Abstract

This study analyzes the structure of reverse mortgages. For the purpose of achieving profits and effectively managing risks, it is important that financial institutions understand the structures of their products. In accordance with the HECM (Home Equity Conversion Mortgage) program, this study decomposes the collateralized property value into six components, including loan amount, rental income, remaining value (on loan termination), reverse mortgage insurance costs and expenses (premiums), and lender profits. This allows financial institutions to understand the profitability and risks associated with the issue of reverse mortgages. Previous studies on reverse mortgages focused on the analysis of reverse mortgage insurances. This study has instead provided a process that enables lenders to specifically evaluate profit and effectively recognize potential risks. Borrowers can also use the proposed approach to obtain detailed conversion value of their property and thus make more informed decisions regarding entry into reverse mortgages.  

Keywords

reverse mortgageoption pricing