, interest rate risk and risk of delayed loan termination. A vector autoregressive (VAR) model is used to simulate economic scenarios and to derive stochastic discount factors for pricing the no negative equity guarantee embedded in reverse mortgage contracts. Our results show that lump-sum reverse mortgages are more profitable and require less risk-based capital than income stream reverse mortgages, which explains why this product design dominates in most markets. The loan-to-value ratio, the borrower’s age, mortality improvements and the lender’s financing structure are shown to be important drivers of the profitability and riskiness of reverse mortgages, but changes in these parameters do not change the main conclusions.

A Study on the Characteristics of Reverse Mortgage Contract and Its Influence Over Monthly Payment

A Study on the Characteristics of Reverse Mortgage Contract and Its Influence Over Monthly Payment

Risk Management and Payout Design of Reverse Mortgages

We analyze the risk and protability of reverse mortgages with lump-sum or income stream payments from the lender’s perspective. Reverse mortgage cash ows and loan balances are modeled in a multi-period stochastic framework that allows for house price risk, interest rate risk and risk of delayed loan termination. A VAR model is used to simulate economic scenarios and to derive stochastic discount factors for pricing the no negative equity guarantee embedded in reverse mortgage contracts. Our results show that lump-sum reverse mortgages are more protable and require less risk-based capital than income stream reverse mortgages, which explains why this product design dominates in most markets. The loan-to-value ratio, the borrower’s age, mortality improvements and the lender’s nancing structure are shown to be important drivers of the protability and riskiness of reverse mortgages, but changes in these parameters do not change the main conclusions.

Housing Wealth and Housing Decisions in Old Age: Sale and Reversion

Population ageing brings new challenges to long-term household economic decisions. In the event of old-age dependency, housing assets become a key self-insurance device. However, little empirical evidence has been reported regarding an individual's expectations of having to use their housing wealth for such a purpose. This paper draws upon two complementary data sources to empirically examine: (1) the influence of housing assets on an individual's willingness-to-sell (WTS) their dwelling for care purposes, and (2) the willingness to take out a reverse mortgage contract loan in the event of old-age dependency. The paper's findings suggest that homeowners' WTS in old age is unaffected by their income or housing assets and is, rather, determined by socio-environmental housing characteristics and the individual's health and personal needs. Conversely, the study finds that the uptake of home reversion loans is largely dependent on income or education, but not on a household's housing assets.

Reverse Mortgages: Contracting and Crossover Risk

A pricing model is developed for a reverse mortgage contract where the borrower receives payments either as a lump sum or in an annuity while the loan balance accumulates as a claim against the house. No underwriting criteria on income are applied. One risk of default is that the borrower will remain in the house after the negatively amortizing loan balance exceeds the value of the house. An explicit pricing model of the reverse mortgage permits the evaluation of this default “crossover” option. Alternative methods involving life insurance contracts and securitization are compared as secondary market channels.